Wolf Richter: US Pension Crisis: This is How Families Get Squeezed to Bail Out Pension Funds in Chicago

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

Chicago is another trailblazer. But it’s not alone. Other cities are lining up behind it. Bankruptcy may still be the route to go. But until then, homeowners, renters, drivers, users of phones, etc. – in other words regular families who’re just sitting ducks – are going to get squeezed dry, in order to slow the momentum of the public-employee pension crisis eating up the city’s and the school district’s finances.

“Because of a new accounting rule, Chicago now has to report its pension debt on its balance sheet,” explains Truth in Accounting. “As a result, the city’s reported pension debt grew from $8.6 billion in 2014 to $33.8 billion in 2015.”

The funding hole for pensions amounts to $18.6 billion, according to current estimates, despite six years of booming asset prices. What is this going to look like when asset prices sag?

The City Council approved Mayor Rahm Emanuel’s $8.2 billion budget yesterday. Crisis or no crisis, it’s up 4.8% from last year. There wasn’t anything to debate because the tax and fee hikes had been done outside the budget process.

But this is what Chicago has to deal with. On November 9, S&P Global Ratings cut Chicago Public Schools (CPS) to deep junk (triple-C), citing the district’s “continued weak liquidity in its most recent cash flow forecast and reliance on cash flow borrowing, combined with the increased expenditures in the district’s new labor contract that exacerbate the district’s structural imbalance challenges.”

On Monday, the district scrapped efforts to sell $426.3 million of bonds this year, citing “changing market conditions.” It coincided with the post-election jump in interest rates. A spokeswoman told the Chicago Tribune, “We’ll sell the bonds when market conditions are optimal.”

Last January, the district already delayed an $875-million bond sale “that became tainted by bankruptcy talk,” as Reuters put it at the time.

On November 7, Moody’s affirmed its junk rating for the city (Ba1), with negative outlook, citing “a very weak balance sheet arising from high and growing unfunded pension liabilities.”

The rating acknowledges the benefit of significant tax hikes [we’ll get to this “benefit” in a moment] that will fund increased pension contributions and reduce the risk of plan asset depletion. However, the city’s unfunded pension liabilities will continue to grow, albeit at a slower rate.

Moody’s also stamped its “negative outlook” on Chicago’s rating due to the risks of “potential contagion” from the school district:

Sustained fiscal stress at CPS could pressure Chicago’s credit profile in various ways, from constraining the city’s practical ability to raise revenue for city obligations to raising the city’s borrowing costs.

The city’s borrowing costs have already blown through the roof, as our Chicago gadfly from Truth in Accounting, Bill Bergman, points out: Sinkhole City Chicago in Worse Fiscal Shape than Detroit?

But even squeezing the families in the city for their last dime isn’t going to solve the problem, according to Moody’s:

Further, although the significant tax increases adopted by the city will support higher pension contributions, high and growing pension debt remains a key credit challenge.

These families have been hit, and will continue to get hit, by a hail of tax, fee, and fine increases. Pension promises, made by politicians to buy votes and curry favors with special interest groups years or even decades ago have turned out to be toxic for municipal budgets. Chicago may well be the next big city to be felled by them. Meanwhile, families are getting squeezed.

According to the Chicago Tribune, the endless series of tax and fee hikes, once they take effect in full, will make life for the average family $1,692 a year more expensive than it was in 2011, when Mayor Emanuel took office and started addressing some of the shortfalls. And that still doesn’t fix the problem. It just slows the momentum toward bankruptcy.

Here are some major nuggets of this endless series of squeezes that started five years ago:

Property tax hikes of eventually $994 a year on a typical $250,000 home. Some of it already kicked in. $348 will kick in next year. Another $106 per average homeowner will commence in 2018 and 2019.

Water and sewer tax hikes, passed in September, phased in over four years, eventually totaling $355 a year in increases, after already having been doubled in 2011.

Garbage pickup fee increase of $114 a year, approved in 2015, for a single-family home.

A fee per store-provided disposable bag of 7 cents. This is supposed to raise $13 million in 2017.

Parking gets more expensive: 685 new parking meters in and around the central business district and in neighborhoods. Parking rates at both airports will jump to pay for airport improvements and operations. To render drivers even closer to insanity, surge pricing will come to parking meters near Wrigley Field for games and events. Parking rates at commercial loading zones will also jump.

A 911 phone tax hike of $50.40 a year for a maximum of three phone lines (mobile or landlines), passed in 2014.

A new cable TV tax of $19.40 a year, on a monthly bill of $80, approved in 2014.

The tax, fee, and fine increases over the past five years “approach $1.9 billion,” according to the Chicago Tribune. Alas: “That doesn’t include new sales and beverage taxes approved by the County Board under board President Toni Preckwinkle, which are slated to eventually raise another $698 million.”

Much of this moolah squeezed is supposed to prop up municipal pension liabilities:

The 911 tax is going to the laborers’ retirement fund at about $40 million a year. The city property tax hikes are being poured into the police and firefighters’ funds at $543 million a year. Another $250 million or so a year is going to the CPS retirement fund. The new water and sewer tax will result in an additional $239 million a year for the municipal workers’ pension fund.

Chicago is not alone in its plight. Many states, cities, and municipal entities are sinking into a similar pension quagmire with massive costs for the people who live there. But Chicago is just a little further down the long road than some of the others.

Already there are signs of an impact on the housing market. Read…  Is Chicago’s Housing Market Next?

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. divadab

    Several years ago, I played golf with the retired fire chief of a 48,000 population Southern Cal city. His pension? $150,000 per year, indexed for inflation. He was in his fifties – he retired the earliest he could according to the formula of years service plus age. His life expectancy as a healthy man is 89 – which means his pension will cost the taxpayers of his city $5.1 million. (SInce pension is indexed NPV is roughly the same).

