Jane the Actuary Retirement

Forbes post, “No Hope In Sight For Chicago’s Worst-In-The-Nation Pension Plans”

Originally published at Forbes.com on August 1, 2023.

Back on July 18, the Equable Institute released the 2023 version of its annual State of Pensions report, which means that, yes, it’s time for another check-in on these infamously-poorly-funded pension plans. Among the wealth of tables is a list of the best and worst-funded of the 58 local pension plans studied, and, yes, you guessed it, the bottom five spots are Chicago plans, with the bottom three at levels far below all others:

  • Municipal employees, 21% funded,
  • Chicago police, 21.8% funded, and
  • Chicago fire, 18.8% funded.

Combined with the Chicago Laborers’ pension fund, with a 41% funded status, the pensions for which the city bears a direct responsibility have a total pension debt on a market value of assets basis of $35 billion. (This data is from the actual reports*, released in May, which doesn’t match the Equable report precisely.) Spot fifth-worst is taken up by the Chicago Teachers, at 42.4% funded, and the first non-Chicago system in their list, Dallas Police & Fire at 45.2%, is twice as well funded, percentage-point-wise, as the Terrible Trio.

If those rankings and funded ratios aren’t dismaying enough, here are some other ways to look at it:

The Police and Fire pensions aren’t targeted to be 90% funded until 2055, and Municipal, not until 2058. Even with this long delay, the Fire plan is scheduled to contribute 78% of pensionable payroll every year until that date, and the Police plan, 68%. And in terms of the overall percent of the budget, the city spends 20% of its operating budget on pensions plus 80% of the property tax revenue it receives as a separate line-item.

And future pension increases for currently clout-less groups aren’t just hypothetical and in the distant future. In 2021, despite then-mayor Lori Lightfoot’s opposition at the time, a more-generous COLA benefit previously available only to grandfathered Fire employees was made available to all in legislation passed by the state, based on the rationale that the state had been continuously changing the grandfathering date so that it was more honest to do away with it altogether. No politician questioned this false narrative: the perpetual cut-off-date changing ended in 2004, when the city and state truly got serious about pension underfunding, and only resumed in 2017, with the same individual, Robert Martwick of Chicago, pushing that change. The following session, Martwick pushed for the same change for the Police, plus additional enhancements, a bill which, as a small silver lining, was not passed, but he hasn’t given up, and this past spring had been pushing for a fix for the entire Tier 2 system, despite the lack of actuarial analysis, which he brushed off as “quite expensive.” And even though those bills didn’t get passed, reporting indicates that the police fix was merely delayed until this coming fall, and, what’s more, one of the co-sponsors of Martwick’s bill to boost Tier 2 Chicago firefighters’ pensions is now deputy chief of staff to Mayor Johnson.

So, given all this, what is the new mayor’s position?

At the moment, new mayor Brandon Johnson is hosting a series of community roundtables on the budget, which is standard procedure. Although, as the Chicago Tribune reports, budget director Annette Guzman has been cautioning her audience that “Unfortunately, it’s sort of like a zero-sum game . . . OK, there’s only so much resources that we have,” Johnson himself has been encouraging attendees to dream big: “How about a budget that creates more than enough for revenue?” And he added a special session for teens and young adults, at which, as Block Club Chicago reports, “Volunteers at each table took notes and helped move the conversation along, asking young people what ideas they had for investment.” (Yes, it is a clear red flag when ordinary social spending is elevated with the label “investment,” implying that it “pays for itself” and is therefore in a special category in which the immediate cost is not an issue.) Throughout his campaign, he promised a wide range of spending increases and tax hikes to fund them, so there is still much uncertainty as to his actual budgeting decisions when bills have to be paid and his new tax wish list is restricted by the need for state approval.

He does, at least, acknowledge the issue, and last May established a working group to discuss the issue, saying, in a statement (per the Tribune),

“As Mayor of Chicago, I am committed to protecting both the retirement security of working people, as well as the financial stability of our government so we can achieve our goal of investing in people and strengthening communities in every corner of the city . . . Together, with our state legislative partners in Springfield, I am establishing a working group to collaborate on finding a sustainable path forward to addressing existing gaps in the city’s four municipal pension systems (Firefighters, Police, Municipal, and Laborers).”

