Crain’s Chicago Business has reported on a statement by Cook County Treasurer Maria Pappas that the average Chicago household now owes $63,525 to cover local government debt, based on figures collected under a debt disclosure law that was amended in February of this year to require pension disclosures. Suburban Cook County households owe $32,901. This was based on a figure of $25 billion of unfunded pension liabilities for the entire county (Chicago and the Cook County suburbs), contributing to total debt within Cook County of $108 billion.
But the truth is worse. By my calculations, there are around $60 billion in unfunded pension liabilities in Chicago and Cook County. Chicago households in fact each owe over $80,000 for all the pensions and other debt obligations when the pensions are properly measured.
As I have written about many times before with Robert Novy-Marx, the extent of pension underfunding is far understated due to the use of flawed accounting procedures by state and local governments, particularly the use of the targeted return level on risky portfolios of assets as a discount rate. Effectively, municipalities are assuming the pension funds will earn 8% per year, completely ignoring the financial risk they are taking on to target those return levels and the high likelihood they will fall substantially short.
Last fall, Robert Novy-Marx and I calculated in a paper prepared for a conference at the Brookings Institution that for the city of Chicago there were in fact $45 billion of unfunded pension liabilities over seven major Chicago plans: the Chicago Teachers, Chicago Municipal Employees, Chicago Policemen, Chicago Firemen, the Metropolitan Water Reclamation District Retirement Fund of Greater Chicago, and the Chicago Transit Authority. Under the government accounting, this unfunded liability was $25 billion for these funds alone. For Cook County, we found $8 billion of unfunded pension liabilities in two county level plans, compared to $5 billion under the government accounting. So for the nine Chicago and Cook County Plans that we considered, there were in fact $53 billion (= $45 billion + $8 billion) of total unfunded pension liabilities (compared to $30 billion under state and local government accounting). And this does not include any of the suburban municipal plans, which based on the Cook County Treasurer’s analysis could increase the unfunded liabilities by around 1/3rd, suggesting that the total unfunded liability for pension systems here would be around $65-70 billion.
While this analysis is based on 2009 asset values, the stock market recovery has not been sufficient to seriously dent this figure, particularly as liabilities themselves have been growing at a fast clip, Chicago funds have generally not adhered to actuarially required contributions, and government bond rates are today lower than they were in 2009. An current unfunded liability for pensions only of around $60 billion for Chicago and Cook County is a conservative estimate.
That is around $35 billion more than what is recognized in the Treasurer’s report, around two-thirds of which is for the city of Chicago itself, suggesting that Chicago households in fact owe over $80,000 per household. And that is before we start digging into whether retiree medical promises are properly measured.