    If Chicago’s situation is anything like this bankruptcy is the only way to reduce these pension liabilities. Such gross pensions are promises made by people who don’t understand compound interest, or are such short-sighted pleasers, they don’t care about dumping such huge liabilities onto someone else to deal with.

    1. MtnLife

      I would wager he gamed the system and his actual avg pay was much lower. Many employees work like crazy (ridiculous overtime, special events, etc) in the last few years over which their retirement pay is based to get that average as high as possible. My mother had friends retire, at 60% of their earnings, with a bigger paycheck than they took home, on average, in the years before the binge. It has got to make budgeting difficult if you plan for one retirement package based on what you think is a fairly set income structure and people game it 40% higher. Not faulting the personal interest expressed, just the system that allows it.

      1. pat b

        NYPD certainly does that, it’s set to the Last three High years or “Three High Years”,
        so if the boss likes you, he lets you rack in the overtime, like crazy as you are headed out the door.

        it should be set to an actuarially computable amount of ‘average salary’ over time weighted
        against planned salary for last 5 years… So you can’t game it too hard.. Realistically the retirement of
        a Captain or Sargeant is going to be higher then the retirement of a patrol officer, but,
        it should be the planned salary of a Captain, not 2X the captains planned wage because his boss let him roll up a ton of overtime

      2. RepubAnon

        Pity nobody with the power to change things seems to be saying: “Hey, this pension system can be unfairly gamed – let’s fix it!” Instead, folks such as Rahm Emmanuel seem to be using it to destroy the public pension system.

        Watch for the same tactics to be used against Social Security and Medicare in your neighborhood, soon. (“Those old folks are living high on the hog, and you hard-working Millennials are being taxed to death to death to pay for their cushy lifestyle!”)

    2. Paul Art

      Thanks for your awesome anecdote. The neoliberals are depending on people like you. This is the kind of story that Rahm and his cronies are depending on to lay waste public education. Systematically under funding pension funds, giving tax cuts for the 1% and then when the chickens come home to roost you point the finger at public servants and trot this kind of a story out about some retired firefighter making $150,000.

      How many firefighters do you know who have retired in their 50s and are on a pension like this?

      The average pension of a school teacher is around $20,000 – $40000.

      Rahm and his neoliberal cronies are attacking public education from a different angle. Their strategy is, if you cannot get rid of them then at least get rid of their funding. This is exactly the method that the GOPers and neoliberals in Washington are doing to the US Post Office. They are forcing them to fund their pension for the next 75 years. Read http://www.nakedcapitalism.com/2015/10/the-right-wings-assault-on-the-post-office-smashing-the-myth-that-its-in-financial-trouble.html

      Hiking the tax rates of the top 1% by even 5% would solve most of these issues.

      1. Paid Minion

        OTOH, his story is not uncommon.

        I Know a bunch of guys like this. Example:

        Twenty years in the military, as an MP………..pension at 42.

        Twenty years in law enforcement for the state government. Another pension.

        Has spent the last few years as a DOJ/Pentagon “consultant”, training all of the National Police in the Middle East and Central America the latest law enforcement techniques.

        What makes me LMAO is this guy is constantly bitching about the people “freeloading off the government”.

        All I know is that all of the government retirees I know are cutting a fat hog, compared to us schlubs who have had the misfortune to have a career in the “free market”.

        It used to be that they received these pensions because the pay wasn’t that hot. Now, you see things like “retention bonuses”, and “competitive salaries”, along with their backed-by-unlimited-taxation pensions.

        Which would be okay, I guess, if the net result was government run by the “best and brightest”.

        Hopefully, all of the “civilians” will GTFOOD, aka “vote with your feet”, and these guys can tax each other into oblivion.

        1. Lambert Strether Post author


          Major Major’s father was a sober God-fearing man whose idea of a good joke was to lie about his age. He was a longlimbed farmer, a God-fearing, freedom-loving, law-abiding rugged individualist who held that federal aid to anyone but farmers was creeping socialism. He advocated thrift and hard work and disapproved of loose women who turned him down. His specialty was alfalfa, and he made a good thing out of not growing any. The government paid him well for every bushel of alfalfa he did not grow. The more alfalfa he did not grow, the more money the government gave him, and he spent every penny he didn’t earn on new land to increase the amount of alfalfa he did not produce. Major Major’s father worked without rest at not growing alfalfa. On long winter evenings he remained indoors and did not mend harness, and he sprang out of bed at the crack of noon every day just to make certain that the chores would not be done. He invested in land wisely and soon was not growing more alfalfa than any other man in the county. Neighbors sought him out for advice on all subjects, for he had made much money and was therefore wise. “As ye sow, so shall ye reap,” he counseled one and all, and everyone said, “Amen.”

          Major Major’s father was an outspoken champion of economy in government, provided it did not interfere with the sacred duty of government to pay farmers as much as they could get for all the alfalfa they produced that no one else wanted or for not producing any alfalfa at all. He was a proud and independent man who was opposed to unemployment insurance and never hesitated to whine, whimper, wheedle and extort for as much as he could get from whomever he could.

      2. divadab

        @Paul Art: “Thanks for your awesome anecdote. The neoliberals are depending on people like you”

        sarcasm noted. SO you think that we should continue paying public servants gold pensions when the rest of us, you know, who have to pay for all this, get a lousy 401k? I include the military in this – where else can you retire with a full pension in your late forties or early fifties but in public service? DO you dispute that some adjustment is required – to when a pension can be taken, to level of pension and to funding?

        Just waving a slogan that “hiking tax rates of the top 1% by 5% would solve” it is so simplistic – I mean, most of these liabilities are local and State – and you’re talking about a federal income tax hike.

