Chicago Credit Rating Dropped to Junk After Pensions Insolvent

http://mobile.reuters.com/article/idUSL2N170121

CHICAGO, March 28 (Reuters) - Fitch Ratings on Monday downgraded Chicago's credit rating closer to "junk," citing last week's state Supreme Court ruling that voided a law aimed at boosting funding for two of the city's pension funds.

Fitch called Thursday's ruling "among the worst of the possible outcomes for the city's credit quality," while warning the rating could be downgraded further in the absence of "a realistic plan that puts the pension funds on an affordable path toward solvency."

"Not only did (the Illinois Supreme Court) strike down the pension reform legislation in its entirety,but it made clear that the city bears responsibility to fund the promised pension benefits,even if the pension funds become insolvent," Fitch said in a statement.

The two-notch rating downgrade to BBB-minus,which is one step above "junk," affects $9.8 billion of the city's general obligation bonds and $486 million of sales taxrevenue bonds. Chicago's credit rating with Moody's Investor Service is already in the "junk" level.

It has been worse during the seventies, and it has been better. The pensions for public employees across America are absolutely out of control. The tail has been wagging the dog. A judge could work four years and get 75% of their salary with full medical without contribution on their health insurance.....guess what.....they did that for all the politicians in Illinois.....rotten to the core. People wonder why I am a Republican......because being a democrat would mean stealing from the public in Illinois. Sadly, the Republican Party in Illinois has shared the blame for the out of control budgets. It is happening in one of the richest states in the nation with some of the best schools and universities in the nation. I have a friend who was the Republican whip, and the stories he tells about some of the budget battles would make your head spin.....they would almost get into fist fights every year.....as nobody would make the necessary tax increases to fix the bonuses they gave themselves........

2seaoat wrote:It has been worse during the seventies, and it has been better.  The pensions for public employees across America are absolutely out of control.  The tail has been wagging the dog.   A judge could work four years and get 75% of their salary with full medical without contribution on their health insurance.....guess what.....they did that for all the politicians in Illinois.....rotten to the core.  People wonder why I am a Republican......because being a democrat would mean stealing from the public in Illinois.   Sadly, the Republican Party in Illinois has shared the blame for the out of control budgets.   It is happening in one of the richest states in the nation with some of the best schools and universities in the nation.  I have a friend who was the Republican whip, and the stories he tells about some of the budget battles would make your head spin.....they would almost get into fist fights every year.....as nobody would make the necessary tax increases to fix the bonuses they gave themselves........

IF it were only for the politicians, there would not be a problem. The unions in Chicago negotiated for higher and higher benefits.

The POLITICIANS in Chicago, and everywhere else for that matter, roll over in a heartbeat since it is not their money and they do not want the garbage to pile up or the snow not to be removed. That guarantees their re-election.

FDR, economic Socialist who extended the Great Depression by seven years did not even support public sector unions.

You really need to understand the problem before commenting. The Chicago teachers have been working without a contract since last year. They are way behind other suburban districts in Illinois. The constitution says the state should pay one half of the cost of education in Illinois yet, the state has only been contributing about 36 percent leaving huge deficits, as rich districts get property taxes and huge contracts with teachers which allows some of the widest gaps in teacher pay between regions in the state, than anywhere in America.......all of which stems from a bipartisan action to disregard the Illinois constitution and divert funding to state employees which again have been rewarded beyond what the budget can sustain. The problem is political. If you do not follow a constitutional mandate, then you have the very rich districts with incredible test scores and rural school districts which are not getting the proper state support. The answer is simple.....keep the temporary income tax in place for five years and make all retirees in Illinois pay for their medical benefits.....also, in Illinois they do not tax pensions.....absurd when the very pensions are bankrupting the state.

2seaoat wrote:You really need to understand the problem before commenting.  The Chicago teachers have been working without a contract since last year.   They are way behind other suburban districts in Illinois.   The constitution says the state should pay one half of the cost of education in Illinois yet, the state has only been contributing about 36 percent leaving huge deficits, as rich districts get property taxes and huge contracts with teachers which allows some of the widest gaps in teacher pay between regions in the state, than anywhere in America.......all of which stems from a bipartisan action to disregard the Illinois constitution and divert funding to state employees which again have been rewarded beyond what the budget can sustain.   The problem is political.   If you do not follow a constitutional mandate, then you have the very rich districts with incredible test scores and rural school districts which are not getting the proper state support.   The answer is simple.....keep the temporary income tax in place for five years and make all retirees in Illinois pay for their medical benefits.....also, in Illinois they do not tax pensions.....absurd when the very pensions are bankrupting the state.

You forget, I am very, very familiar with Chicago.

The problem certainly is politics and the Unions which control the city. For the reason I stated previously.

Please list the "temporary" taxes which have actually been lifted when they expired.

http://www.huffingtonpost.com/harold-schaitberger/public-employee-pensions_b_1665029.html

There’s an oft repeated myth being fed by many that claims the defined benefit pension plans available to most public employees are going bankrupt.

