Analysis of the Mess Illinois Finds Itself – Fact 9

A continuation of the analysis of the current situation in Illinois by WirePoints:

Fact 9

9. Downstate pension costs. By 2015, cities across the state were in deep pension crises of their own. Public safety pension promises (accrued liabilities) had grown 6.4 percent annually over the previous decade and costs were squeezing virtually every city budget – the direct result of state mandates on pensions and collective bargaining laws. Despite a doubling of taxpayer contributions to pensions over the decade, downstate taxpayers watched pension shortfalls double to $10 billion by 2015.


Analysis of the Mess Illinois Finds Itself – Fact 9 — 4 Comments

  1. A few key concepts to understanding unfunded pension liability.


    The unfunded liability is the amount that should be in the pension fund right now, but is not.

    It is missing money.


    The investment return that will be achieved over the next year on the unfunded liability is zero.

    In other words, the investment return on zero, is zero.


    There is an interest component to the unfunded liability.

    The unfunded liability consists of principal and interest.


    The interest component is a big problem.

    As an analogy, there is interest on a car loan or home loan.

    There is also interest in an unfunded liability.


    The interest makes the unfunded liability more expensive vs 100% funded.

    100% funded means there is enough money in the fund right now to pay out 100% of what will be owed for work already performed.


    The unfunded liability represents work that has already been performed.

    It does not take into account future work.


    There are many assumptions that go into calculating the unfunded liability such as futute investment returns, retirement dates, life span, payouts, salary hikes, etc.

  2. The pension deficit is about twice the official number according to Moody’s, and the state leaves out the free insurance etc (OPEB) that adds another 73 billion to the deficit.

    So if you pick the lesser of the 2 numbers it’s 200 billion, and if you use Moody’s it’s about 325 billion.

  3. A couple of points to be sure everyone is on the same page.

    The post (Fact 9) is about Downstate Police and Downstate Fire Pension Funds.

    Downstate Police and Downstate Fire are separate from the state pension funds.


    Next, here’s a brief overview of the various types of police and fire pension funds in Illinois.

    This is helpful so one gets an idea what Downstate Police and Fire means, and what police and fire departments and fire protection districts are covered under that umbrella.


    1. Downstate Police and Fire

    These are individual funds, for instance, Crystal Lake Police, and Crystal Lake Fire, are two separate funds, each with a board which oversees investments.

    The funds are not combined for investment purposes.

    The funds must follow the rules for Downstate Police and Downstate Fire in the Illinois Pension Code.


    2. Chicago Police.

    3. Chicago Fire.

    Chicago Police and Fire are not part of Downstate Police and Downstate Fire.

    As is so often the case, Chicago has its own rules, separate from the rest of the state.

    Thus, there is a section in the Illinois Pension Code for Chicago Police, and another for Chicago Fire.


    4. County Sheriff’s are in IMRF SLEP (Sheriff Law Enforcement Plan).

    IMRF “SLEP” has separate rules from IMRF “Regular”.

    Thus there is a section in the Illinois Pension Code for IMRF.


    5. Some small police and fire departments, which don’t qualify for Downstate Police and Fire, are in IMRF “Regular”, and some don’t have any pension fund.


    Now back to the comment regarding Moodys and the the state pension funds (TRS, SERS, SURS, GARS, JRS).

    Let’s make it simple.

    Say the expected rate of return is 6%.

    The real expected rate of return varies for each of those funds, and the boards of the funds sometimes raise or lower the expected rate of return.

    Anyways, Moody’s says 6% is too high.

    Moody’s thinking is pension funds should have a conservative estimate, say 3%, for several reasons.

    First, retirees are depending on these pensions, so we want to be conservative in the expected rate of return.

    Actual returns could be lower than historical past.

    So Moody’s cut the expected rate of return from 6 to 3, which doubles the unfunded liability.

    The reason cutting the expected rate of return doubles the unfunded liability, is, for example:

    $100 x .06 = $6.

    $100 x .03 = $3.

    $200 x .03 = $6.


    More money is required upfront to compensate for the lower expected rate of return.

    Keeping in mind the unfunded liability is money that should be in the pension fund RIGHT NOW, but actually is not there.


    Right now the pensions are a completely screwed up situation and have been for decades.

    The unfunded liability of the state funds at 60% unfunded (40% funded) is using the 6% rate of return assumption.

    If 6% rate of return is scrapped and replaced with 3%, as just explained, the unfunded liability grows, so maybe the state pension funds would be 80% unfunded (20% funded).

    The percentages used here are just ball parked for simplicity.


    There’s some other pension funds too, most of which don’t impact McHenry County property taxpayers directly.

    There is a Cook County Fund, Cook County Forest Preserve, Chicago Municipal (MEABF), Chicago Laborers (LABF), Chicago Parks, Chicago Teachers, Metropolitan Water District (MWDRF), and some transit funds (RTA / CTA / Metra / Pace), and CHA.

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