        As it stands now in these United States, the ruling classes are getting a wake-up call. Yes they should pay more tax on their 4 million pieces of silver they got for selling us out to foreigners. But it would be better spent on better Social Security and medicare for EVERYBODY than to prop up outrageous municipal pensions.

      3. Felix_47

        Well my brother in law retired at 48 with a sore knee from one local Ca fire department and he is getting 110,000 plus lifetime health insurance and a myriad of other benefits, my other brother in law retired with a sore back and got more since he was a captain. He was off work more than he was working during his career due to back ache but he did work a lot of hours his last year….he could ride his Harley pretty well and he started another business in retirement. The local police chief recently retured with a bogus back claim and total incapacity to become a municipal politician….the mayor….. The pension is north of 200K.

        1. Yves Smith

          Please name all the specific police pension plans in question so I can verify this. With no links and no names of any of the local governments in question, this is sus.

          1. Republic If You Can Keep It

            To those who question whether the example of the Fireman official given above was “typical”, let me offer this example, the police retirement program of Montgomery County, Maryland. My field is employee benefits. This following example is not atypical.
            This county which has about a million residents is as a liberal as they come. ALL elected officials have been Democrats for decades. Until recently 70% of ALL police “retired” “early” (before working 20 years) because of “disability”. The product symbol of this liberal-permitted system-rigging was a Montgomery police official who retired long before 65, because he was “disabled”. He was paid immediate disability pension payments, was hired by an adjacent county as head of its police force, and started participation in a second public pension program. He even competed in triathlons — and won. But not in triathlons for the disabled. So much for being disabled. There was nothing Montgomery County could do to his disability pension, he had stolen it fair and square. The Demcratic Party said not a peep about this. And since he was a public official, they had no excuse that he might sue for defamation. Of course that was no reason for the Party not changing how the pension program was “rigged.” Remember the Police unions are bastions of reaction, not Democratic voters. It came to light because of the efforts of one crusading Democratic county Councilman, Phil Andrews, who was never supported by the Democratic Party organization, only tolerated. All county public unions worked in each of his elections to defeat him, and eventually he was gerrymandered by the Democratic Party, separating him from his long time constituents. This Democratic councilman was not the typical liberal and far from a Bernie supporter. He is best characterized as a supporter of “good government.” For example, before the gerrymander he successfully outed the abuse of the police disability program and led the passage of one of the strictest limitations on campaign finance ever enacted in the US, e.g. contributions are limited to $150 per person, and you must be a resident of the county and human person, not a corporation, to finance an election. After years of fruitless campaigning, his campaign finance efforts passed in a reaction to Citizens United, not because of long term Democratic commitment, of which there was none. If he had not laid the groundwork for years, the reaction would have not produced the better county law.
            I think this suggests who are the true allies of the average voter and taxpayer who works for a private employer. It is not the Democratic Establishment, financed and staffed by Finance, and supported by an army of unperceptive followers of a Democratic form of mass marketing. It will be found on the outliers of the Democratic Party, among the dispirited, and among Independents.

            1. madame de farge

              Well there is a tax code in this country. and I for one am for restoring the tax rates from the 1920s (when only 10% paid any income taxes) or the tax rates from the 1950s that were used to pay for WW2 debt, Veterans Education, build hospitals and roads all over this country……

    3. johnnygl

      I see the key part of what you wrote as, “retired fire chief”. The top guys get taken care of quite well. Average, rank-and-file firfighters? I suspect not so much.

      Wolf’s post is a good one but failrd to mention mayor daley’s massive parking meter giveaway as his parting gift. That helped put another dent in city finances. Plus chicago, like other cities, always manages to handover piles of tax breaks via TIF giveaways to their real estate developer buddies. Those never seem to make the chopping block.

      1. j84ustin

        And in fact, TIF was what was used to avoid the teacher’s strike this fall. There’s no lack of money, just lack of political will to use it where it should be used. For what it’s worth, my house in Chicago is assessed at less than 200k and my taxes went down this year.

        1. madame de farge

          I live in Baltimore County and pay about 100% in property taxes than other homes appraised at the same value…..

      2. divadab

        The same pension formulae, years of service + age, and percent of highest ten years of earnings, generally apply to public safety employees. Of course, a fire chief has a higher salary than a regular fireman but it’s a tough job, if you know anything about firehouse politics.

        Basic good-old-boy deals seem to be the rule rather than the exception in municipal politics. Too bad the good old boys would rather force bankruptcy to cure their bad pension decisions rather than bite the bullet. But it seems another rule of municipal politics is it can never be my fault – the rules apply to you not to me.

        1. MyLessThanPrimeBeef

          There was a time when time and space together formed the stage we experienced life. And everyone thought they’d never change…space would never expand nor contract, time would never slow down nor speed up. Then came the Theory of Relativity.

          Similarly, we dump trash into the ocean, thinking the ocean is not impacted in anyway. Like space-time, we assume it will always be there, the same as it has always been. Or maybe not.

          Are taxpayers and the working class thought of in the same way? Do we think we can just keep on taxing them or shipping their jobs overseas?

          Until dying working class voters started to stand up – then, we’ve since noticed that, like space-time, like nature, they are not infinite in size or capacity, and we can’t keep on extracting from them.

      3. oho

        i expected something more coherent from Mr. Richter.

        A) as someone w/a police officer sibling…don’t blame the rank-and-file for the financial innumeracy of the politicans. Skimp on compensation for first responders and you’ll attract a less able pool of workers.

        Do you really want a team of 63 y.o. firefighters who earn $12/hr to be the ones to try to rescue you from a burning building?

        B) the City of Chicago has no one to blame but themselves and a lifetime of Democratic Party machine politics under the Daleys and Rahm.

