Chicago and Illinois Finance Update: Forecast Pain
Yeah, I know it's not much of a forecast. I've been making it for a decade now.
This crap is ongoing.
Plenty of old posts/”news” are in here… but really, none of this is news. These situations have been building for decades.
Waiting for the Shoes to Drop
Mish Talk: When Do Mayor Brandon Johnson and the City of Chicago Finally Implode?
Despite the massive stock market boom, the Chicago Firefighters pension is only 21.6 percent funded.
Police is 31.1 percent funded. The Teachers’ pension is only 43.4 percent funded.
Brandon Johnson is a former teachers’ union organizer and is beholden to the union at the expense of safety, Chicago businesses, and citizens.
….
Illinois’ pension crisis has put taxpayers on the hook for $211 billion in unfunded state and local pension liabilities according to the Illinois Policy Institute.
The Census Reporter shows the population of Illinois is 12.55 million and shrinking. There are 5.07 million households.
If you live in Illinois, your household share is $41,617. By the way, 11.6 percent of the population is below the poverty line.
….
I am openly rooting for Chicago and the entire pension system of Illinois to implode.
That sounds harsh bit it isn’t.
There will be no reform until crisis hits, and the sooner the better because those currently collecting unwarranted massive pensions are bleeding the pension funds dry.
The sooner the collapse, the more pension money will be saved for the average Joe.
Good pension reform would target excesses on the top end with a threat of municipal bankruptcy hanging over everyone’s head if the unions refuse to cooperate.
But hey — it’s not all due at once!
People need to remember, from the Detroit example, that pensions can be cut in a municipal bankruptcy.
Chicago is not allowed to declare bankruptcy at this moment, even though yes, it’s deep in debt (not only pension debt). Chicago will require the Illinois state legislature’s change in state law:
Chapter 9 of the Bankruptcy Code has become a popular topic among academics, politicians, and the general public alike. With the financial and pension crisis facing Illinois governments, everyone is searching for a way to solve the problem. One suggestion is for cities, towns, and other units of local government to file municipal bankruptcy under Chapter 9 of the United States Bankruptcy Code. What many commentators fail to recognize, however, is that in Illinois, Chapter 9 is only an option for municipalities with populations of 25,000 or less.1 For municipalities with populations of more than 25,000, relief under the Financially Distressed City Law and the Illinois Finance Authority may be had, but this may not be enough to resolve large municipal financial crises.2 Thus, legislation that enables larger municipalities to seek Chapter 9 protection is warranted.
More on the situation here:
Civic Federation, 2014: An Overview of State Intervention Laws in Illinois
Illinois Policy, 2018: Hog-tied: Illinois state law not equipped to address local governments’ pension problems
Illinois cannot address its own pension problems, and Chicago will run out of cash first. Illinois is in no position to bail out Chicago.
Do you think anybody at the federal level is interested in bailing out Chicago? In the next 4 years?
I don’t think so.
Will Chicago’s pensions last that long? With Brandon Johnson and his merry crew, who knows?
Wirepoints: Chicago’s black hole: Pension debts jump even though taxpayers pour billions into city funds – Wirepoints
That’s extremely easy to understand. The absolute amount doesn’t matter — even with the huge increase in pension payments, they’re still underpayments.
I will show you two examples — the Chicago Municipal fund, which was pretty dire, and projected to fail this year when I first looked at it in 2017.
One of the assumptions from that projection that didn’t hold was my assumption of a 1% growth rate for contributions.
This is what contributions really did:
The blue bars are the contributions, as a percentage of payroll. They ramped up, hugely, in those post-2015 years I had projected.
The red bars you see are all the contributions that should have been made but weren’t.
This is like when you have an outstanding credit card balance, keep charging on the card, and don’t pay enough to cover the accruing interest and new charges.
Yeah, the balance is going to increase. You’ve been increasing the debt.
Illinois Needs The Money Itself
October 2024, Illinois Policy: Illinois pension crisis would devour ‘millionaire tax’
Illinois needs to spend $4.9 billion more annually to pay for pensions, but the “millionaire tax” would only raise an estimated $3-$4.3 billion. That’s too little for the pension bills and would leave nothing for property tax relief.
Proponents of a push to scrap Illinois’ constitutionally protected flat income tax and add a 3% income tax hike on those earning more than $1 million claim increased revenue could be used for property tax relief.
Don’t count on it.
Analysis shows all new revenue from the tax would likely be consumed by Illinois’ growing pension crisis. That would leave nothing for property tax relief. It would also set up other taxpayers for a much larger income tax hike.
I will be blunt: the cash is fungible. The “millionaire’s tax” would be a property tax relief inasmuch they won’t have to raise the property tax rate.
You’re welcome.
Here is the math from Illinois Policy:
To keep it simple, let me show you what the largest of these plans, the teachers’ pension, looks like:
The blue portion of the bar is the amount actually contributed by the state, and it’s been about 2/3 the actuarially determined amount, which is the amount (under a certain set of assumptions) required to hit certain funding targets within certain horizons. It’s a super-slow amortization of the unfunded liability.
Many might think: well, they’ve never made a full contribution, ever, even when they had pension obligation bonds. (Quick - look at the graph. Which year was there a POB?) What’s the big deal? May as well continue undercontributing to the pension.
After all, we have experts that say it’s okay. (Not the actuaries, for what it’s worth.)
This is what the funded ratio has done:
And the cash flows:
(Yes, you can see the POBs in this graph.)
What will happen with continuing undercontributions is an ever-escalating amount just to tread water for the funded ratio.
What’s the end game?
Usually, it takes decades to burn through piles of assets and revenue flows, but Brandon Johnson seems to be attempting a speed run.
To be sure, he did get in his position after decades of deliberate underfunding of the pensions, and the ramp-up in contributions occurred only a few years before he came into office.
As noted, MEABF (the municipal pension fund) was projected only 7 years ago to run out of all its assets by this year. That’s why they increased contributions, even those were still too low for sustainability.
But he’s decided to act as if Chicago has an infinite well of cash to draw on and has any sort of leverage with Illinois. The state itself is strapped for cash.
What’s the leverage here?
I understand Johnson wants all sorts of goodies for his friends in the CTU, but he doesn’t have the money to distribute to them (yet). He needs to learn about this thing called negotiation, which involves working with people who have competing interests, not the fake thing he has been doing with his friends where they agree on some number that they think they can get away with.
All this while Pritzker is trying to set himself up as some sort of Trump antagonist… while he has no money to do this. Illinois would do better to go back to its shameless begging.
What happened to that money you were given, Illinois?
How are those pensions doing?
Illinois pensions are doing better than Chicago pensions, so perhaps they should think about what happens when the money runs out.
Johnson did inherit the worst city pension problem in the country.
He’s not making it better.
And nobody is coming from the outside to rescue Chicago.