Bankruptcy is inevitable. Putting it off only increases the pain for the city’s residents and retirees.
Who is to blame? Richie, Rahm, all the current and past aldermen that failed to ask the hard questions; and of course Lightfoot, whose malfeasance has absolutely pushed the city to the brink. Bankruptcy gives our current leaders a chance to make it right. It's a chance to undo the wrong, to make our city livable again, to return to that place our forbearers envisioned. To not take this step is to turn a blind eye to the reality about to overtake us.
The Chicago skyline, May 12.PHOTO: SCOTT OLSON/GETTY IMAGES
Chicago’s pension problems are nothing new. Analysts and observers have known for years that the Windy City’s annual pension contributions were unsustainable. In 2016, the contribution for 2022 was projected to reach nearly $2 billion, 4.3 times what it was for 2014. Despite this gargantuan contribution, the pension plans’ funded ratio was projected to plummet—from a poor 31% in 2015 to an alarmingly low 26% in 2021. I urged Chicago at the time to increase its annual contributions by enough to prevent the funded ratio from dropping below 31%. Doing so would still have left Chicago’s pensions in worse shape than those of any major city in the U.S., but at least the hole wouldn’t get deeper. Chicago’s leaders did not embrace my recommendation.
In the ensuing four years, the situation has gone from very bad to worse. The graph below compares the funded ratios and annual pension contributions as they existed or were projected four years ago to what they are now. The funded ratio swiftly broke through the previously projected low of 26%. By the end of 2018, the funded ratio was 23%. It is now projected to remain under 26% until the end of 2024. And it isn’t expected to get back to 31% until 2031.
Under state law, Chicago’s annual pension contributions must be adjusted upward if the funded ratio turns out to be less than originally projected. As a result, Chicago’s annual pension contributions will be significantly higher than projected four years ago. For example, the contribution in 2022 has increased from $2 billion to $2.3 billion. Since these figures don’t account for the pandemic’s effect on the pension plans’ investment performance, expect them to look a good deal worse by this time next year.
It’s no longer credible to claim Chicago can work its way out of the huge hole it has dug for its pension plans over the past 20 years. From 2000-19, their funded ratio dropped from 83% to 24%. Even before the pandemic, Chicago lacked the resources to make $2.3 billion in annual pension contributions. Never mind making such payments year after year for decades to come. If Chicago’s employees wish to receive their pensions, and if Chicago’s residents wish to avoid being milked dry, the status quo is not the answer.
Fortunately, there is a viable alternative. Chicago has the wherewithal to fund its pensions and provide public services. But it can’t do those things and also service its debt. Chapter 9 of the U.S. bankruptcy code provides a means to cancel a great deal of that debt.
Chicago’s general-obligation debt is arguably junior to its pension liabilities, since the Illinois constitution protects pensions from modification. The general-obligation debt totals about $7 billion and entails annual debt service of around $600 million. In recent years Chicago has kept itself afloat by securitizing its future sales-tax revenues—assigning away those revenues to service bonds issued by a financing entity. Chicago has already issued $3.7 billion of these sales tax bonds. The sales-tax revenues needed to pay those bonds are no longer available to the city to make pension contributions and meet other needs. With regard to the sales tax revenues, these bonds are senior to the pensions.
Chicago could presumably borrow even more by assigning away more sales tax or possibly other revenue streams. Doing so might postpone, but not avoid, a bankruptcy. Bankruptcy is probably inevitable, and putting it off would come at a great price to Chicago’s pensioners and residents. Over time, greater amounts of future revenues would be diverted away for new bond issues, the amount of debt that is senior to the pension liabilities would grow, and junior debt would continue to be paid down.
Chicago is a great city. It wouldn’t be tarnished by a bankruptcy. To the contrary, chapter 9 would enable the city to provide public services and honor its pension liabilities in a way that would otherwise be impossible. This was true before the pandemic, and it is even more true today.
Mr. Brodsky is chief investment officer of Aurelius Capital Management, LP, whose funds are positioned to profit in the event of a Chicago bankruptcy.
The Chicago skyline, May 12.PHOTO: SCOTT OLSON/GETTY IMAGES
Chicago’s pension problems are nothing new. Analysts and observers have known for years that the Windy City’s annual pension contributions were unsustainable. In 2016, the contribution for 2022 was projected to reach nearly $2 billion, 4.3 times what it was for 2014. Despite this gargantuan contribution, the pension plans’ funded ratio was projected to plummet—from a poor 31% in 2015 to an alarmingly low 26% in 2021. I urged Chicago at the time to increase its annual contributions by enough to prevent the funded ratio from dropping below 31%. Doing so would still have left Chicago’s pensions in worse shape than those of any major city in the U.S., but at least the hole wouldn’t get deeper. Chicago’s leaders did not embrace my recommendation.