        1. OIFVet

          Skimp on compensation for first responders and you’ll attract a less able pool of workers.

          They are very able. So able, in fact, that they cost us Chicago tax payers more than $50 million per year in compensations to the victims of their brutality. Then there are the perfectly healthy police scumbags who collect disability on phony claims, while holding second jobs and shooting rhinos in Africa. Frankly the police organised crime family in Chicago needs to be dealt with, ruthlessly.

        2. optimader

          forgot Harold Washington?
          The municipal employee retirement deals were struck between lazy, irresponsible connected politicians and Union labor negotiators. The public was left holding the bag on absurd retirement plan liabilities in Chicago and certainly some outlaying burbs.

          Do you really want a team of 63 y.o. firefighters who earn $12/hr to be the ones to try to rescue you from a burning building?

          A fallacy of false choice…vacuous hyperbole. How about FF that make $25-35/hr, fund their own retirement (like virtually everyone else I know) and have to retire 45yo to spend more time at their second jobs? There would be long lines of fit young people to sign up for this gig.

          The ubiquitous $100k pension for life as a benchmark would require the average taxpayer having $10M in at risk investments working for them at a heroic 1% ROI these days.

          1. divadab

            Yup – I have to live on my 401k and social security after 35 years in the corporate salt mines. Fuck you if you think I’m going to pay for featherbedding caused by cowardly venal politicians in cahoots with the featherbedders.

            1. laughingsong

              Can’t speak for Chicago, but as a public employee in Oregon, I have to wonder where these supposed Cadillac pensions are. If I am lucky, I will have a pension of about 68% of my salary, which is not nearly as much as I made in the private sector. Yes, it’s a defined benefit pension, or at least part of it is, the other part is a 457 and may or may not live up to its promise.

              I also pay taxes as well as contributions so it’s not just being given. And I am fairly certain most other employees here are pretty much in the same boat (speaking for the Indians not the chiefs). And we do not get overtime so there will be no padding.

              So is that Cadillac? Best that can be said is its defined benefit nature. That is pretty cool compared to defined contribution. But rather than say that public sector employees shouldn’t get defined benefit, why don’t we say that private sector employees should?

              1. RMO

                All too common an attitude: ‘Hey! I’m being force fed raw sewage while that other guy gets prime rib! That’s unfair. HE should be force fed raw sewage too!”

                401(K)’s are an outright scam. Pushing everyone onto them is not a solution unless you believe the problem is that the financial sector isn’t sucking up enough of the wealth and vaporizing it yet.

      4. oho

        as someone w/a police officer sibling…don’t blame the rank-and-file for the financial innumeracy of the politicans. Skimp on compensation for first responders and you’ll attract a less able pool of workers.

        Do you really want a team of 63 y.o. firefighters who earn $12/hr to be the ones to try to rescue you from a burning building?

        the City of Chicago has no one to blame but themselves and a lifetime of Democratic Party machine politics under the Daleys and Rahm.

      5. OIFVet

        And then there are the insane subsidies doled out to big corporations to keep or to get them to move their headquarters to Chicago. It started with Boeing and rolled downhill from here. It reached absolute lows with Sears and the CME. Did anyone with one functional brain cell believe CME’s threat to move its HQ to the industrial wasteland of NW Indiana?! Meanwhile my property tax jumped by 25% this year, and I am getting less bang for my property tax bucks than ever before. Yes, there is some ridiculous waste associated with the pension system, and let’s not forget the ridiculous disability payments scam that some perfectly cops have devised to bilk the taxpayers to fund their hunting safaris to Africa (there was a good Tribune series on it). And then there are the more than $50 million per year that we have to pay the victims of police brutality and murder. Here is a prediction though: the teachers and garbage collectors will get screwed, while the cops will get treated with kid gloves. I love Chicago, but I can’t wait to get the heck out of this Machine cesspool of neoliberalism.

    4. Jess

      Your retired chief is a piker, a piker I tell you, compared to my little SoCal city of 65,000. Between them, our last two fire chiefs take home pensions totaling $400K. ($170-something for one, $220K+ for the other.)

      And every time I hear about how evil Prop 13 is, I remember these articles about people in other states having their prop tax bills escalate uncontrollably to fund obscene pensions.

    5. rd

      It is important to understand that there are two general types of public pensions. One similar to what this gentleman likely had allows for a relatively early retirement age and is based on the last year or two of earnings. The percentages per year worked are fairly generous. These are common in the fire and police sectors. There is often overtime available that is handed out generously to people just before retirement so that the year that determines their pension is greatly inflated over previous years.

      The other type, common for teachers etc., has an annual credit of 1.-2/3 to 2 % of pay per year worked. The pension percentage is then multiplied by the average pay over several years, but those years cannot be greatly inflated over the previous years’ pay, with differences bigger than about 10%-20% disallowed. In many cases for teachers, the pay can only be for certain types of work, usually associated with classroom contact time with students – pay for other activities like committees etc. don’t count towards pension calculations. These pensions tend to start at age 62 or later – you can retire earlier but usually the pension gets cut by an actuarily determined percentage. Pensions in these systems tend to be in the $15k to $60k range and generally can’t go above the teacher’ pay when working. It would be very difficult for public servants like teachers to get 6 figure pensions, and definitely not in their 50s.

      Public pension problems are caused by incompetence and mendacity of the politicians and trustees who don’t want to put aside and manage money in a prudent fashion to match the promised benefits. In some limited cases, there is poor pension design that allows for out-of-proportion pension payments but this is usually limited to the fire and police sector.

