A month ago I published a chart that illustrated the revenue sources for a typical public pension. That chart alone, published by the National Association of State Retirement Administrators (NASRA), does not provide a good picture of where our pension fund stands. The NASRA chart only provides a view of how a typical public pension fund is financed, it doesn’t take into account the Firemen’s Annuity and Benefit Fund of Chicago, our pension fund. The second chart, published here, illustrates both the actual assets in our pension fund compared to the cumulative contributions of all active members of our pension fund.
When making the comparison you will see that the green bars representing the member’s contributions are almost as much as all the assets the pension fund has on its books. If you then look back up at the pie chart from NASRA you are probably asking yourself where is the 26% in employer contributions and 63% in investment earnings. Well, there really aren’t any substantive employer contributions or investment earnings to speak of or to record on the books of our pension fund. Practically speaking, those revenue sources don’t exist in our pension fund because they are spent as soon as we get them.
You may recall in 2016 I wrote about my concern that it is very possible the assets in the pension fund was not enough to cover the employee contributions of active members. I went on to write that each year the pension fund is required to send each member an accounting of their contributions that have been ‘improved’ with statutory interest. As a trustee, who I believe has a sense of prudence and accountability, I wanted to make sure that at a minimum, the fund had enough assets on hand to support the individual statements we sent out to you. Otherwise, what would be the point of sending out the statements? Unless we put a disclaimer on there that stated something along the lines of – “This is what you have legally accrued at the pension fund but we can’t guarantee the pension fund actually has those funds available to everyone.” I think that would be a more honest accounting to the membership. Because after all, if the Fund’s poor funding status ever requires us to utilize active member contributions to pay for retired members benefits we would essentially be running a Ponzi scheme. This chart represents how close we have come to that point in that past.
Funding matters! I don’t know how to emphasize this any more to the membership. It is critical that we utilize our resources and attention to making certain the City, as the plan sponsor, honors the Pension Promise. As the above charts illustrate, a law or a state constitution will not guarantee this Promise, only financial assets found in stocks, bonds, real estate and cash will guarantee our retirement security. Do not believe the sympathizers among the membership, that align themselves with the politicians who show no sense of fiscal responsibility. The health and security of our retirement security can be seen in the funding ratio found in the pension fund’s annual report and the frequency and amount of asset liquidations. To the members that rely solely on the State’s Constitutional Clause as reassurance – professionally generated financial statements and analysis are not on your side. I know there are some on the Local 2 Executive Board that have expressed their disdain for college degrees and book readers, but in my 16 years on the job, when it comes to financial matters I’ll take professional advice over the kitchen table lawyers. Does anyone really think the kitchen table lawyer’s view – “They have the money, the City ain’t broke” – is realistic when the Illinois Senate President recently requested a $41 Billion bailout from the federal government? We need to pay attention to these events.
At the June 2020 Monthly meeting the Fund’s Controller reviewed the projected cash flows for the remainder of the year, a synopsis follows:
As you can see from the table the Fund had approximately $4.6M in cash at mid-June with an expected inflow of $1.7M from member payroll contributions; there were no further property tax receipts anticipated for the month of June. Generally speaking, property taxes represents the City’s contributions. For the remainder of June the Fund also anticipates outflows for benefit payments of $31M and administrative expenses of approximately $400K for a total outflow of $31.4M. The month of June will leave us approximately $25M short for the month, requiring a liquidation of assets. The next 3 months are cashflow positive due to the anticipated influx of tax receipts. The remainder of the year is cash flow negative, requiring future investment liquidation. Overall, for the last half of 2020, our pension fund will be cash flow negative of approximately $85.8M. It is important to keep in mind that this cash flow analysis does not take into consideration the potential for investment gains. But if we have approximately $831M of investments and cash as of mid-June we will need to generate an annualized return approaching 22% in order to remain cash flow neutral for the remainder of the year. That is an unlikely endeavor. So it is likely, for the remainder of 2020, the Fund will see a further erosion of our assets to cover promised benefits without additional contributions from the City. Thankfully in 2021, the pension fund will hopefully see the City start to make the ARC payments that licensed financial professionals calculate; not the contributions calculated by State legislators. When that happens the comptroller anticipates the fund will be cash flow positive, without potential investment gains or losses, of more than $30M. It is critical that the membership keeps a watchful eye on the rather fluid events occurring in Springfield and at City Hall so the current pandemic is not used as an excuse for once again postponing adequate funding of our retirement security
Timothy McPhillips
Pension Fund Trustee
This newsletter is my opinion only and clearly is not the opinion of the Retirement Board of the Firemen’s Annuity and Benefit Fund.