In the ensuing four years, the situation has gone from very bad to worse. The graph below compares the funded ratios and annual pension contributions as they existed or were projected four years ago to what they are now. The funded ratio swiftly broke through the previously projected low of 26%. By the end of 2018, the funded ratio was 23%. It is now projected to remain under 26% until the end of 2024. And it isn’t expected to get back to 31% until 2031.
Under state law, Chicago’s annual pension contributions must be adjusted upward if the funded ratio turns out to be less than originally projected. As a result, Chicago’s annual pension contributions will be significantly higher than projected four years ago. For example, the contribution in 2022 has increased from $2 billion to $2.3 billion. Since these figures don’t account for the pandemic’s effect on the pension plans’ investment performance, expect them to look a good deal worse by this time next year.
It’s no longer credible to claim Chicago can work its way out of the huge hole it has dug for its pension plans over the past 20 years. From 2000-19, their funded ratio dropped from 83% to 24%. Even before the pandemic, Chicago lacked the resources to make $2.3 billion in annual pension contributions. Never mind making such payments year after year for decades to come. If Chicago’s employees wish to receive their pensions, and if Chicago’s residents wish to avoid being milked dry, the status quo is not the answer.
Fortunately, there is a viable alternative. Chicago has the wherewithal to fund its pensions and provide public services. But it can’t do those things and also service its debt. Chapter 9 of the U.S. bankruptcy code provides a means to cancel a great deal of that debt.
Chicago’s general-obligation debt is arguably junior to its pension liabilities, since the Illinois constitution protects pensions from modification. The general-obligation debt totals about $7 billion and entails annual debt service of around $600 million. In recent years Chicago has kept itself afloat by securitizing its future sales-tax revenues—assigning away those revenues to service bonds issued by a financing entity. Chicago has already issued $3.7 billion of these sales tax bonds. The sales-tax revenues needed to pay those bonds are no longer available to the city to make pension contributions and meet other needs. With regard to the sales tax revenues, these bonds are senior to the pensions.
Chicago could presumably borrow even more by assigning away more sales tax or possibly other revenue streams. Doing so might postpone, but not avoid, a bankruptcy. Bankruptcy is probably inevitable, and putting it off would come at a great price to Chicago’s pensioners and residents. Over time, greater amounts of future revenues would be diverted away for new bond issues, the amount of debt that is senior to the pension liabilities would grow, and junior debt would continue to be paid down.
Chicago is a great city. It wouldn’t be tarnished by a bankruptcy. To the contrary, chapter 9 would enable the city to provide public services and honor its pension liabilities in a way that would otherwise be impossible. This was true before the pandemic, and it is even more true today.
Mr. Brodsky is chief investment officer of Aurelius Capital Management, LP, whose funds are positioned to profit in the event of a Chicago bankruptcy.
The city issued sales tax bonds, but opts not to prosecute the looters that deprived retailers of sales and the city itself of the revenue those sales would have generated. We currently have school teachers who contribute only 2.5% of their salaries to the pension fund while other city employees contribute 8.5% and can boast of 30% student participation rate in remote learning, where the teachers haven't been in person for 8 months and are balking at returning in January. And while Mayor, Richard M. Daley boasted of trimming the city payroll from 42,000 to about 31,500, thereby reducing the number of pension contributions by about 10,000. And on top of all that, his deadbeat nephew, glommed onto 64 million from the city's four pension funds while paying himself and his partner $9 million in management fees. Sorry Rich, I put all this in your lap. You were the Mayor that gave pensioners a big fuck you on contributing the city's fair share to the funds. You also manipulated yourself into a fabulous pension by consolidating your city, state and county pensions into one much larger pension. You, though you claim ignorance, directed your nephew Vanecko to the pension funds where 2 of your cabinet members sit on each of the 4 funds. You were the one who directed the funds to lend the money to your nephew. You claim ignorance of all this and that claim shows how arrogant and ignorant you are. You got 20 plus years to set the city straight. Downtown and the museum campuses look great. But they had to be paid for. You gave away the Skyway and the parking meters and pissed it all away. Vyrdolyak is right. Everything for the Daleys and everyone else is a Polock. Your legacy, when everything is put into perspective is that you, and your family looted the city, screwed everyone else and when all of this came to light, you claimed you knew nothing about it. That's your legacy you ignorant arrogant A-hole. End of rant.
ReplyDeleteWell done.
DeleteSometime learn about paragraph spacing?
DeleteI 'LL second that....
ReplyDeleteI say, bankruptcy now! Get it over with and for once be honest to the taxpayers and city employees. The pension fund was a nice little piggy bank for the Daley family and their cronies. The same applies to the state. Simply put, we have too many government workers in this city and state, and too generous with pension benefits.
ReplyDeleteHow much money in TIF Districts there is plenty of money!
ReplyDeleteOpen the pension plans to all residents everyone contributes!
ReplyDelete