      1. John Zelnicker

        @rd – Thank you for explaining the difference between many police/fire pensions and the far less generous teacher and state employee pensions. Here in Alabama, teachers and state employees also contribute to their pensions, and the contributions are not tax-deductible, although the retirement payout is exempt from state income tax. I have several retired teachers as clients and none of them make more than they did during their working years.

    6. Yves Smith

      The odds are high that this “retired fire chief” was in a pension plan overseen by the tainted pension counsel Robert Klausner, who has made a considerable business with fire and pension funds. We covered how he helped set up a secret pension fund in Jacksonville, Florida, that paid in excess of the IRS allowable maximum to the retired fire chief who was the administrator of that fund. That fund was also superfunded while the regular pension fund was one of the most severely underfunded in the state. Klausner was also the fiduciary counsel for the similarly disastrously underfunded Kentucky state pension, which has engaged in a raft of dubious practices and hired costly outside managers who underperformed….and were likely introduced to state officials at a pay-to-play conference that Klausner hosts every year.

      In other words, there’s a disease vector in the police and fireman pension space, and it’s a big mistake to generalize from them to pension funds generally.

    7. rob johnson

      Your fire chief situation is being played out by the thousands here in Cal. Teachers , Cops, gov. workers are all taking too much. Here in our golf community the new Royalty is retired gov. workers. I read through some of the salaries and positions in the Palm Springs school district and it was amazing how many made way over 100k with their benefits. The real kicker is that people still haven’t figured this scam out yet. I mention something here and since so many are government or retired government workers the room goes silent.

  2. amouise

    Okay, I’ll bite because I’m really tired of the chicken little under-funded pension stories without an author flat out stating their solution, especially when they miss that Chicago sold their parking revenue to private investors about a decade ago. The investors are on schedule to recoup their investment in 2020, a full 60 years before the end of their 75 year lease.


    So that makes me questions the rest of the facts of the article as to where the “extra” money is going to. Is “new money” going to fund underfunded obligations or is it going somewhere else since the plan is to declare bankruptcy regardless.

    What, that’s not the plan? If I were funneling money upwards and didn’t think of workers or city residents are “real” or “worthy” people, then it would be my plan.

    1. Yves Smith

      Never assume malice when mere incompetence will explain behavior.

      The city was under great budget stress and the parking meter deal seemed to be a stopgap. I recall reading that for some reason the investment banks were able to create time pressure and the contracts were not reviewed closely. Not that that would have made a difference; we have private equity limited partnership agreements and they are extremely complex documents and are basically “take it or leave it” agreements. The norms for privatization are pretty well set, and I similarly doubt these agreements would be subject to much negotiation.

      More generally, post crisis, states and municipalities were having huge shortfalls due to collapses in revenues. I heard from a credible source that banks were basically threatening them: “If you let us privatize your assets, you’ll be able to float your bonds for the next five years. If not, all bets are off.” The Fed apparently got wind of this and sat the perps down and told them to cut it out.

      1. Jess

        Just curious: How do you think the pension crisis will, or might, affect the muni bond market with respect to bonds currently in the market or held by bondholders, whether individuals or bond funds?

      2. Optimader

        Good memory.. when the sht hit the fan under the leading edge of scrutiny, the aldermen shrugged their collective shoulders that they didnt have time to read the Contract before voting.


      3. Republic If You Can Keep It

        Why was it the “Fed”, the Federal Reserve Board in Washington, which did this? Why not the SEC, the Secretary of the Treasury, the Chairman of the Senate Banking Committee? Each of whom had jurisdiction? I think it was 1) a unique time, 2) the Fed had opened a line of credit to the investment-commercial banks and any entity owning a bank or savings and loan (which is almost every large corporation, e.g. GM and Prudential each owned one; GM, Bechtel and Caterpillar even have their own families of mutual funds). In my view, the Fed had the expertise all
        along and, momentarily, control and the will to act.
        Seeing 1) things could spiral further out of control, and 2) the commercial-investment banks emboldened with hundreds of billions in Fed Reserve loans, the Fed understood they could bankrupt or force the country’s municipalities to summit to the banks Fed-financed threats. The Fed then determined, in an unprecedented way, to act. The Fed was emboldened, maybe they saw it as being forced, to act; knowing that none of the other power centers who could, or would, act. This seems a lesson that our/my Democratic Party did not teach us or inform us about. Certainly this is the first time I have heard of it.
        Now, less informed by the Democratic Political Class, we are in for miserable, dire times, or worse. Slavery was worse, for a minority. Now we are threatened with a form of authoritanism AND financial serfdom. And we lack leaders. I see no one in the Democratic Party, or outside, even asking how did we come to this? I invite comments.

  3. Kirk Hartley

    There are multiple macro economic reasons to favor decent, secure pensions. In short, when retired people have no money, they cannot purchase anything and are simply a drag. The real questions are 1) how to deal with much longer life spans (e.g. push out years of work), how to pay for the pensions, how to invest pension moneys, and how to account for the financial ups and downs. See this post by a pension expert actually interested in the public good. IMHO, this web site should use more of his writing. http://pensionpulse.blogspot.com/2016/11/will-pensions-make-america-great-again.html

    1. vegeholic

      Linking infrastructure development with pension funds seeking low risk yield is basically a good idea. But the devil is in the details. My prediction is that we are going to massively “invest” in infrastructure that was appropriate for the 1950’s. As usual we will do a marvelous job of fighting the last war. Huge freeways and airports that Robert Moses could only dream of. Unfortunately the days of JHK’s happy motoring are over. Conventional (cheap) oil production is withering and all new discoveries require expensive production techniques with only marginal net energy contributions to the economy. We just don’t need more incentives to continue squandering nonrenewable resources. Instead we need investment in water, electrical grid, passenger/intercity rail, local, low FF agriculture, etc. I do not see evidence that anyone in the new administration, or any other foreseeable administration understands any of this. Taking into account the real world when considering pension planning would be a welcome trend. On the other hand what I expect is more wishful thinking and longing for bygone eras which will never return. Pension fund solvency will be yet another casualty of this backward looking vision.