What that means, in practice, appears to be a matter of finding new tax revenues, for example, according to the reporting at WTTW. And in that regard, it is disappointing that the actual members of Johnson’s Pension Working Group are exclusively local politicians, Chicago government officials (e.g., the CFO), representatives from the affected unions and, in the case of one individual without a listed affiliation, a longtime staffer in the Pritzker administration and the Chicago Public Schools. There are no representatives of the Civic Federation, with its history of promoting good governance, or any other organization with a similar point of view.

What’s more, Ralph Martire and his Center for Tax and Budget Accountability continue to promote what he calls “reamortization” as a solution to the problem, both through an April Chicago Sun Times commentary and through the release of a report, “Understanding – and Resolving Illinois’ Pension Funding Challenges” (which is an update of a prior proposal). This proposal, which is directed at Illinois pensions but is clearly meant based on other comments to be an all-purpose fix, sounds innocuous, as merely a sort of “refinancing” as one might with a mortgage, but it’s really much more as he proposes to

  • Reduce the funded status target from 90% to 80%, based on the claim that the GAO deems this funded status to be the right target for a “healthy” plan (whether he deliberately misleads or not, he is wrong here, the National Association of State Retirement Administrators or NASRA clearly explained more than a decade ago that 100% funding is always the right target and the only significance of an 80% level is that private sector pension law requires plans funded less than 80% to take immediate corrective action rather than have a long-term funding schedule, and the American Academy of Actuaries more explicitly calls this a “myth”);
  • Issue large sums of Pension Obligation Bonds, which were questionable already when they first began promoting this but are now a terrible idea with our current high bond rates, all the more so for a low-credit-rating city such as Chicago; and
  • Move contributions from last day of the fiscal year to the first day, which he argues would be a gain of a year’s investment return while forgetting that it requires the city to have this money on Day 1 and forgo the other uses it would have.

So where do we head now? In a perfect world, the need to make Tier 2 changes would set the stage for a “grand bargain,” similar to Arizona’s pension reform, in which they got public support to make a very limited exception to their own constitutional pension protection clause. In the real world, in which fiscal conservatives have disappeared from Chicago or Illinois government even as a strong minority voice and in which Covid funds have filled budget holes and allowed the illusion of spending prudence, I don’t hold out much hope for such a solution.

 

*Links for the pension funds’ actuarial reports are here: Chicago Fire, Chicago Police, Laborers, and Municipal Workers.

 

Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Mismanagement Compounding Underfunding: The Chicago Police Pension Forensic Audit”

Originally published at Forbes.com on September 6, 2021.

 

Readers, when I first read that retirees and employees in the Chicago Police pension system were pursuing a “forensic audit,” that seemed like nothing more than wishful thinking. It seemed plainly obvious that the plan’s massive underfunding was explained by the lack of a commitment to fund the plan properly, and by years of delusion that future favorable investment returns would solve the plan’s problems. But it turns out that there are serious issues with how that plan was managed that compounded these underlying issues, as revealed in a new report released at the end of August.

The background to the report is this: after this rapid decline in pension funded status over the past two decades (the police pension was, after all, 71% funded as recently as 2000), a group of retirees, widows, and active officers formed a group called the CPD Pension Board Accountability Group in February 2020, asking for a full audit of the fund. Their requests were denied, even when they offered to pay the full cost themselves, so they hired the author, Christopher Tobe, who set about doing the research based on publicly-available information as well as through making a series of Freedom of Information Act (FOIA) requests, the largest number of which, Tobe says, were illegally denied.

Here are some of the highlights of the report:

It is reasonably well-known that the pension plan has been underfunded for years, and that the state, in setting a new funding plan, allowed a “funding ramp” in 2011 and then re-set that ramp in 2016, so that funding according to the “90% funded by 2055” target only began in 2020. However, Tobe alleges that “Chicago has consistently underfunded the plan more than the statutory amount, blatantly breaking the law, with no consequences.”

Regarding fees and management, Tobe alleges that the pension fund has “failed to monitor and fully disclose investment fees and expenses” and that “fees and expenses could be 10 times that which they disclose” because the fund’s disclosure “omits dozens of managers and their fees.” He also reports that the Fund claimed that “hundreds of contracts for the investment managers” are exempt from FOIA, and denied him access to the fund’s own analysis of fees. He concludes that “PABF may have over 100 ‘ghost managers’ in funds of funds,” that is, the fund is required to disclose its managers but it fails to do so, even though Tobe has identified them through other sources.

