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Politics and Mathematics Collide in Chicago

Mar. 4, 2015
by Bob Adelmann

Chicago is a microcosm of Illinois: it has a determined unwillingness to face reality. Even Moody’s, in its latest downgrade of Chicago debt, has failed to grasp the enormity of the shortfalls facing the city and the state. 

Moody’s tried to be realistic, using unrealistic numbers:

[Our rating] incorporates expected growth in Chicago’s already highly-elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned….

The “expected growth” will likely surprise to the downside even the realists at Moody’s, as the real shortfall in the five pension plans the state is funding is vastly greater than even the $100+ billion the state faces. A “special pension briefing” performed back in November by the state’s Commission on Forecasting and Accountability showed the accrued liabilities on those plans to be $183 billion, with just $72 billion in assets, leaving a shortfall of $111 billion. On the surface, that means those plans are more than 60 percent underfunded.

But there are at least two problems with that calculation. First, it assumes that those assets will earn seven percent a year, or more, for as far as the eye can see. Secondly, it assumes that the investments will be safe and sound.

But in a two percent world, where are those investment managers likely to get seven percent? A quick peek into the assets backing the largest of the plans – the Teachers’ Retirement System – reveals investments in junk bonds, real estate, derivatives and private equity firms. In fact, TRS, according to Mish Shedlock, has invested more than $1 billion in bonds that Moody’s or Standard and Poor’s have rated as junk.

Further, according to the latest forecast from GMO LLC, a firm calling itself “a global investment management firm committed to providing sophisticated clients with superior asset management solutions,” predicts returns over the next seven years for equities and bonds to fall far short of the returns necessary even to meet the actuarial assumptions built into those plans.

With investment managers reaching for yield and taking consequent risks, in the “seven bad years” ahead, those pension plans are in desperate trouble.

But none of this is entering the political conversation as Chicago Mayor Rahm Emanuel is running for his political life against Chuy Garcia, both of whom have big plans to spend even more, for schools, for infrastructure, and other “investments” to get the economy moving again. In fact, Emanuel’s 2015 budget says nothing about the pending shortfall of revenues needed not only to service the increasing costs of those plans and nothing whatever about the state-mandated payments in 2016 to keep the police and firemen’s pension plans afloat. Instead, Emanuel issued this, following Moody’s report last week:

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