      1. Jess

        I respectfully disagree. IIRC, we have an enormous backlog of bridges, tunnels, and existing roads (not to mention public buildings) that are in dire need of either replacement or massive rehabilitation. No real need to create new projects, just replace existing. (That does not, of course, mean that this is what will actually be done, but it is a possibility, and should be the desired strategy.)

    2. Katharine

      With all due respect, he took a long time to come to the point and then did not develop it. I was looking for substance and was disappointed.

  4. Matthew cunningham-cook

    This article seems like a lot of disparate facts shoehorned together to make a pro-austerity argument.

  5. Damian

    The politicians buying short term peace with organized labor unions has now reached the long term effect – defacto bankruptcy – Puerto Rico / NJ / Ill / Chicago / Penn / etc. – are falling like dominos after 8 years of ZIRP.

    The pension obligations are as arbitrary as the willingness of taxpayers to pay in the face of the respective State Constitutions changed to upend this game with willing super majorities.

    There are no comparable pensions, many of which go to $100-250,000, in the private sector. The government workers at all levels know that fact. Cutting by 50% will become the rule whether existing recipients or futures.

    The scam is over, except for the shout out before the cram down!

  6. MyLessThanPrimeBeef

    Medicare for all.

    And Social Security for all. The retired police chiefs may not like it, bu others will appreciate the equality (for all), and especially, the (improved, though not immune to cut back) security of Social Security for all. No more worries over the city going bankrupt.

  7. Michael Fiorillo

    As I commented on Wolf’s site, this article ignores the important fact that public sector pensions are in the position they are largely because states and localities underfunded them for years, re-directing that money to make up for general revenue shortfalls caused by corporate welfare and refusal to raise taxes on the rich.

    Sure, you can find public sector retirees drawing absurdly high pensions, but look closer (as in the fire chief example) and you’ll see it’s administrative types receiving them. Pension averages are much lower, despite these relative outliers, and rank and file pensioners receive far, far less.

    Notice too how in Chicago the fees and taxes intended to make up for the pension underfunding falls disproportionately on “the little people,” something intended to drive public opinion even further against public sector unions, workers and defined-benefit pensions (once the standard, not the rapidly-disappearing exception) in general.

    I’d have thought that NC would have presented something like this with a more critical eye. It may not have been intended as anti-worker propaganda, but that’s essentially what it is.

    1. Michael Fiorillo

      End of paragraph three should read, “(… Once the standard, now the rapidly disappearing exception)…

    2. Vatch

      Good point. Revenues intended for public pension funds have been diverted to general government funds for years, which is a major reason why public sector pensions are underfunded in many states. An article explaining this for Illinois and New Jersey, poster children for state corruption:


      Christie and previous New Jersey governors since 1996 have made pension payments below what is actuarially recommended, leading to $40 billion in liabilities entering 2016, according to data from Moody’s Investors Service.
      . . . . .
      After years of diverting revenue earmarked for statutory contributions to the general fund, state lawmakers adopted a payment schedule in 1995. That plan ran afoul of the Securities Exchange Commission, which brought fraud charges in 2013 for failing to disclose that the plan significantly underfunded pension obligations and increased risk to its overall financial condition. The charges were simultaneously settled by Illinois.

      1. David

        That is correct Illinois an Chicago enjoyed much lower raxes and higher services for years and now have a big bill due but he as most of these people who write on this never point out Illinois drastically cut pensions for new hires and by mid century will have no more pension debt. Bankrupcy is not in the cards

      2. Paul Art

        IIRC Christine Todd Whitman was the pioneer in this area of redirecting pension funds, taking the lead in passing legislation that allows for this kind of nonsense. Funny thing is, everyone sleep walked through this crap.

        1. Vatch

          Regarding sleepwalking through legislative shenanigans:

          “Eternal vigilance is the price of liberty.”

          Naked Capitalism and similar sites help us to avoid future sleepwalking.

    3. Jim Haygood

      For sure, public pensions have been underfunded for years. Taking advantage of their exemption from ERISA, public pensions have used fantasyland return estimates of 7 to 8 percent to drastically understate the present value of their liabilities. As Wolf Richter notes, a new accounting rule effective in 2014 has caught out these discount rate scammers in flagrante delicto.

      What won’t wash, though, is the “we’re so poor” shtick from public sector unions. The universal popular sense that public pensions are rich is amply backed up by facts:

      Average career [public sector] employees in eight states were pension “millionaires.” Nevada led the pack with its average full-career employee receiving more than $1.3 million in retirement benefits, with Alaska, California, Colorado and Oregon state workers exceeding $1.2 million.

      State government workers do exceedingly well, with the average career public employee enjoying a replacement income of 87% of final earnings.

      Indeed, employees of 14 states wind up in the 90% to 100% range, three (Oregon, California and Texas) in the 100% to 110% range, while New Mexico and West Virginia public retirees enjoy far higher standards of living than in their working years — with replacement incomes of 113% and 115%, respectively.


      There’s a bounteous irony in your call to “tax the rich.” Compared to private sector retirees, public pensioners ARE “the rich,” brother.

      As Damian notes above, public pensioners are facing serious haircuts. They will get zero sympathy from the rest of the public, shouldering the tax burden of paying for the exorbitant benefits of the public sector’s aristocratic special snowflakes.

      1. Matthew Cunningham-cook

        Jim has been making this same tired comment for years now. It’s boring and reduces the caliber of discussion on NC.

