Chicago boosts utility rates in overdue move to shore up pensions
Action taken by the Chicago City Council Wednesday may help ward off disaster when it comes to the city's pension fund.
In December, the city's financial report revealed that the city's pension plan would be depleted within 10 years if the council didn't act. The council voted to raise water and sewage rates by approximately 29.5 percent over four years beginning in 2017 to help offset pension costs. In addition to this adjustment, the council increased employee contributions for new hires by 3 percent and moved the age of eligibility for full benefits from 65 to 67.
The city only had 32 percent of the money it needed to fund pensions for city workers. The tax increase is expected to provide the city with 90 percent of the money it needs for its pension plan by 2057. That left it with few choices when it came to finding the money for the plan.
“The only ways out are to cut benefits, raise taxes or ask for federal help," Amit Sinha, a New York City-based investment portfolio manager, told Chicago City Wire. "I think those are the only three ways,”
Sinha compared Chicago to Greece when it came to its financial situation.
“Greece is insolvent and does not have money and technically would have been bankrupt a long time ago if it weren't for a bailout from the European Union and International Monetary Fund,” Sinha said.
States and municipalities can continue to put off the day of reckoning for years, but it only makes it more painful for future taxpayers and retirees, who have to fix the problem, Sinha said.
Chicago's underfunded pension system isn't unique, but with several other U.S. cities and states dealing with pension funds that lack enough money for retirees, Chicago's crisis may be the worst. The conversations about how to solve pension-fund shortfalls need to begin now and involve retirees, taxpayers, and state and federal governments, Sinha said. This isn't a situation in which a city can simply file for bankruptcy because of the laws dealing with pension plans, Sinha said.
The pension problem actually began decades ago, but a lack of action created the huge problem being seen today. From the 1950s through the 1980s, pension plans seemed to be reasonable options, Sinha said. At that time, there was a large workforce, with more people working and fewer retirees. The amount of money going into the plans exceeded what was going out. The plans provided security to government workers so all of that made sense, Sinha said.
The problem came when the economy changed, people began living longer and the workforce started aging, but Illinois did not make any adjustments to the system. The government was receiving a lot less money in the '80s and '90s, and the number of retirees began to grow, while the pool of younger workers to fund pensions began to shrink. With less money being collected and more money being spent, the government became more reliant on interest rates. This should have set off red flags, and the State Assembly should have said there is going to be a big problem in the future if we don't begin saving more money for the plan today, Sinha said.
If they had looked at what they truly owed, rather than at how much they predicted the plan would make from the stock market, they might have instead chosen to put some of the money into government bonds, a safer option, and they would have been better off today.
Although government bonds pay 3 percent interest, the state expected and hoped the plan would make 7.5 percent interest in the stock market, a riskier option. Although money can be made in the stock market, money can also be lost, Sinha said.
If no action, had been taken in Chicago, the plan would have been heading for serious trouble unless equity returns on the stock market doubled for the next 10 years and interest rates jumped, but even then, they would have had to put more money into the plan, Sinha said.