Chicago’s other problem: Pensions

The deep sigh of relief to have resolution in the CTU teacher strike may be short-lived, as this article in the New York Times points out:

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in.

That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

One of the issues is contributions, as the city is currently making the vast majority of the teacher’s share; should this continue, warns Emanuel, cuts to other areas could double class sizes.  However, if teachers were to contribute their full amount, it would negate much of the compensation gains just negotiated.  In other words, there is a big and growing fiscal hole, and neither side has money to fill it.

Pensions will be a serious issue in Colorado as well.  In 2011, PERA returned 1.9% and lost almost $1.2 billion.  The year before the fund (like the market) did much better — about 14%.  How PERA is doing depends a lot on when you start looking.  If you look at a 3-year annualized return ending in 1999, the fund averaged -1.5%; a 3-year annualized return starting in 1999 averaged 10.9%.

However the 8% projection PERA uses strikes many people (myself included) as overly optimistic.  As this article notes, not many people are projecting an 8% return inthe near term (particularly in a fund which in 2010 allocated almost one-third of its investments in fixed-income and real estate). If the fund were to return just 6.5% — a pretty respectable return given the economic climate and its asset allocation strategy, the pension will barely be half-funded.  The risk of just a point or so lower return is immense.

Personally, if someone were to tell me they are predicting an 8% return in their fund, I would offer to invest  with just one stipulation: they can take any excess return over 8% as long as they would guarantee to make up the difference if they fell short.  I wonder if the PERA trustees would give me that deal.

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