Thursday, June 08, 2017

Pensions: The Numbers Add Up

My children are grown and have long flown the coop.  Global HQ is devoid of inhabitants now except for Mrs. English and myself.  People have asked me if we'd ever sell the house and move back down into the city.   On the surface that could be tempting.  For all of its well worn problems, Chicago is still an international class metropolis.  Its museums and art scene match most places in the world, we have champion caliber sports teams, wonderful restaurants and a vibrant theatre district.  Also, the city has worked hard to make the civic experience more enjoyable by adding the Chicago Riverwalk and the 606 bike trail.  

You can break up the Chicago experience into two seasons:  Cold and Warm.  Cold means winter has arrived.  Winter is a hard season here.  It usually shows up mid-December but its initial effects are muted by the holiday season.  But January, February and much of March are cold and usually snowy.  Winter then morphs into a two-three month period where it spits rain, we never see the sun and temperatures make a mockery of the calendar which states it's supposed to be spring. By Easter and Passover, everybody here is vitamin D deficient.  But June finally arrives, the days turn long and warm weather finally arrives.  Sometimes it's too warm as moist tropical air invades from the Gulf of Mexico, bringing heat up this way that rivals anything they have in the deep south.  That's why we have the lake.  There are miles of shoreline in Chicago and our beaches are packed with young people and families in the summer.  You can walk or ride a bike along the lakefront and it will bedazzle and rival Rio or the South of France in July and August.  Summer is our highlight season when you can sit outdoors and eat great food while people watching, take in a Cubs or White Sox game or visit one of our fabulous parks.   September brings a cooler but more temperate climate.  Fall lingers here usually well into November and the outdoors beckons at least that long.  So given all of that why wouldn't we likely ever consider moving back downtown?  Simply put Chicago is broke.  

Nearly every aspect of local government is billions of dollars in the red.  The Chicago Public Schools struggle each year to find enough money to limp into summer.  The city and Cook County have expenses that they are unwilling to pass along the true cost to their taxpayers.  Chicago looks toward the state government for help.  In times past that might have occurred, but the State of Illinois is also billions in arrears and the citizens "downstate" show no interest in bailing Chicago out.  A pro-business governor is deadlocked with the state legislature.  Our Governor, Bruce Rauner wants a property tax freeze and an overhaul on how the state works.  Democrats, who control the legislature object to that and want to raise taxes.  The state is about to enter it's 3rd year without a budget and the Democratic strategy now is to try and wait the Governor out with the hopes they can get a Democrat in the office. So far their stalking horse is JB Pritzker, an heir to the Pritzker {Read-Hyatt hotel chain} family fortune.  JB is a businessman with no political experience but has promised to self-fund his campaign.  The Democratic establishment is lining up now behind Pritzker so nothing will get done until the election is over in 2018.  That's about 18 months from now.  Chicago can expect no resolution until then, the bills will keep piling up and if JB becomes Governor then all the citizens of Illinois, but especially Chicago and Cook County can likely expect higher taxes to bail everything out.

Then there are the pensions.  This is a problem all over the country but is especially serious here.  I'll let Danielle Dimartino Booth, a much better writer and explainer of things financial then I'll ever hope to be,  give you a little nugget of wisdom about this problem.  In one of her latest columns  over at her blog "Money Strong" she discusses the issue on pensions, their funding and the baby boomers who are retiring.  This is a problem throughout the Republic but she uses Chicago in her post an illustration to make her point. The highlights are mine:

"Microcosm this demographic {pension} dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment returns but paid out $8.511 billion to retirees.
Chicago Mayor Rahm Emanuel recently proposed raising new city employees’ contribution to help fill the gulf of underfunding but Illinois’ Governor quickly vetoed the measure declaring Emanuel was, “trying to fix a drought with a drop of rain.”
Projections suggest that one of the two funds will be cash flow negative by 2023; the other will run short by 2025. If all else remains the same, a big IF with risky asset prices trading at frothy high valuations, property taxes would need to be doubled to cover the coming shortfalls.
Many Cook County taxpayers are forsaking a wait-and-see approach. Chicago was the only large city in America to lose population last year, its resident count dropped at nearly double the rate of 2015."
These are simply unfathomable numbers in terms of our local economy if Deborah is correct.  Since her numbers jibe with what you can find on line, its pretty safe to assume that she's at least in the ballpark in terms of her math.

Now please understand I make no political calls on the statements in this post.  Here we are talking about money.  I am a numbers person and simply stating what the accounting has been telling us about the looming pension crisis for years.  Basic math knows no ideology and when the pensions run dry all the commentary emanating from the political class will do nothing about making sure pensioners are payed what has been promised to them.  To try and address some of the shortfall Chicago has passed a series of tax increases over the past few years with the most of the funds raised going to shore up the pensions.  The majority of that money raised doesn't go to fix roads, fund schools or put sorely needed police officers on the streets.  Even then it will likely not be enough and city residents will be asked to cough up more tax dollars to in many cases fund somebody else retirement instead of their own.  Add to that the funding needs of Cook County and the State of Illinois and all the various other governmental entities means that as a resident of this area you have to protect yourself by making sure that as few of these taxing authorities have a claim on your wallet as possible.  

When I look at it from an economic analysis, irregardless of how wonderful it could be to live downtown, then there's just no way at this point I could justify making the move.  Too many mouths to feed.  Politicians in the city have no real interest in finding a way to resolve problems besides raising taxes.  It's too bad that we're in this mess because it didn't have to be this way and I truly feel for the people that have no alternatives or have a pension they're worried about.  But I cannot expose my own net worth to an unknowable bill that is likely to emanate from the city if things get as bad as it looks right now.  So it's likely I'll stay put in the suburbs.   And, if it gets really bad I have the ability and luxury to move away from the area.  That's a concept politicians here don't understand.  That is, in today's modern economy money has the opportunity to move where it's treated best.  It is hard for me to say that.  I've lived here for over 30 years.  But from an economic prospect I have to call it like I see it.  At a minimum I can stay where I am or move twelve miles west into DuPage County and be free of Cook County's problems.  The taxes are less and instead of a 20 minute drive to the city it will be a 45 minute trip.  Very doable to enjoy all the benefits of our world class city.

Or if things get really bad I can move to Florida or South Carolina.  Summer's are brutal but the tax climate's better.  And, they have no winter.

Back Tuesday or Wednesday of next week.