Tobe also found that “pay to play” is alive and well in Chicago. A 2014 report found that “former Mayor Rahm Emanuel received campaign donations of over $600,000 from investment managers who manage accounts for the PABF and other city funds.” In addition, Mayor Lightfoot has received $200,000 in donations from firms managing Chicago pension funds.

In addition, while poor performance is never a proof of failure in isolation, Tobe found that the pension fund had well-below-average investment performance, compared to other funds — at the 90th percentile (bottom 10%), which he attributes to the fund’s use of alternative investments, with high fees not compensated for with high returns. He also raises concerns of cooked books, but cannot confirm this because of the city’s repeated denial of records requests.

With respect to governance, the fund violates a fundamental aspect of prudent governance because its Chief Investment Officer is not a professional with qualification in the field, but simply a trustee and active-duty policeman, and, what’s more, one who has “22 allegations of misconduct as a police officer including one for bribery/official corruption.” Further, no staff members hold the credential of a CFA charter, another marker of professionalism. Another related governance issue is the use of offshore investments, e.g., in the Cayman Islands, which lack key governance and transparency protections of US-based funds.

Finally, with respect to financial reporting, “the Chicago Police Pension has decided to stop issuing Comprehensive Annual Financial Reports,” issuing a report neither in 2019 nor in 2020 (though it has made public the actuary’s reports for those years and makes available the valuations back to 2007 on its website).

There’s more, but I’ll stop here, as this is more than enough to illustrate that there are troubling practices at the fund that only compound the already-serious funding issues. It is not possible to know how much these mismanagement issues have effected the plan’s investment returns and plan expenses, but regardless of the magnitude, none of this should be happening. The city of Chicago wants us all to believe that the corruption which has been part of the city’s legacy for so many years, is in the past — but this report calls that into question. And, regrettably, Tobe’s report has gone practically unnoticed in the local media, with, to the best of my knowledge, coverage only at the local CBS affiliate.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Are Contribution Underpayments Really The Cause Of Chicago’s Pension Woes?”

Originally published at Forbes.com on September 7, 2019.

In response to my latest article on Chicago’s underfunded pensions, a commenter at my personal website shared a link to the Center for Tax and Budget Accountability to affirm his view – and that of many others – that the cause of the the underfunding is simply the unconscionable failure of the city to pay its contributions. The article in question dates to this past January; titled “Chicago’s pension crisis isn’t really about pensions — it’s about debt,” it makes the claim that

“By far the largest reason for Chicago’s level of pension debt is that the city has simply failed to pay what it owes,”

which it backs up in part with a chart showing that the pension normal cost, or annual new benefits accrual, is relatively stable between 2017 and 2030 while pension payments balloon – a statistic that’s true enough but doesn’t provide any evidence one way or the other regarding a claim that boosts in benefit provisions in past years play a role because that’s all now baked into the current and future normal cost.

But beyond that, it attempts to prove that the cause of the crisis is city underpayment with the same recitation we’ve heard before: the city hasn’t paid its required contributions. The author, Daniel Kay Hertz, provides a chart which looks quite a bit like my own graphic from back in January (though his chart starts only in 2008, uses some different timing, and combines all plans, while my analysis only included the largest Municipal Employees’ plan), in which I demonstrated that it’s simply an unhelpful, trivial statement that the city didn’t pay its required contributions, when those contributions themselves grew unsustainably. Hertz’s chart shows an increase of 150% (in nominal dollars) from a bit less than $1 billion in 2008 to nearly $2.5 billion in required contribution in 2017.

And, as a bit of a refresher, here’s my calculation from January of the Municipal required contributions recalculated to remove the effect that each year’s unpaid contributions are, in part, added to the following year. The bottom line remains that, looking at this chart, it’s plain to see that, had the city been paying the required contributions according to the actuary’s formula, we’d be experiencing complaints that the size of those contributions was spiraling out of control – and (again, go read my prior linked article) even paying those contributions would have left the Municipal plan (again, the subject of my prior analysis) at only about 50% funded.

But that’s only the Municipal plan; without engaging in the full reconstruction (and FOIA requests) necessary to recreate the above chart, I have pulled together some basic data for the Police and Fire plans.

In my January analysis, I sought to answer the question, “how did the Municipal Employees’ plan’s funded status drop so dramatically from its peak of nearly full funding in 2001?” But neither of these two plans ever made it as high as that – while that same year was more-or-less the peak funding year for both of these plans, the highest funded status these plans ever attained was 71% in 2000 – 2001, for the Police, and hovering-at-60% from 1997 – 2001, for the Fire plan.

