Chicago Police Pension shows serious shortfall

Police Pension Report shows serious
shortfall — Cops should be concerned

IPSN August 28, 1997

THERE’S A GLOSSY, 32-page pension report book making the rounds of Chicago Police Department facilities these days that purports to tell a story of financial stability, sound investment practices and the promise that when Chicago cops are ready to retire, the bucks will be there.


SOME OF THE numbers printed in the report suggest that the people who control the fund’s $2.5 billion in assets are conjuring up a smoke-and-mirrors job that attempts to overlook, or at least downplay, the fact that the fund is just under $2 billion short in covering its liabilities for 1996—which is the year of the report.

THE WAY the shortfall looks is this:

Total Obligations $4,311,222,000

Available Assets $2,496,984,990

Funding Shortfall $1,814,237,010

The way pension funds work generally, and the Chicago Police fund works specifically, is that any amount listed as the fund’s total obligation is based on deferred wages earned through the present date—or the date of the pension fund report. In that the $1.8 billion shortfall in the Chicago Police fund is dated December 31, 1996, that’s quite literally the amount the Policemen’s Annuity and Benefit Fund (as the Chicago fund is formally known) owed Chicago police through the end of last year.

NO MATTER what may have happened since the end of last year, the $4.3 billion figure is the amount the pension fund owed its people as of that date. Even if Mayor Daley could somehow replace the entire Chicago Police Department with Andy Frain ushers, the fact remains that the fund owed $4.3 billion to those police—either still on the force or retired—but had only $2.5 billion to pay its debts. The net effect is the Chicago Police pension fund is short some $1.8 billion .

In terms of percentages, the funding status of the Chicago Police fund has only 57.18 percent of its obligations on hand. In personal terms, if a typical Chicago cop owed ComEd $100.00 before they shut off the juice, he or she would have only enough cash on hand to pay $57.18 of the total amount due.

IS THIS good or bad? Is this a serious threat? Is this a situation that anyone should be concerned about, whether they’re already retired or still on the force?

ACCORDING to the fund report itself, “The current funding ratio of 57.18% is considered below normal levels.”

We didn’t invent that 57 percent figure. It’s from the official document. However, earlier this year, Fund Trustee Ken Hauser, writing in his column in the Fraternal Order of Police newsletter, claimed the pension fund had enough money to cover 70 percent of its obligations.

So if Hauser, who has been a Chicago cop since 1968 and a pension fund apologist since 1993, feels the need to inflate the fund’s assets by 13 percent, perhaps that “below normal levels” statement is something to be concerned about.

Revenues for the Chicago Police pension fund come from three different sources:payroll deductions from working cops, employer contributions from the City and profits on investments. If money from any one of these three different sources starts to slip, then the “below normal levels” statement quite quickly becomes something to worry about.

It’s not very likely that either the City or the FOP will ever let working cops voluntarily opt out of the pension fund, so that source of revenue is as good as guaranteed. But the other two—employer contributions and profit on investments—are nowhere near as solid.

We’ve already seen how the guys who run the pension fund can get together with their cronies from the Mayor’s office and, with just a little lunchtime sleight-of-hand, start charging retirees something like $2,300 a year for health insurance premiums. Think about that: a $2,300 a year insurance bill is exactly the same as a $2,300 reduction in pension benefits, which is what is currently happening to Chicago’s retired cops and their spouses.

SO MUCH FOR the unwavering stablilty of employer contributions. Also, it should be noted that the City managed to reduce its annual contribution to the fund between 1995 and ‘96 by $1,531,587. And, during that same one-year period, guess what happened to the employee contribution figure. It was increased by $3,137,723.

Also, Watson Wyatt & Company, an outside actuarial firm that the pension fund hires to go over its books, discovered an “administrative lag” in the amount of money the City contributes to the fund. According to state law, the employer is required to contribute at least $2.00 for every $1.00 that is put into the fund by working cops. But, because the fund has been steadily slipping over the years in its precarious attempt to remain solvent, a City contribution of $3.20 for every $1.00 put up by police “is needed to adequately fund the system,” Watson Wyatt concluded.

