I like Chicago. When I worked there for what was then known as the First National Bank of Chicago, I lived near Lincoln Park. I remember taking long walks as a way to explore the Windy City.  Whenever I return now for business, I do so with pleasant anticipation. Unfortunately, local taxpayers may be less upbeat, now that Fitch Ratings has downgraded Chicago as an issuer of debt.

According to Crain’s Chicago Business, ratings for $8 billion in “unlimited tax general obligation bonds” fell from A- to AA-. Commercial paper notes with a current face value of $200 million issued by the City of Chicago saw its rating drop “three notches, to BBB+, from A+, putting them two notches above junk bond status. In “Fitch gives Chicago another credit rating jolt” (November 11, 2013), reporter Paul Merrion describes a scary outlook if nothing changes. He credits Fitch for asserting that “If Chicago and other local governments raised property taxes to cover the annual required pension contribution, with no reduction in benefits, payers would face a 35 percent tax increase.”

Like other cities in the news these days, Chicago is no stranger to the quagmire of underfunded pension plans. In his July 14, 2013 Chicago Tribune op-ed, Mayor Rahm Emanuel wrote that “[t]he longer we wait for pension reform, the higher the price we will pay.” He continued that “We can do everything else right as a city, but without fundamental changes to our pension system, the tough choices and critical investments we have made will be for naught. Our broken pension system not only threatens hard-won investments we have made in rebuilding our infrastructure or in early childhood education, it endangers essential city services.”

I heard some journalists talk today about the next Detroit, intimating that Chicago may have to file for bankruptcy if meaningful pension reform is not forthcoming. The numbers don’t look good. According to the City of Chicago website, the facts suggest some major headaches ahead. Consider the following:

  • There are 71,850 retired employees and beneficiaries.
  • Current unfunded liabilities related to six city pension plans total $26.8 billion.
  • Collectively, these six pension plans “only have 50% of the funding needed to support the current pension system.”

Discussions of reform are underway but face an uphill battle. In “Quinn in tight spot over Chicago Park District pension bill” (November 11, 2013), Crain’s Chicago Business reporter Greg Hinz predicts a “near-certain” challenge in court by Chicago Park District plan particpants over last week’s legislative proposal to implement delayed retirements, lower cost-of-living adjustments, incrementally issue debt and ask employees to make larger contributions. Hinz adds that taxpayers are unhappy campers as well.

I wrote about public pension plan underfunding problems as early as 2006. Before it became a political movement, I created a blog post entitled “Tea Party Redux: State Pensions in Turmoil” (July 27, 2006). After I created my award-winning pension blog,, I started getting inquiries from various taxpayer groups, asking if I knew whether public pension benefits could be changed in order to avoid significant rate hikes. My answer was always to seek out the advice of an attorney to ascertain whether government benefit plans were constitutional. Sure enough, that is the exact issue that jurists are being asked to consider at this very time.

The problems did not appear overnight. In its January 2013 report about city pension and retiree health care plans, the Pew Charitable Trusts list three factors that, if poorly managed or ignored, would almost surely lead to a terrible outcome for all. These include the following:

  • Fiscal discipline in funding benefit plans with 80 to 90 percent of actuarially required annual contributions deemed to be a reflection of good behavior;
  • Accuracy of assumptions, especially as relates to the use of a conservative expected rate of return on assets rather than an inflated investment performance number; and
  • Reigning in overly generous benefits for workers that are not affordable when promised and not sustainable thereafter.

Authors of “A Widening Gap in Cities: Shortfalls in Funding for Pensions and Retiree Health Care” describe a four-pronged approach to pension reform that includes a change in plan design, improving funding of legacy arrangements, freezing or otherwise modifying the rate of growth in benefit levels and/or transferring some obligations to the state. 

I have a tee shirt that I just recovered from the depths of my drawers. I found it while doing some long overdue spring cleaning. It reads “If ignorance is bliss, why aren’t more people happy?” When it comes to public, private and international underfunded benefit plans, it gives one pause for reflection. What happened? Where did all the money go? Can change occur in time? Is ignorance a road to happiness or a bellwether of tough economic times ahead? What can be considered “fair” for the taxpayers and equitable for the employees and retirees who are counting on promises made?