At the same time, actual city contributions are likewise available in the posted-online reporting going back as far as 1997. (Small disclaimer: before 2006, this includes a contribution for retiree medical, but this is a very small piece of the total.) Here I’m only showing contributions prior to the implementation of the “ramp” in 2015, to get a better understanding of past history and avoid the short-term distortion.

Looked at in terms of relative changes since 1997, the Fire plan’s contribution nearly doubled, and the Police contribution increased by 63%. Yes, there was some fluctuation, but no “contribution holidays” in the sense of entirely failing to pay contributions. In fact, whether by coincidence or by design, over this 18-year period, for both plans, whether considering the total sum in nominal amounts or adding in expected asset returns, the contributions very nearly match the amounts as if the city had increased their contributions by the expected annual increase in payroll (that is, using the assumed 3.5% for Fire and 3.75% for Police in the 2018 valuations) – which is not a surprise given that the contributions were based on a “multiplier” approach that should increase in this fashion, but goes against the narrative of contribution cheating.

Now, again, there are multiple factors in move from low to the present catastrophically-low levels of funding: demographic impacts, benefit increases, and the relentless impact of asset losses and assumption and experience losses, in a plan where an asset return rate as high as 8% make the plan very vulnerable when the asset return isn’t achieved. (And, at the same time, the Municipal Employees’ plan achieved its short-lived almost-full-funding with a combination of both very favorable asset returns and increases in the asset return assumption itself.)

But there is nothing that suggests that in the recent past the city has deliberately shorted the pension plans; clearly there’s no pattern that can tie the crash in funding levels to a decline in contributions.

What the funded status and funding patterns do suggest, however, is that, at their inception and for many subsequent years, these plans were never really intended to be any more than partially funded – and by the time everyone involved acknowledged that, indeed, true efforts at funding were necessary, it was too late to reverse course without contribution hikes at levels so large that they themselves would cause howls from people with competing funding demands.

And, yes, I’ll go there: for years upon years, decades upon decades, the city’s firefighters and police officers bargained for wage and benefit increases via their unions. But they, too, saw underfunded pensions as so thoroughly ordinary and unexceptional that, so far as I can tell, it never crossed their minds to bargain for improved pension funding.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Chicago Fire, Chicago Police, Chicago Pensions: Why A COLA Change Isn’t A Cure-All”

Originally published at Forbes.com on September 6, 2019.

 

Yes, I am certainly just one of many who get on their respective soapboxes about Chicago pensions (as I have been) and say, “a fixed 3% COLA is unsustainable when inflation is running at a rate far less than that.” But in the interest of being careful with the facts and avoiding misunderstanding, I owe readers an article clarifying what that particular fix will — and won’t — do.

To begin with, only the Municipal Employees’ and the Laborers’ plans have a compounding Cost-of-Living Adjustment for their Tier I employees. This was implemented as of January 1, 1999, at a point at which the plan had a 90% funded ratio due to the bull market of the late 90s. (Prior to this date, beginning in 1984, the COLA was 3% non-compounding, pre-1984, the COLA was 2% non-compounded.) The change from a non-compounding to compounding COLA, at the time, “cost” a modest 5% increase in liabilities — however, the change was “cheaper” to implement that it would be today, because the valuation interest rate was 8% (now it’s 7%, which raises the relative value of the benefit payments further into the future), and because it used an older mortality table (if retirees are predicted to die sooner, the value of the compounding nature of the COLA is relatively less than with predicted longer life expectancies). If the same effect were calculated today, it might be more like 6 – 7%; in either case, it was not wildly reckless for the city to have provided this enhancement.

For Police and Fire, the story is different.

For both of these plans, future retirees receive a 1.5% annual adjustment, non-compounded, that is, always based on the original benefit. Those born before the year 1966 receive a 3% COLA, but it remains non-compounded. This benefit provision is much closer to the Tier 2 benefits that Municipal and Laborers’ participants (and teachers and state workers) have.

And the Police and Fire plans comprise almost exactly half the total liability (50.1%, to be precise, according to the CAFR).

What’s more, the benefits in the Police and Fire plans are as generous, or more, than the Municipal and Laborers’ plans, despite the lack of a compounding COLA; the Police, Fire, and Labobers’ plans each have benefit accrual rates (normal cost rates) of 19% of payroll while the Municipal Employees’ plan is only at 13%.

