by Mish

"Without a taxpayer bailout, Chicago’s police pension fund won’t have enough money to pay benefits to retirees in 2021, according to a projection by Local Government Information Services (LGIS), which publishes Chicago City Wire.

At the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following year.

Fund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS.

LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015.

The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015.

Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.

Even assuming Chicago taxpayers and active Chicago police officers continue subsidizing the fund at traditional levels, and that the fund manages to generate investment returns consistent with the last 12 years– 5.19 percent per year, on average– its assets will still race to zero, outpaced by faster-growing benefit payments."

Income vs Benefit Projections

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Higher Salaries Bigger Retirements

Read the article for more gory details but here is one key point: Chicago taxpayers are currently paying more retired police officers than they are active ones as salaries soared by 39% and pension spiking escalated.

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2021 at the Latest

The above analysis assumes fund manages to generate investment returns consistent with the last 12 years– 5.19 percent per year, on average.

What happens if it’s even less?

The obvious answer is the fund will run out of money prior to 2021. And that is precisely what I expect.

Projected Returns

I am giving a presentation on Saturday and here are a few slides I will be discussing.

Shiller P/E Ratio

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Median P/Es

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Projected Returns

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Tweet of the Day

Earlier today, Johnathan Tepper Tweeted “Two Powerful charts showing you what kind of equity returns to expect over the next 10 years. Enjoy

"Two powerful charts showing you what kind of equity returns to expect over next 10 years. Enjoy.

— Jonathan Tepper (@jtepper2) June 23, 2017"

Too Broke to Fix

Higher taxes will drive people and businesses away. Reform is too late to save Illinois public pensions.

On June 21, I commented Governor Bruce Rauner Screws Illinois when the governor proposed raising taxes while asking for virtually nothing in return.

Proposed Deal

  1. Four-year tax hike to 4.95%, up from 3.75%
  2. Expansion of sales taxes
  3. New taxes on cable and satellite TV
  4. Four-year property tax freeze
  5. No right-to-work reform
  6. No collective bargaining reform
  7. No pension reform
  8. No workers’ compensation reform
  9. No spending cuts
  10. No term limits
  11. No gerrymandering reform

The freeze will be off in four years so Republicans would gain nothing.

That’s not a done deal yet, as Democrats want even more. Hopefully, Rauner changes his mind.

“B” Word Hits Chicago

On January 20, Governor Rauner proposed bankruptcy for the Chicago Public School System. I commented “B” Word Hits Chicago

On May 3, I commented Puerto Rico Placed in Bankruptcy Protection: Illinois Needs Similar Deal.

In the above link, I stated that Illinois desperately needs five things.

Five Desperately Needed Reforms

  1. Municipal bankruptcy legislation
  2. Pension reform
  3. Right-to-Work legislation
  4. End of prevailing wage laws
  5. Workers’ compensation reform

Bankruptcy, the ONLY Solution

Number one on my list of Illinois reforms is bankruptcy legislation. It is the only hope for numerous Illinois cities strapped with impossible-to-pay pension liabilities.

As part of any budget package, Rauner must demand municipal bankruptcy legislation. Bankruptcy is the only solution for Illinois that works.

The system is simply too broke to fix.

Mike “Mish” Shedlock

Bankrupt Illinois Cities Forced to Cut Services to Fund Pensions

Multiple cities in Illinois are forced to cut police, fire departments and other city services to fund pension plans.

Chicago Pension Liabilities Jump 168%, Understated by $11.5 Billion

New accounting rules show Chicago has understated its pension liabilities by $11.5 billion.

Chicago Pension Situation Improving Says Mayor: Careful Analysis Uncovers Lies

Chicago Mayor Rahm Emanuel brags about balancing the Chicago budget and fixing the city’s pension plans. Reuters writer Dave McKinney took the lies hook line and sinker.

Dallas Police and Fire Pension Halts Withdrawals in Solvency Crisis, Lawsuits Await

The Dallas Police and fire pension fund was hit with an alleged “liquidity” crisis that forced the Dallas mayor Mike Rawlings to file a legal motion to halt withdrawals

Dallas Police Retiring in Droves, Taking Lump Sum Pensions, Fearing the Money Isn’t There (And It Is

The Dallas police and firefighters pension fund has just 45% of the money it needs to cover benefits. The fund rates to be out of money in 15 years at the current rate of withdrawals.

85% of Pension Funds to Fail in Three Decades

Bridgewater Associates did an analysis of pension funds recently and concluded 85% of them will fail if returns average 4%.

“B” Word Hits Chicago: Illinois Governor Proposes Bankruptcy for Chicago Public School System

At long last, Illinois has a sensible proposal to help Chicago schools: Bankruptcy.

Pension Problem Too Big To Ignore?

Bloomberg writer Danielle DiMartino Booth says the Pension Crisis Too Big for Markets to Ignore. But I have a question: If the problem is too big to be ignored, why is nearly everyone complacent?

Illinois Pension Plans Dumps $1 Billion in Value Stocks to Self Manage

An Illinois pension plan just pulled a billion dollars from an underperforming value fund to seek better returns.