Tuesday, November 12, 2013

Retirement for Chicago Park District Employees, With Full Benefits: Age 58; Reflections on Chicago's Second Triple-Notch Bond Downgrade in Six Months

Want to retire at age 58? With Full benefits? When Private sector workers do not qualify for full Social Security benefits until age 67?

Who doesn't?

Hey, no problem. Just work for the Chicago park district (or countless city police and fire departments).

Retirement for Chicago Park District Employees, With Full Benefits: Age 58

Please consider the November 7th article Parks and Wrecks by the Illinois Policy Institute.
The Illinois General Assembly today approved a pension bill that requires taxpayers to pay an additional $75 million into the Chicago Park District pension fund in addition to tripling the taxpayer contribution to the troubled pension fund.

Make no mistake: This bill is bad for workers and taxpayers. It will most likely result in higher taxes and fees for city residents, but no greater level of retirement security for park district workers.

The Chicago Park District has more than $1.4 billion in official debt. This includes $40 million in debt related to retiree health care, $426 million in pension debt and $944 million in other long-term debt.

Private sector workers do not qualify for full Social Security benefits until age 67; the retirement age for the majority of Chicago Park District workers, under this bill, would be 58. Any pension reform bill must match the government retirement age to the private sector retirement age to fix the system.

The bottom line is that with today’s actions, lawmakers in Springfield cemented tax and fee increases on Chicago residents. They are continuing to paper over the city’s pension problem and refusing to tackle it head on.

Reflections on Chicago's Second Triple-Notch Bond Downgrade in Six Months

Also consider Chicago’s triple-notch credit downgrade
Pension costs are already unraveling the state’s finances. Now it’s the city of Chicago’s turn.

The city’s out-of-control pension liabilities and “accelerating budget pressures associated with those liabilities” has resulted in another credit downgrade by Moody’s Investors Service.

The national credit rating agency downgraded the city’s nearly $8 billion in general obligation bonds to A3 from Aa3. This is a triple-notch downgrade.

Chicago is now just four notches above junk-bond status – any further downgrades mean the city is likely to face problems borrowing money.

The agency made good on its April 2013 promise to evaluate state and local pension plans on more realistic assumptions. At that time, Moody’s placed 29 local governments under review – including Chicago.

The rating agency has long critiqued pension funds’ use of overly ambitious investment return targets that allow funds to understate their true pension shortfalls.

Based on the new Moody’s methodology, which uses more conservative assumptions, Chicago’s 2012 pension shortfall jumps nearly 90 percent, to $36 billion from $19 billion.


However, Chicago’s burgeoning liability is not the city’s only problem. The yearly bill to pay for those pensions is set to spike 2.5 times to $1.2 billion in 2015 from $467 million in 2014.



The increase is due largely to a law that will require significantly higher pension contributions by the city beginning in 2015. These contributions will create a “tremendous strain” on the city’s operating budget, hurting the Chicagoans that most depend on core government services such as education, health care and public safety.

Chicago’s crisis is no different from what the state is experiencing. Under new Moody’s methodology, the underfunding for the state’s five state-run funds is set to approach $200 billion.

Pensions are threatening to bring down both Chicago and the state as a whole.
Reflections on Pension Plans in General

Pensions are the #1 problem for cities and states. The Fed artificially suppressing  interest rates makes matters worse.

Pension plans heading into the crisis were underweight equities. Now, because bond yields in general have collapsed, pension plans are likely overweight stocks, hoping to catch up at the worst possible time.

Even if the above assumption is false, and pension plans are now weighted normally, how the hell can plans meet 7.5% to 8.0% return assumptions with 10-year bonds yielding 2.75%?

The answer is simple: It won't happen. Pension plans attempting to meet unreasonable expectations by leveraging into equities now will be hammered in due time.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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