Why? These two plans have provisions for retirement at an age that’s significantly younger than even the Tier I Municipal Employees:

For the Fire and Police pension, age 50 if hired before 2011; age 55 (or 50 with a reduced benefit) if hired in 2011 or later.

For the Municipal Employees: age 60 if hired before 2011, or age 55 with reductions; age 67 (or 62 with a reduced benefit) if hired in 2011 or later.

That’s a lot of years of additional benefit! And, in order to provide a full-career-sized retirement benefit even with a shortened career, the per-year-of-service accrual factor is higher accordingly.

This makes a big difference, and the (let’s be honest) lower life expectancy isn’t enough to offset the early retirement ages.

Now, I’ll admit: I am not an expert in the health and well-being of firefighters or police officers at retirement, nor whether they’re able to work at a desk job, nor can I opine on the degree to which those individuals who retire at age 50 simultaneously collect their pension and work in the private sector — all of which factor into the question of exactly how much room there is for increasing the retirement age for these workers. Certainly, though, if an age 55 retirement age is deemed fair for the post-2010 hires, that seems to suggest that it’s at least a starting point for reform for the pre-2011 hires.

Is the city, are the aldermen and the mayor willing to ask the question of what the proper retirement age is, for police and firefighters? To ask for concessions? To limit retirees to a partial benefit for the early retirement years on the expectation that these former workers are still employed, though possibly at lower rates of pay?

So why is there so much focus on the COLA?

In part, because that’s the low-hanging fruit (to whatever degree something requiring a constitutional amendment can be labelled “low-hanging”); there’s no apparent harm done to anyone by trimming this benefit, and it’s simply not readily defensible to insist on keeping the fixed, compounded 3%.

Other cuts have a much more visible cost to them. Yes, it’s possible to eliminate cost-of-living adjustments entirely and cut liabilities as much as 20% (based on my own, simplified calculations), but some sort of inflation-compensating adjustment is generally recognized as appropriate for as long as these workers do not participate in Social Security. The benefit accrual rate is 2.4% for city workers, 2.5% for police and fire – might the city cut this, for future accruals and future pay increases, and by how much? Might the city apply the pensionable pay cap that’s already in force for the Tier 2 workers, to Tier 1 as well? Apply a cap to benefits already in payment? Increase the retirement age for Tier 1 workers and not just their Tier 2 counterparts?

There are plenty of options if an amendment is passed protecting the dollar-amounts of accrued benefits only, but each of them has more pain for the affected retirees and workers than an unwinding of the compounded COLA.

The bottom line? Eliminating the fixed compounding COLA is a great first step, but if it’s the only step, the improvement in funded status will be small.

Note on sources: each of the four entities has websites on which they make available their actuarial reports: the Police, Fire, Laborers’ and Municipal Employees’ plans. Each of the reports includes substantial detail, including history of the plan, that year’s results, and a 50-year projection of the plan financials on an “open plan” basis — and each of the reports includes strong language from the actuaries urging sounder funding. For three of the four, reports for the past decade are available; the Municipal Employees’ plan website provides actuarial reports dating back to the 1980 plan year, very handy for my January deep dive into the system.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “It’s The Insolvency, Stupid -Why Pensions Really Are An Urgent Issue For Chicago”

Originally published at Forbes.com on September 3, 2019.

 

First, an apology and a disclaimer:

I really do have more to say on eldercare – honest! – but squirrel! – it’s Chicago pensions in the news again and I really can’t resist.

Second, both Mayor Lightfoot and Gov. Pritzker are relying heavily on new revenue from pot legalization and increased gambling, and I am highly skeptical of the position taken by many supporters that this will be achieved without increases in the degree to which the paycheck-to-paycheck denizens of city and state spend money they don’t have on these activities, because the money will come from tourists and from residents currently gambling elsewhere and toking illegally. At the same time, to my knowledge, no study exists that clearly confirms or refutes such claims, which means that I’m ill-equipped to opine with certainty on how much revenue the city and state will wind up with as a pension-funding source, and at what social cost.

But let’s dive into the pension math (and history).

Here’s a table of the current contribution schedule and history, for the four City of Chicago pensions, taken from the 50-year projection tables in their actuarial reports (see below for sources), and reported in thousands of dollars.

Individually by plan and in total, the city contributions are scheduled, by current law, to increase each year by dramatic amounts, until 2023, when the ending point of the city’s contribution ramp is reached. At this point, increases hover at about 2%; they are intended to rise in step with pensionable payroll, which is less than total payroll because of the increasing impact over time of the pay ceilings that affect post-2011 hires.