        1. Paul Art

          Jim is our resident conservative barnacle. My bet is that he is someone known to Yves and could be a well wisher who truly believes in the Austrian business cycle. The general modus operandi that is followed here regarding him is to simply ignore him.

      2. Vatch

        Nobody is a millionaire because he or she receives more than a million dollars over a long period of time. A person only becomes a millionaire by possessing at least a million dollars worth of net assets at a time. If a person survives for 20 years after retirement, and receives $1.3 million, then that person averages $60,000 per year. And if that person’s pension payments are indexed to inflation, he or she may eventually receive more per year than her or his salary while employed. That doesn’t mean that the pension is extravagant — it means that the dollar has lost or will have lost value. Some states don’t participate in Social Security, so comparisons between private 401(k) plans, which supplement Social Security, can be misleading. According to NASRA (National Association of State Retirement Administrators):

        Approximately one-fourth of employees of state and local government participate in a public retirement system in lieu of Social Security. This includes approximately 40 percent of public school teachers and over two-thirds of firefighters, police officers, and other first responders. Every state has groups of public employees that do not participate in Social Security. Most to substantially all of the public employees in Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio are not in Social Security.

        Alaska, Colorado, and Nevada are in the list of “millionaire” pensioners, but most of those people don’t get Social Security.

        Are there problems with many state pension plans? Of course. There’s double dipping, and senior retired employees, such as school district administrators, sometimes do get the extravagant pensions that you protest against. But let’s not exaggerate with claims about millionaire pensioners.

        1. Vatch

          Oops. Minor goof up. $60,000 should be $65,000. But that’s only one state, and my argument is still valid.

        2. nixit

          Alaska, Colorado, and Nevada are in the list of “millionaire” pensioners, but most of those people don’t get Social Security.

          That means these people also didn’t pay into Social Security, so they had an extra 6.2% every year to invest in an IRA that would have easily outpaced what SSI would return. That also means these folks are exempt from the means testing and get to keep every dime of their retirement.

    4. Republic If You Can Keep It

      Throwing ad hominems and judgmental characterizations should be beneath this site’s ethics. I enjoy back and forth on public employee pensions and their funding and non funding. It’s a complex subject, brings out the site’s political economists and exposes the clientalism and moxie of public unions. Clientalism is pervasive in our self-directed, atomized society. Part of the solution is increased Social Security and Medicare, e.g. end the Republican enacted statute requiring Medicare to paying retail prices for prescriptions. Bernie broke with clientalism with his proposed Social Security increase — a reason that few Democratics supported Bernie — nothing in it for their public sector clients. Public employees don’t care about “national, public options”. Public unions have been divided, but not conquered. They are in retreat, abandoning new members, who get only defined contribution pensions, 401(k)-like plans. That existing public union members give up nothing shows their clientalist clout. The Democratic Party of Clinton abandoned private sector employees. They, blindly, reciprocated in kind. If Bernie had been the nominee, and the leader, things would have been different.

    5. nixit

      public sector pensions are in the position they are largely because states and localities underfunded them for years

      But a significant portion of that pension under-funding went directly into public sector salaries. In Illinois’ case, there are multiple references dating back decades that show politicians balancing budgets by keeping operational funding the same (employee salaries) and shorting pension funds. If all these units of government would’ve funded pensions properly, there would have been less money left for salaries, raises, health benefits, promotions, positions, etc. All of which would have led to lower pensions and/or lower net pay over a course of a career. It’s the inconvenient truth that most public sector folks seem to ignore.

      To think that over a 30+ career, only tax increases would have happened and not one compensation reduction – salary freeze or smaller raise or lower health benefits or no promotion or no change in pension rules – is the most consistently naive argument brought forth by pensioners in the pension funding discussion.

      1. Yves Smith

        First, operational funding is much more a matter of headcount than salary levels. When private sector companies cut costs, the do so overwhelmingly by firing people. It would take a bit longer in the public sector, since it would take place via hiring freezes and attrition.

        Second, more generally, private sector employees opted for higher pay jobs with more risk. It turns out many public sector employees made the better bet.

        1. nixit

          Yes, but every raise a public sector employee received over the course of a career would’ve been smaller if more of that money were put into pensions. In fact, if all else stayed the same over a 30 year period except for one 3-year contract with a salary freeze – just one – could’ve cost an employee $200,000 in earnings over the course of a career and reduced their final pensions by 10%. Most certainly, this would’ve happened once in a 30 year time span, no? Or maybe each raise was 1% less than it was otherwise. Or maybe a new pension tier would’ve been created decades prior with reduced benefits for future hires. All this the results of funding pensions properly.

          In essence, each public sector paycheck contains a small early pension withdrawal. The math and logic may be cruel, but it’s honest.

          1. Yves Smith

            No, and you are ignoring what I said. The far more likely way they would have cut costs would have been to contain or reduce headcount. You do that by allocating the tasks of the eliminated jobs among those who remain and cutting service (longer queues).

            There have been analyses that have shown that public sector workers in fact are not better paid than private sector workers when you adjust for educational levels. The public sector employs a higher proportion of college grads than the private sector.

            1. nixit

              So what you’re saying is some folks who have pensions never should’ve had pensions because they never should’ve been hired to begin with. So do we start a lottery and eliminate 10% of the pensions? Either way, by reducing headcount or reducing compensation, the pension liability should be lower today. It’s only a matter of how the reduction would be distributed.

              I’ve heard the “public sector workers in fact are not better paid than private sector workers when you adjust for educational levels” argument before, but you forget to factor in one important factor: risk. So how much is the premium worth on a career job in the public sector with no worries of WFRs, quotas, etc? 20%? 50%? There’s a value there you should take into account.

