More on Chicago Pension Finance: Those Pension Sweeteners Sure are Sour

Break the bank to buy votes... and get a bailout?

It’s those Tier 2 pension benefits.

It’s always Tier 2.

20 July 2025, Austin Berg: Pritzker’s pension problem, charter chatter, and an abundance agenda victory

Chicago is home to the worst-funded pension plans in the nation. That debt is the single biggest drain on tax dollars that could otherwise go toward education, social services, or public safety. It’s also the main driver of the city’s endless cycle of tax and fee hikes.

A bill now on Gov. JB Pritzker’s desk would make the pension problem much worse. It adds $11 billion in pension liabilities for Chicago police and fire, costing the city $60 million next year and $753 million in 2055.

But Chicago Mayor Brandon Johnson hasn’t said a word about it. So it was refreshing to hear outgoing Illinois comptroller and potential Chicago mayoral candidate Susana Mendoza speak out against the bill this week.

Paris Schutz: Speaking of financial decisions that could impact the city, the governor has on his desk a bill that would increase pensions for the so-called Tier 2 police and fire employees. And according to some analysis from the Civic Federation, that’s going to cost billions … up to $750 million a year by 2055. How can the city afford another unfunded liability like this?

Mendoza: Let me be the first to say that I love the police. My brother’s a police officer. I want to see them be able to [get] their pensions … But when we take what is already a woefully underfunded pension system at 25% funding and do this, which really truly is unaffordable right now, from a 25% worst-in-the-nation funding level to an 18% funding level, what that really means is if we want to be truthful with people is that it might go completely insolvent. I don’t know how you recover from an 18% funding level. If we were in a better fiscal condition then we could argue let’s do these things. We definitely want to help our police, our firemen, our frontline folks. We love them. But I also want to make sure that when they retire

Mendoza’s answer was excellent. Frontline workers aren’t to blame for this disaster. Lawmakers are. And they can still choose not to make it worse.

More leaders should follow Mendoza’s example.

Making a promise is not the same as fulfilling that promise.

Let me remind you of my prior post on Chicago finances, how well the city has been making contributions to the police and fire pension funds of late:

Chicago Fire:

Chicago Police:

You see those red bits? That’s the bits of the promise that they’re supposed to be contributing to the pensions to meet the promises they’re currently making.

BEFORE bumping up the unfunded portion of the promises by an additional 40%.

They huffed and puffed about “Oh, we’ll do a longer amortization schedule”, but that simply makes the pension funds more vulnerable to failure, because they’ll be asking for smaller contributions for a bigger promise.

That is nuts. They’re already failing to meet their obligations.

WHY WOULD YOU MAKE THAT OBLIGATION BIGGER?

Wirepoints in the WSJ

The Wirepoints guys had put forth their thesis that it’s a bad idea to boost the Chicago pension promises in this 18 July 2025 op-ed: JB Pritzker Presides Over an Illinois Pension Mess

Enacting the Chicago legislation would be a complete denial of financial reality. In typical Illinois fashion, the bill slipped through in the middle of the night during budget negotiations. It took policy experts days after the end of the session to even realize the bill had passed.

If lawmakers wanted to sweeten pensions, they should have balanced the interests of highly compensated Tier 2 employees with the interests of taxpayers. Instead, the sweetener bill throws pension debt on a steep amortization ramp to minimize the upfront effect on taxpayers. The new law adds $60 million to the city’s pension tab in 2027, but by 2055 the increase jumps to $753 million. Private companies aren’t allowed to stretch out pension payments like this. Normal practice is that if you want to change pension provisions, you pay for them in full the year you make the change.

“Normal practice”? In public pensions?!

Normal practice in public pensions: Pay more later!

MY DUDES, you know that “normal practice” is what they did here.

California did this exact thing when they boosted pensions in 2000, claiming that SB 400, which did a massive pension benefit boost to CalPERS participants, would not cost the state taxpayers any extra contributions. More background from Ed Mendel in this 2019 piece: How a CalPERS-sponsored bill increased pensions

This is what happened with CalPERS:

Yes, the graph stops in 2013. Yes, they are still getting employer contributions, don’t worry. There are just issues in how the data are reported and aggregated. The main thing to look at is the very small amounts “required” in 2001 and 2002… which ramped up rapidly until 2005.

