Back in June, the consulting firm Milliman updated its estimated composite funded status for the 100 largest U.S. public pension plans, reporting that at the end of May, plans had made a fair amount of progress in recovering from the March market crash: while the 2019 year-end funded ratio had reached a level of 74.9%, and the March-end ratio had dropped down to 66%, at the end of May its estimate was of a recovery to 71.3%.
(For comparison, the funded ratio for Milliman’s version of private-sector average funded ratios stood at 87.5% at the end of 2019, 85.6% at March 31, and 84.0% at May 31, because corporations measure their liabilities at corporate bond rates; the drop in bond rates in the past months boosts liabilities to a greater degree than stock market recovery boosts asset levels. But public pension plans are allowed to measure their liabilities using their expected long-term rate of return, which doesn’t move based on these short-term developments.)
That’s good news, right?
At the same time, though, the Center for Retirement Research at Boston College calculated, back, again, in early June, that the prospects for the worst-funded plans “may confront the very real prospect of asset depletion” in the long-term in the case of a weak market recovery, highlighting the Chicago Municipal, Dallas Police and Fire, and New Jersey Teachers as three plans which are at risk, in 2025, of having “assets equal less than two years of benefit payments.”
Which brings me to today, as both the city of Chicago and the state of Illinois have released their 2019 Certified Annual Financial Reports.
For the city of Chicago, WTTW reported, “Chicago’s pension debt soared by approximately $1.7 billion in 2019, according to the city’s audited annual financial report released Thursday.
In all, Chicago owes $31.79 billion to its four employee pension funds representing police officers, firefighters, municipal employees and laborers, according to the 2019 Certified Annual Financial Report. That is an increase of nearly 5.6% from 2018, according to the report.”
The report calculates funded status, for the individual plans, of 24% (Municipal), 43% (Laborers’), 21% (Police), and a paltry 18% (Fire), for a composite funded status of 23% — and that’s at December 31, that is, prior to the market crash.
Put another way, the fiscal responsibility advocacy group Truth in Accounting calculates that the city’s Taxpayer Burden is $39,400 per taxpayer, up by $2,300 from the prior year. In its January calculation, only New York City fared worse, and this as an apples-to-oranges calculation because the debt for the city’s teachers are not included in the Chicago’s, but are included in New York City’s financials.
Likewise, the state of Illinois released its annual report on July 2, and Wirepoints provides its analysis. Year-over-year, its pension debt increased by $3 billion, from $134 to $137 billion— and that based on the lowball asset-return discount rate method. The funded status of the plans landed at 40.3%. And the state’s own reporting shows pension costs exceeding a quarter of the state’s budget for the next 25 years. And all of this data is based on year-end 2019 figures: despite the nation’s longest-ever bull market, the state hovered at a 40% funded status for the past decade.
Regular readers will recall that shortly after the market crash, I analyzed the prospects for both the city’s and the state’s pension plans, and concluded that the state will stay solvent but is at extreme risk of falling far short of its 2045 funding goal, and the city is at risk of actual insolvency.
The CRR’s calculation of their database plans’ 2025 funded status calculates that they each make contributions according to the following formula:
“Total pension contributions (employee and employer combined) for each plan are assumed to grow by 8.5 percent in 2019 and 2020 – equal to the average annualized rate of growth for PPD plans between 2013 and 2018. Thereafter, each plan’s contributions grow by 2.5, 2.6, 6.8, 6.5, and 6.5 percent from 2020 to 2025 – equal to the average year-to-year pattern of growth for all PPD plans immediately following the Great Recession in 2009.”
Is this a reasonable assumption for the most-troubled plans?
Will they indeed make their scheduled contributions?
Illinois, which took “contribution holidays” during the 2008 recession, has, to be sure, built this into their 2021 budget —but, at the same time, they have built that budget on an assumption that federal cash will be forthcoming as needed and no belt-tightening will be needed.
In other words, the question of how Illinois (and New Jersey, and Kentucky, and Connecticut) will fare is not a matter of actuarial analysis — it’s a matter of political will. And all the good proclamations of, say, a Governor Pritzker, are at risk of wilting once the commitment to pension funding requires more than the hope of federal cash but instead genuine fiscal discipline, hard choices, and upsetting voting blocs. Compared to this, politicians may decide that paltry funding levels or even pay-as-you-go status is their preferred choice.
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