              1. BillJ.

                Public sector pensions are DEFERRED wages, not “perks”. That’s the bargain public sector workers made with their partners (states & municipalities) when they agreed to forgo higher wages today for greater security tomorrow. The states have indeed underfunded these pension funds and redirected the money into general revenue to address budget shortfalls that are the sole consequence of corporate welfare and a refusal to tax the wealthy appropriately.

                The question that needs to be first on our minds here is what needs to change in order to insure that other workers are pulled UP to where public sector employees are now and not bitterly search for a means to drag everyone into penury. Clearly a federal response is warranted, specifically in the expansion of Social Security thus transforming this into a true universal pension system (+Medicare for All) and eliminate the need for states to fund pension systems at all.

  8. Adam Eran

    Public pensions are just the latest to feel the tentacles of the vampire squids. Ellen Schultz’s Retirement Heist tells how, at one time, 70% of American workers had nice, defined-benefit pensions until the C-suite looted them to goose their own compensation and stock prices.

    As for the examples of Chicago (and Stockton, San Bernardino and Bell CA) there’s certainly some connivance going on to inflate those public pensions collected. Robert Reich’s comments are the best I’ve seen about this. Essentially, the public pensions are modest, on average, and mostly (86%) paid by the employees who enjoy them. The fiscal connivance of Rahm and his like serves to de-legitimize such expenses, as well as degrading the public realm. A degraded public ream (including the environment) disempowers the average person and makes the plutocrat’s position even more favorable.

    Finally, the de-funding of the public realm probably plays into the neoliberal privatization movement, turning all of the economy into toll booths. One example: Federal subsidies for higher education have declined 55% since 1972. Gosh, I wonder why higher education is so much more expensive than it was when a kid could work part-time, go to college, and graduate without a millstone of debt around his neck….but the new thing is a feature, not a bug.

    1. rd

      Probably 70% of major corporations workers. Small business, farmers, etc that made up a lot of the workers didn’t have pensions. The golden age of pensions is over-rated.

  9. DJG

    There are two general problems here: First, Chicago is operating, if operating is the word, with a continual corruption tax. Note that the city budget is regularly passed without discussion and with perfunctory public hearings at which the members of the public are obviously ignored. The TIFs are slush funds, yet when Chuy Garcia mentioned in his campaign that it is hard to tell Chicago’s exact financial condition because of the accounting finesse that diverts so much money who-knows-where he was hooted down by the many local goodthinkers who believe that Rahm is a capable politician and Silver Fox. The parking deal is another example of the corruption tax, as is Ventra, the system for collecting fares on public transit. The bond rating of CPS is just a visible manifestation of the bad management tinged by racism that has now succeeded in destroying the school system (in part because the student body became “majority minority”).

    Yet as for this, “To render drivers even closer to insanity, surge pricing will come to parking meters near Wrigley Field for games and events.” Too bad. That’s a tourism tax. The corruption tax is when we have extensions of Sunday metering.

    The second issue is something I see in this thread and have seen before: Lots of people complaining about someone else’s (middle class) pension. It is one thing to observe and criticize golden parachutes in private business. It is another thing to complain about cops’ and firefighters’ pensions. And it is pure divide-and-conquer to insist that they (or teachers) don’t deserve pensions (especially when they and their plans have opted out of Social Security). My Facebook feed consists of plenty of misguided liberals trying to solve non-problems (currrent big problem, the Electoral College, which has only existed since 1789). Now we want to engage in beggar-thy-neighbor? Great for building up an independent left, now isn’t it?

    1. 1 Kings

      Why did they ‘opt out’ of Social Security? Couldn’t be they had a better deal in the works?

      You should give full disclosure and mention what your ‘middle class’ pension is, roughly. The question is not whether teachers or anyone deserve a pension, it’s that it is paid for by others, and if it’s not enough they can strike for more.
      The politicians can just write themselves new checks(um, new taxes/fees).
      Both are the problem.

  10. Republic If You Can Keep It

    I think this post shows one basic reason why the Rustbelt voted overwhelming Trump. Because Trump, not Hillary, told them what they, felt, but couldn’t articulate, that “the system is rigged.” Trump believed it, but didn’t add what else he believed, “you poor saps deserve it.” This blog is populated by readers who know how things are, not “Professional Democrats” who have a form of religion, which is follow the Leader. My field is pensions, so let me add one of the realities behind what the Rustbelt “feels.” That they have no pension, but the rigged system gives a “New Class” real pensions. Real pensions, i.e. Defined Benefit Pensions, are pensions that are a large % of salary, pensions which, unlike 401(k)s, you never outlive. You get a check until the month after you die, which is another way of saying you will have undimished pension income when you are in the frail elderly. 401(k)s by contrast “ease” you into retirement, and then they’re gone. 401(k)s are not pensions, they are a tax deferred savings account created by federal “pension” law. The only citizens who at this point get Defined Pension Pensions are public “Safety Employees”, police and firemen; most other public employees, who get less generous pensions; full professors (public and private schools); judges who get sweetened pensions; airline pilots; the one million uniformed military who get sweetened pensions; until recently, all military contractors (pension costs were assumed in the Defense Acquistion Regulations, the DAR, to be a built-in cost of “cost+plus” military contracts); and only the Creme dela Creme of the private sector: most managers in finance and managers generally (who get a myriad of “non-qualified” pensions, e.g. Top Hat Plans, “Supplemental” 401(k)s, etc. that no one wants you to know about).
    Most Democrats don’t know this, and most of those those who do, are covered by Defined Benefit pension plans, as public employees I will tell you who gets health insurance benefits sweeter than Medicare in retirement another time.

  11. Paul Hirshman

    This story explains why we should pay more attention to the trillions of dollars the Defense Department says it can’t account for. Austerity for you is “let the good times roll” for the creeps who run things these days.

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