While a new report by the Pew Center for the States feeds those myths, Pew’s research paints a false picture of pensions. Here are five oft-peddled myths about public pensions followed by the facts.

1. Pensions are going bankrupt.

The methods used to calculate a pension system’s funding level are quite complicated and convoluted, which has enabled detractors to point to the funds in a few states — Illinois, Rhode Island, Connecticut and Kentucky — where funding shortfalls are notably higher.

Pew’s “new” report relies on data from 2010, but that snapshot gives an inaccurate portrayal of the current fiscal health of pensions. In 2010, when the recovery was not as far along as it is today, 16 states were above the threshold that Pew says is necessary to qualify for good fiscal health. The number of states meeting that threshold today is probably much higher. For example, in Wisconsin the primary pension fund is 99.8 percent funded today. In the state of Washington, pensions are 119 percent funded today. In North Carolina, pensions are 100 percent funded today. Perhaps most important, pensions will continue to recover steadily as markets rebound.

2. States are facing an “unfunded liability” in excess of anywhere from $3 trillion to $757 billion.

The concept of an “unfunded liability” is misleading because pension benefits are paid out over decades. A mortgage represents a good analogy. Imagine newlyweds, both of whom work, buying a $300,000 home and putting $20,000 down. The $280,000 they owe represents an “unfunded liability,” but like pensions, that money is not due all at once. It is due over 30 years, under the terms of a typical loan agreement.

Opponents of public employee pensions have skillfully portrayed pension liabilities as a bill that is due today. If homeowners had to pay the full cost of their home at the time of purchase, 99 percent of us would be renting. But homeowners don’t have to pay for the homes all at once, so it’s very misleading to portray pension funds in that light because pensions are paid to retirees over many decades.

3. States can no longer afford to pay benefits.

Payments to pension systems account for less than three percent of state budgets. Most of the funds in pension plans are not even provided by taxpayers — two-thirds of all pension assets are contributed by employees or earned on investments.

Where pensions are underfunded, it’s overwhelmingly because of the recession and because states took “pension holidays,” which means politicians declined to make their state or locality’s annual contribution — breaking a promise to the public servants of that state and in a bad faith effort as the fiscal stewards of taxpayer dollars. Had they simply honored their commitments when times were good, virtually no state pension system would have unfunded pension liabilities that raise concerns.

This approach has worked for opponents of pensions because it allows them to shift blame to workers, but it does not change the fact that it advocates allowing states to ignore their responsibility to the people who perform the work to protect the public, teach our children and keep the state providing many other valuable services to its citizens.

4. Public employee benefits are overly generous.

Since pensions are now virtually non-existent in the private sector, and because the recession decimated the nest eggs of everyone with money in the stock market, opponents of defined benefit pensions have gained traction with this argument by creating and fostering pension envy.

The story that isn’t told is that the pensions public employees receive, in most cases, are the only source of income those workers receive in retirement since most are not allowed to collect Social Security. And the median benefit of those receiving a pension paid by a public employer is $23,407, according to the National Institute for Retirement Security.

The hope is that their pension gives the average public worker the ability to pay their basic bills, but they definitely aren’t getting rich in their old age.

CEO pay provides a better example of overly generous pay. Apple CEO Tim Cook earned $900,000 in pay and performance benefits in 2011 and received restricted stock worth $376 million that vests in 2016 and 2021. CEOs of the S&P 500 Index companies earned 380 times the salary of an average worker in 2011, according to the AFL-CIO’s Executive Paywatch study.

5. We can fix the pension system by converting to 401(k)-style defined contribution plans.

There is a well-financed effort to force 401(k) plans as the solution because Wall Street firms stand to earn billions of dollars in fees if pensions are converted to 401(k)s.

But the momentum of that effort is dwindling because 401(k)s have provided investors with a paltry return over time. Think about what has happened to your own 401(k) since 2008 and whether the money in that account would be enough to sustain you in retirement.

A 60-year-old who worked for 30 years has an average 401(k) account balance of $172,555, according to the Employee Benefits Research Institute. That will provide retirement income of only $575.18 per month. It would take a 401(k) account balance of $1,000,000 to provide $40,000 annually over one’s lifetime. To achieve a $1,000,000 account balance, you would need to contribute $1,000 a month every month for 30 years and earn a 6 percent return [after fees]. With an estimated 20 million Americans unemployed or underemployed and with real wages stagnant for decades — average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen just 5.3% to $19.72 since 2000, according to the Bureau of Labor Statistics — those who work for a living in this country over the past 30 years, not many have $1,000 to save every month after paying their bills.

The real retirement crisis is not in the public sector. It is in the private sector. The average 401(k) balance today is just $71,500, according to Fidelity Investments. Americans whose retirement security relies on Social Security supplemented by such small balances in 401(k)s must consider how they will avoid falling into poverty in their retirement years and states will need to figure out how they will provide welfare to those who do.

401(k)s were always intended to supplement — not replace — one’s retirement income. About 10,000 Americans a day are turning 65 years old, according to the Pew Center for the States. While Wall Street’s 401(k) plans have done nothing to help retirees enjoy their golden years, defined benefit plans are the best way to support retirees and allow them to continue to contribute to their local economies.

