Thursday, September 20, 2012

Chicago's Next Crisis ... Pension Funds ... And Then City Services ... And Then Taxes ... And Then Schools Again ... And Then Jobs ... And Then Poverty ... And Then Crime ... The City Is Broke ... The State of Illinois Is Broke ...The Circle Is Unbroken

Now that Chicago's teachers and students have returned to the classroom, let's look at the elephant in the room --- teachers unfunded pension costs and liabilities. It's a massive problem in Illinois and elsewhere, too. And it's one that been hidden under the rug for far too long now. Following the common sense rule that if something can't go on forever, it won't, the pension issue is about to hit center stage in Chicago, the rest of Illinois, California and perhaps a city and/or state near you as well. Sadly, we didn't heed the warning of the Boy Scouts. We're not prepared.

In large measure, it's the result of using the pretend and extend cash method of accounting at work. Simply put, "leaders" agreed to spend the money that should have been contributed to fund the future teachers pensions on salaries and other things instead. Thus, they simply skipped making pension contributions while pretending that they had done so for the purpose of calculating future pension obligations and benefits. They even allowed the teachers to omit making the lion's share of their  promised contributions as well.

Dereliction of duty, fraud, kicking the can down the road and getting all the cash NOW and letting tomorrow take care of itself somehow all took place over the years. They followed the present path of future taxpayers to the rescue as the union and school district leadership simply ignored funding pension obligations adequately. They all should be fired for malpractice, if nothing else.

But since that's not going to happen, let's look at the specifics for Chicago and the rest of Illinois, too. It's part of a very necessary education in economics and public finance that we're all going to need.

Chicago's Next School Crisis: Pension Fund is Running Dry describes the horrific situation regarding the funding of Chicago's teachers pensions.

{NOTE: So why didn't they deal with this issue in the latest round of teachers negotiations? Could it be because they have no clue how to break the bad news to the taxpayers? Oh well, at least the teachers got a nice raise while the pension funding problems were ignored by both the union and the city officials. But what they chose to ignore is a genuine biggie, so here's the story:

" One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

“There’s a huge crisis,” said Laurence Msall, president of the Civic Federation, a nonpartisan research organization in Chicago that works on fiscal issues. “The problem does not get easier by waiting. The problem gets bigger, and starts to become an insurmountable obstacle.”

Having skipped its pension contributions for many years, Chicago is supposed to start tripling them in another year under state law. But the school district has drained its reserves. And it cannot easily turn to the local taxpayers, because of a cap on property taxes. Borrowing the money would be difficult and expensive as well, because of a credit downgrade this summer. One of the few remaining choices would be to make deep cuts in other services.

Like Chicago, many cities and school districts now face pension pressure after reducing their contributions in recent years to save money. Among the funds for different types of workers, teachers’ plans tend to be shortchanged more often . . . .

The reasons are unclear, but in many states — California, New Jersey, Rhode Island and Illinois, among others — pension contributions must be set by state legislators every year. And since teachers’ pension costs are blended with other education spending, lawmakers sometimes decide to withhold money from pensions to allow more direct state spending on the schools. The teachers’ pension fund for the State of Illinois is in even worse shape than the Chicago teachers’ fund.

What many Chicago residents may not realize is that their school district also has been paying $130 million a year to cover most of the pension contributions required of the teachers, a practice known as a “pickup,” which became a flash point last year in the collective bargaining battle in Wisconsin. . . .

Mr. Emanuel has made it clear that he wants to address teachers’ pensions, too. Earlier this year, he tried to curb at least some of Chicago’s ballooning costs by seeking to raise retirement ages, increase employee contributions and trim the 3 percent yearly pension increases that the city’s retirees now receive. He called those increases “the single greatest threat to the retirement security of city employees,” because they drain money from pension funds very quickly.

The State Legislature, whose approval is needed for such changes, has said pensions must wait until next year. But Mr. Emanuel says the system is broken and he is not willing to make any increased contributions until it has been fixed. The mayor said earlier this year that making the larger contributions would lead to “direct cuts in our classrooms.”

“Those cuts mean the average class size will jump to approximately 55 students,” he warned.

The teachers’ union has criticized Chicago for failing to set aside enough money for the pensions, but it has reassured workers and retirees that their benefits are protected by the State Constitution and cannot be reduced. A state law bars strikes in Chicago over pension issues.

Retirees say they are dismayed at the way their fund has been neglected, though they generally say they believe their benefits are safe. . . .

. . . teachers in Chicago, as in many cities, earned no Social Security credit for their years in the classroom. Their pension plan is intended to replace the federal benefit. . . .

Indeed, the State Legislature granted the Chicago school district a break from its pension contributions, starting in 1995. Since then, the city has never contributed the required amount; for many years it put in nothing. All the while, the teachers’ benefits kept building up.

Pension fund documents say the teachers continuously made their share of the contributions, 9 percent of each paycheck. But in fact, the teachers have been putting in just 2 percent of their pay, while the school district has been making up the rest of what is called the “employee contribution” every year. The practice began under an agreement reached in the early 1980s....

Such pickups were not widely known until Gov. Scott Walker of Wisconsin began his push to make public employees pay more for their benefits and to bar them from bargaining for anything other than base pay. Wisconsin law calls for public workers and their employers to split the cost of pension contributions, but in practice, state and local governments were picking up almost all of the employees’ share. Local and state workers have contended that they sacrificed current pay increases and the pickup should not be considered a giveaway.

Chicago does not have the state’s only pickup. While Illinois says that teachers outside Chicago send in 9.4 percent of every paycheck for the separate state fund, the state really pays most of that too.

Gov. Pat Quinn of Illinois and Mr. Emanuel have both called for public workers to increase the amounts they pay toward their pensions. Forcing the Chicago teachers to make their full contributions, of course, would erode much of the salary increases they fought for during the strike."

Summing Up

This is a terrible situation. Perhaps the worst thing of all is that the practice of not paying but pretending to pay has left Illinois taxpayers between rock and a hard place.

If the State Constitution guarantees the benefit, taxpayers have been fleeced by both the teachers union and the government negotiators as well. 

And we need to throw in the various statewide legislators, including Governors, as well.

There appear to be no innocent parties whatsoever, except for the unsuspecting and all too trusting taxpayers and undoubtedly some teachers, too.

This crap of spend now and leave tomorrow's funding to tomorrow's taxpayers is just plain criminal.

After reading this, what do you think of Chicago's politics and the way the teachers negotiations were handled by both sides? And for that matter, Illinois politics as a whole? And too many other cities and states as well?

I know at least one thing for certain. This pension issue is going to be bigger than the teachers strike was. And for good reason, too. It's going to be much more expensive and telling of just how things work in the Windy City and the Land of Lincoln.

Thanks. Bob.

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