This is what happened to CalPERS’ funded ratio:

Every year, the “required” payments are made, and every year, they’ve just slowly deflated in funded ratios. Yes, some of it is the result of lowering the discount rate used to value the liabilities. CalPERS went from 8.25% in 2001 to 6.8% in 2024. That does make a difference.

However. They’ve had almost 25 years of much higher contribution rates than that very small amount in 2001. And yet… Well, I may need to revisit CalPERS for its own post, because there are some nasty things brewing over there.

I will note that it wasn’t just CalPERS that deflated, but that red line also shows that similar U.S. public pensions also went from fully-funded to about 70% funded over the same period, even if they didn’t necessarily retroactively boost their promises as California did.

Best practice: pay when the promises are earned

Best practice is paying for the promises you make at the point at which they are accrued. Not paying Tuesday for a hamburger today (my dudes, don’t be financing your hamburgers… you’re not doing that, are you?)

If you increase the pension benefit formula, as they want to do here, that means a whole bunch of past work had earned more pension benefits than you already calculated for. You need to pay for it now, to recognize that you just boosted the unfunded liability.

But their idea is not only will they boost the unfunded liability even higher, they will amortize that unfunded liability over a longer period, and use a “ramp” to make it more politically palatable.

PAY MORE LATER!

If you read the op-ed, you see the Wirepoints guys point out the much higher amounts projected for 2055… a time when many of the politicians making this decision assume they’re going to be dead and not have to deal with any of this.

Letters to the Editor: WSJ

WSJ ran some response letters, and shall we say these were very lop-sided: Is Pritzker Playing 5-D Chess With Illinois Pensions?

I just want to pull one:

Illinois doubling down on its enormous pension disaster is complete economic folly—unless Springfield is confident that a big federal bailout will be in the offing when the state hits the wall. If so, then well played, Illinois, for picking our pockets.

Dana R. Hermanson

Marietta, Ga.

Now, they may think: well, the multiemployer pensions (MEPs) got their bailout — why won’t we get ours?

To remind people for a moment, the MEPs slipped their bailout in the nascent Biden administration in March 2021, while the Democrats were having fun cramming in a bunch of unrelated items to a COVID “rescue package”. A bunch of money was thrown around, and we all remember what happened after that….

(Yeah, somebody put this together thinking that the recent very high grocery prices might be a great dunk against Trump… maybe if you forgot about 2021-2024.)

Here is a comparison I made at the time of the amount of unfunded liabilities of various retirement systems:

If Illinois gets its timing right, maybe it could get its pension bailout. But even during COVID, when Illinois politicians asked for a “little” help in making pension contributions, nobody was feeling it.

People are currently freaking out about Social Security. The people not directly dependent on Illinois pensions may not be in the mood to top up Illinois when their pension funds are feeling the squeeze of the pension python.

Note how I was saying above: “they’re already not meeting their obligations to the pensions?”

Public pensions folks generally act as if, as long as people are getting their benefits, the obligations have been met. Paying for the promises when they’re accrued isn’t the “meeting obligations” part, unlike everywhere else in finance.

In insurance, a company gets taken over by regulators if you don’t have enough money to cover the promises made in its policies, plus extra to cover adverse situations.

So, to the politicians, the pensions aren’t bankrupt when the assets run out. It’s when the assets run out, AND the benefits cannot be maintained on a pay-as-you-go basis.

But to be even more cynical, many of these politicians assume they will be out of office when the trouble arrives.

The Daleys operated that way. They took the money and ran. Some others are looking for the exit.

Another comment from the WSJ on the Wirepoints op-ed:

Michael Baldridge

2 days ago

My neighborhood in a popular city in a red state has an unusual number of young, retired, California teachers and cops. They take their rich pensions and move to a low tax state, away from the disasters they help create. Now they're voting Blue here. They're like a virus, infecting a host, moving to a healthy one, then infecting that one.

A lot of the retirees have to move away, given the very high property taxes (and other taxes) in Illinois, which they need to pay for all these high benefit levels.

But the problem is — how to finesse the Chicago (and Illinois) public pension bailout? People will look at it and know: you guys deliberately underfunded your pensions for decades. And you come cap-in-hand, asking for hundreds of billions of dollars to be made whole?

The only way it gets done is similar to the MEP bailout — and the Chicago Tier 2 sweeteners. People have to be completely distracted by something else.

So… get working on that distraction, Chicago and Illinois.

I’ve seen the Obama Presidential Center. Looks like the perfect place to try to develop such a plan.

Barack Obama Presidential Center, April 2025

Get cracking.