The Phaserl


This is How You’ll Bail out Municipal Pension Funds

by Wolf Richter, Wolf Street:

Check the bills in your mailbox. Happening now in Chicago.

It has gotten so bad that the phrase “Pension Crisis” made it into Wikipedia. It’s the perplexing reality that municipal, state, federal, and corporate pensions in the US and similar schemes around the world are so badly underfunded that it will be impossible to fulfill the promises by a wide margin. By many trillions of dollars.

With state and municipal pension funds in the US, the situation is particularly tricky because the beneficiaries are voters and employees of the government, and politicians of all stripes bought their votes with promises of low contributions and rising benefits. They got away with it for decades because no one cares about “underfunded pensions.” Even the term makes people’s eyes glaze over.

But someone is going to pay. And it’s not going to be the politicians.

This is how they will pay for it in Chicago – the city whose credit rating Moody’s cut by two notches to junk in April last year, and whose interest payments, despite historically low interest rates, have continued to skyrocket as it borrows more and skids deeper into the sinkhole of its own making.

On Wednesday, the City Council approved Mayor Rahm Emanuel’s scheme to bail out its largest and worst-off pension fund, the Municipal Employees’ Annuity and Benefit fund, which would otherwise be insolvent within ten years – and a lot quicker if markets have a hissy fit.

Despite seven years of rampant asset price inflation, and asset bubbles nearly everywhere, the fund’s obligations are only 20% funded. It forms part of Chicago’s $34 billion in retirement debt, accumulated over the decades by politicians making promises to buy votes and support from special interest groups. But neither the beneficiaries nor taxpayers via the city contributed enough to pay for those promises.

To save this one pension fund out of its four pension funds from insolvency, the city is jacking up water and sewer levies by 33%, phased in over a few years. Property owners in Chicago will pay, one way or the other, $3 billion into the fund by 2022, up from $1 billion under the prior scheme. Despite these billions of dollars involved, the fund covers only 77,000 workers and retirees.

Beyond 2022, additional revenues must be extracted from the hapless people to keep bailing out the fund for decades to come.

In theory, the scheme will be 90% funded in 40 years – “in theory,” because in practice, long-term projections like this never work out. There are recessions and market crashes that draw a red line through optimistic assumptions.

Even this won’t be a cure but it would “head off a financial disaster,’’ explained finance committee chairman Edward Burke before the vote.

The other three pension funds of the city will also be bailed out. For residents and property owners, it will be like, to coin a new phrase, “Chicago water torture”: one drop at a time, whereby the drops are getting more frequent and bigger.

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