Here’s the history:

For the Police and Fire plan, the city funded the plans based on the archaic “multiplier” system without regard to future funding levels of the plan, until, as of 2011 legislation (Public Act 96-1495), the city was required to begin funding towards a goal of 90% funding in 2040, with a ramp enabling the city to continue to pay too-low contributions until plan year 2015. In 2016, the city re-set the ramp with a new schedule of fixed, lower contributions through 2019, and with a new objective of 90% funding in 2055. (Note that the contribution designated for any given “plan year” is actually made in the following year, so that there can be apparent mismatches in descriptions of timing.)

The Municipal Workers and Laborers’ plans were unaffected by this 2011 legislation; only in 2014 did legislation implement requirements for funding, in which the funding target was set at 90% in 2055, with a ramp of lower funding levels up to 2020. However, the legislation which implemented this new funding target and ramp (Public Act 98-0641) was the same legislation as contained the attempted pension reform, so when this was ruled unconstitutional, pension contributions reverted to the old “multiplier” method, until in 2017, a new funding target and ramp was created for these two plans, with a target of 90% funding in 2058 and lower funding levels through 2022.

And, bearing this in mind, Mayor Lightfoot was asked, in the Crain’s forum I cited at length earlier this week, whether she had considered adjusting the ramp, and replied that the rating agencies wouldn’t stand for it.

Wrong answer!

It’s not about being obliged to follow arbitrary and capricious rating-agency requirements. Following the statutory funding schedule is the only thing that stands in the way of pension insolvency. The age-old politician’s game of deferring payments to later will leave a bitter pill not merely for “the children”, at some vaguely-defined point in the future, but before Lightfoot’s own daughter (she’s 10 now, or was, at the time her campaign website bio was written) graduates from high school.

I did the math.

(I did way more math than I should have, really.)

If the city were to decide that the Municipal plan’s contributions are burdensome enough as it is, and to freeze the ramp except for an inflationary increase, the plan would become insolvent in 2027. That means that the fund would be completely drained and the city would have to start paying pension benefits directly, in 2027, a cost of 1.3 billion and climbing steadily. (Mayor Lightfoot’s now 10-year-old daughter would be graduating high school.) And that’s assuming that assets continue to earn 7% per year in investment returns; if the stock market drops further, and, for example, average returns are only 3%, insolvency comes sooner, in 2026. (Her daughter is choosing a college or a skilled trade.) And if the city decides that even the current contribution level is too great a burden when there are affordable housing and mental health programs to be funded, and backs up to last year’s contribution, insolvency hits in 2025. (Her daughter is getting her driver’s license.) And, of course, there are other hypotheticals: what about population declines? Tax base losses? But I hope I’ve made my point.

The Municipal Employees’ plan is the most extreme case because the Police and Fire plans, while even more poorly funded, are further along on their ramps, but if the city chickens out and reduces their funding back to an earlier stage in their ramp, they’d be looking at insolvency at a similar timeframe; the Laborers’ plan, while the best funded and least at risk of insolvency, is also the smallest of the four.

And, incidentally, a bit more history: the actuarial report for the Municipal Employees’ plan in 2013, prior to the ramp, and in 2015 and 2016, when the ramp was scuttled, also predicted insolvency in 2025.

So, again, to repeat: when we speak of the importance of pension funding, most of the time, it can be fairly abstract and hypothetical. It’s unfair to future generations to ask them to pay what amount to basic payroll costs. There’s a risk that a plan that relies on future tax base growth could fall apart because, let’s face it, by the time you can predict that a city or state’s population is declining rather than growing, it’s too late. And giving legislators the ability to defer funding places us at risk of them succumbing to a temptation they simply shouldn’t have. (Yes, I’ve hashed this all out before.)

But this is no longer hypothetical. It’s no longer about good governance principles. It’s about impending insolvency if the city backs out of its funding schedule.

A note on sources: each of the four entities has websites on which they make available their actuarial reports: the Police, Fire, Laborers’ and Municipal Employees’ plans. Each of the reports includes substantial detail, including history of the plan, that year’s results, and a 50-year projection of the plan financials on an “open plan” basis — and each of the reports includes strong language from the actuaries urging sounder funding. For three of the four, reports for the past decade are available; the Municipal Employees’ plan website provides actuarial reports dating back to the 1980 plan year, very handy for my January deep dive into the system.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.