Further, as more Chicago Police functions are privatized (remember when the CPD used to operate its own world-class Crime Lab?), it follows automatically that employer contributions to the pension fund will decrease. In fact, the pension fund report points out that the last increase in the rate of employer contributions took place in 1982—or 15 years ago. So don’t look for the City to come rushing in to wipe out the pension fund’s liability shortfall anytime soon.

AND THAT THIRD source, profit on investments, is that really money we can take to the bank? The answer would be an unequivocal yes if every year were as strong as 1996. In ‘96, the Chicago Policemen’s Annuity and Benefit Fund realized a record income level of $504 million, which was up from the relatively modest profit level of $146 million in 1995. But for the previous five years, the fund’s profit on investments averaged only $122 million, which is just a little over half of what its expenses for 1996 were.

So, a $500 million year is great when it happens, but it’s so out of the ordinary that it should not be expected to happen again. For the Chicago police pension fund to earn half-a-billion one year, then repeat that same neat trick the next time out would be something akin to the Cubs winning the World Series one year, then coming right back and hitting the same kind of home run season the next. It just aint gonna happen.

ACCORDING TO the 1996 Report of the Policemen’s Annuity and Benefit Fund, which features colorful graphics of the American flag, the City of Chicago flag and the State of Illinois flag on its glossy cover, “The Fund’s 1996 return of 13.8% exceeded that of its performance benchmark by a healthy margin.”

To use the word “healthy” in any description of a pension fund that is less than 60 percent solvent is one of those Alice in Wonderland kind of statements that only a Richie Daley or the FOP’s Bill Nolan can be expected to try to get away with.

This is a fund that has 65.2 percent of its assets invested in the stock market and another 30.3 percent tied up in bonds. That means that the $2.5 billion referred to above is not actually in the form of money. About $1.5 billion of it is trading in the same common stocks that have been steadily rising in value in recent years, but are overdue for a market “adjustment” of near-crash proportions. As recently as Friday, August 14th, the Dow Jones Industrial Average lost 247 points, or 3 percent of its value.

The Chicago Sun-Times headlined that multi-billion dollar loss in stock value as the “Worst dip for Dow since ‘91.”

We’re not trying to suggest that the stock market is going to collapse in the next day or so, but we do think that anytime investors lose 3 percent of their assets in one day, that some serious financial re-thinking is called for.

If the Chicago Police pension fund is already operating at less than 60 percent of its overall obligation—which means it’s more than 40 percent in debt before it sends out its first pension check each month—how many such 3 percent stock market hits can it take before it’s wiped out?

Also, the so-called “safe” bond market investments that 30.3 percent of the Chicago Police fund is invested in can use a little scrutiny. In actual fact, although bond investments are always claimed to be less volatile that stock market gambles, are they really?

THE PEOPLE who invested something like $30 billion in Orange County, California bonds are still standing in line to get paybacks of maybe ten cents on the dollar as a result of that “super-safe, super-rich” County’s bankruptcy filing last year. Earlier, bond buyers who thought investing in paper issued by a Pacific Northwest utility company would be a great way to clip coupons were rudely awakened when that power company blew a financial fuse of multi-billion dollar proportions.

Closer to home, the individuals and pension funds that put money into the original Calumet Skyway—now operated as the Chicago Skyway—have yet to see anything remotely resembling a profit on their bond investments.

SO WHAT can the typical cop on the beat do? First, don’t buy into the puff stuff that people like Walter Knorr, the pension fund president and Kenneth Hauser, the rank-and-file representative give off like sheep expelling gas.

Find out when the next FOP membership meeting will be and raise some basic pension fund questions.

Or, call the pension fund offices down the street from City Hall to find out when their next public meeting will be, and be there.

OR BETTER YET, call Joe Longmeyer at the Combined Counties Police Association.

Maybe it’s time for some outside agency to raise such basic questions as:

When Chicago cops retire, will their pension fund be there?