************

Typical... ignore the ideologically inconvenient reality... and search desperately for a revision or diversion to believe.

Why is this even an issue then? Besides it being a vast right wing conspiracy of course.

Once again my good friend 2seaoat makes a statement and then cannot back it up.

Simple question. List for us the "temporary taxes" which have actually expired.

http://www.epi.org/publication/understanding-cuts-public-pensions/

"In the past several years, fears that underfunded public pensions are a growing burden on taxpayers have led to calls to cut employer-provided pension benefits through increased employee contributions, increased retirement ages, reduced cost-of-living adjustments (COLAs), or other changes. But too often news reports on proposed or enacted pension cuts either overplay the rationale behind them, or minimize the impacts on affected workers. The latter is especially true with changes that do not decrease take-home pay but reduce future retirement benefits and thus may be harder to quantify.

This primer is intended to help organizations understand both the rationales behind and the details of proposed cuts to public pensions. It provides tools for assessing and understanding the true underlying health of public pension plans, the history behind any actuarial shortfalls, and the impacts on workers and taxpayers of proposed or enacted legislation that reduces pension benefits. The primer is organized as a series of 10 steps, although all may not be relevant in every situation. While it ends with a specific example of the percentage change in lifetime benefits, measured in real terms, received by a prototypical worker under four different pension plan changes, it provides guidance on using alternative measures as well..."

[...]

"In most cases where there is a genuine problem with the actuarial health of a public pension plan, the problem has nothing to do with accounting assumptions but is instead driven by the employer’s failure to make required contributions in full. Most pension funds that remain close to the 80 percent threshold in the wake of the 2008 market downturn are probably in decent shape and were responsibly funded prior to the downturn, though there are some exceptions. In the rare cases where overoptimistic assumptions played a role, the problem was compounded by an unusually low worker-to-retiree ratio. Under normal circumstances, a shortfall caused by unrealistic assumptions will be amortized over a predetermined number of years by increases in employer contributions. The shortfall will also result in changes to assumptions. Employer contributions are automatically adjusted each year, whereas assumptions are usually changed after actuaries conduct periodic experience studies, typically every five years.

Pension fund critics often ignore the fact that contributions and assumptions are adjusted in response to changing economic conditions. For example, a report by Josh McGee of the Laura and John Arnold Foundation claims that the California Public Employees’ Retirement System, with $237.5 billion in assets, will have a $300 billion shortfall if it misses its 7.75 percent investment target by half a percentage point and a $540 billion shortfall if it misses its investment target by a full percentage point (McGee 2011).4 However, this assumes contributions are not adjusted to amortize the shortfall or as a result of a lower rate-of-return assumption.5 In other words, McGee’s estimate appears based on a naïve or deliberately misleading idea of how pension funds actually operate.

Though it is not necessary to research the history behind severe underfunding to determine the impact of proposed cuts going forward, it is often helpful to do so simply to assess whether the proposed solution is actually addressing the root cause of a shortfall. Often, however, such research shows that the problem lies not with the structure of the pension itself (rosy accounting or lavish benefits) but instead with politicians who have wanted to spend more and tax less (and thus cut contributions to the pension, the bill that is easiest to shirk). Unfortunately, this history can be hard to unearth because the causes of underfunding often go back many years and pensions in the early years often functioned more on a pay-as-you-go rather than advance-funded basis..."

[...]

"A 2013 CRR analysis of 32 plans in 15 states found that in most cases cuts that have already been enacted will fully offset or more than offset the impact of the 2008 financial crisis on the sponsors’ required contributions (Munnell et al. 2013a).8 The analysis took into account benefit cuts and increased employee contributions that reduced employer costs, as well as changes in actuarial assumptions that increased employer costs. The report found that employer normal costs (the cost of current benefits) will be almost halved once reforms are fully phased in.

As noted earlier, pension shortfalls caused by market downturns should not automatically lead to benefit cuts, especially since such shortfalls, like surpluses in boom years, often prove temporary. Instead, both shortfalls and surpluses should normally be eliminated through adjustments in contributions designed to gradually amortize shortfalls or surpluses over time. However, not only did workers appear to bear the full brunt of the 2008 crisis, but the authors of the CRR report noted that in 40 percent of the cases examined, employer normal costs were actually reduced below pre-crisis levels..."

[...]

About the author
Monique Morrissey joined the Economic Policy Institute as an economist in 2006. Her areas of interest include Social Security, pensions and other employee benefits, household savings, tax expenditures, older workers, public employees, unions and collective bargaining, Medicare, institutional investors, corporate governance, executive compensation, financial markets, and the Federal Reserve. She is active in coalition efforts to reform our private retirement system to ensure an adequate, secure, and affordable retirement for all workers. She is a member of the National Academy of Social Insurance. Prior to joining EPI, Morrissey worked at the AFL-CIO Office of Investment and the Financial Markets Center. She has a Ph.D. in economics from American University and a B.A. in political science and history from Swarthmore College.