How Chicago's Largest Pension May Run Out Of Cash In As Little As 4 Years

Tyler Durden's picture

Chicago's pension funds, along with several other large public pensions around the country, are in serious trouble (we recently discussed the destruction awaiting our financial markets here: "Are Collapsing Pensions "About To Bring Hell To America"?"). 

The problem is that the pending doom surrounding these massive public pension obligations often get clouded over by complicated actuarial math with a plan's funded status heavily influenced by discount rates applied to future liability streams. 

Take Chicago's largest pension fund, the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF), as an example.  Most people focus on a funds 'net funded status', which for the MEABF is a paltry 20.3%.  But the problem with focusing on 'funded status' is that it can be easily manipulated by pension administrators who get to simply pick the rate at which they discount future liabilities out of thin air.


So, rather than lend any credence to some made up pension math, we prefer to focus on actual pension cash flows which can't be manipulated quite so easily. 

And a quick look at MEABF's cash flows quickly reveals the ponzi-ish nature of the fund.  In both 2015 and 2014, the fund didn't even come close to generating enough cash flow from investment returns and contributions to cover it's $800mm in annual benefit payments...which basically means they're slowing liquidating assets to pay out liabilities.


Of course, like all ponzi schemes, liquidating assets to pay current claims can only go on for so long before you simply run out of assets. 

So we decided to take a look at when Chicago's largest pension fund would likely run out of money.

On the expense side, annual benefit payments are currently just over $800 million and are growing at a fairly consistent pace due to an increasing number of retirees and inflation adjustments guaranteed to workers.  Assuming payouts continue to grow at the same pace observed over the past 15 years, the fund will be making annual cash payments to retirees of around $1.3 billion by 2023.


Investment returns, on the other hand, are much more volatile but have averaged 5.5% over the past 15 years.  That said, the fund took big hits in 2002 (-9.3%) and 2008 (-27.1%) following the dotcom and housing bubble crashes. 

But, just to keep it simple, lets assume that today's market is not a massive fed-induced bubble and that the MEABF is able to produce consistent 5.5% (their 15-year average) returns every year in perpetuity.  Even then, the fund will only generate roughly $500mm per year in income compared to benefit payments growing to $1.3 billion...see the problem?


Which, of course, means that the fund has likely just entered a period of perpetual cash outflows which will not stop until either (i) the city decides to cut back retiree payments or (ii) the fund runs out of money.


And, putting it all together, even if Chicago's largest pension generates consistent positive returns for the foreseeable future, it will literally run out of cash in roughly 6 years.


And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today's market gets exposed as a massive bubble and we have another big correction in 2018.

Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone....


....and the system would run out of cash completely within 4 years.


The risk associated with America's pension ponzi schemes have largely been overlooked by investors to date because so long as they can meet annual benefit payments then plan administrators can just continue to 'kick the can down the road' and pretend that nothing is wrong.   

Of course, that strategy ceases to work when the pensions actually run out of cash...which could happen sooner than you think...and when it does, America's retirees will suddenly find themselves about $5 trillion poorer than they thought they were.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pound the vix's picture

In Government 4 years is a lifetime.  They don't fix anything until the disaster happens

pound the vix's picture

And then they just paper over it

knukles's picture

Then have a Pizza Party!


I sure miss the good old days when "Hizzoner Da Mayah Daley" was in charge and "da city woiked"

Stuck on Zero's picture

Government papers over everything  ... with newly printed bills.

Cognitive Dissonance's picture

Tyler assumes no contributions are being made each year and the only 'growth' comes from investment 'returns'. But if $200 million is contributed each year by 'someone' it changes the entire dynamic.

It takes 5 years to go broke instead of 4.

All fixed. Nothing to see here. Move along.

MrSteve's picture

Chicago is grossly under assessed which is why it doesn't have the revenue to operate the city. Da Mare was just bonding out the budget shortfalls, like living off a second mortgage loan rather than current income. The first outside support will be from Cook County and the county suburbs' RE taxes going way up. Cook will take over major city streets as county-maintained roadways. Even the well-funded burbs' pensions are seriously short now due to way too low interest rates for way too many years, paralleling insurance companies folding annuities and long term care operations.

It ain't gonna be pretty!!

Anon2017's picture

The city didn't work all that well even when Daley senior was mayor. Whole neighborhoods went from white to black in the space of a few years as whites fled to the suburbs to escape rising crime in the city.

Bernie Madolf's picture

Sounds like another job for Super Joe Taxpayer!

GunnerySgtHartman's picture

Yes, Super Joe is going to get hosed yet again!

Iconoclast's picture

Same in the UK, we have a defined benefit pension defict of circa 1 trillion of our splendid English pounds and circa 4 trillion of unfunded public pension liabilities. Fubar, we ain't getting paid out. The Ponzi/pyramid schemes that are pensions will be finished by 2030, the robber barons will scarper with our loot before then, the goverment will prop it up, by printing more and more fiat, fuck knows how they can do that for perpetuity.

Hopeful Skeptic's picture

Sadly, teachers and public employees tend to be the most politically progressive, and therefore those retirees are the least likely to imagine that the bureaucracies they're so enamored of could ever fail, or that they should be preparing for the inevitable. Tragedy will abound.

GunnerySgtHartman's picture

Oh yes, Mayor Rahmbo 'Dead Fish' Emanuel will be blaming him right off the bat.  I can see the Chicago Tribune headline now:


HRH Feant's picture
HRH Feant (not verified) Hopeful Skeptic Mar 31, 2017 7:01 PM

Awwwww. Here's a tissue. One single tissue for all of those liberal tears.

rockstone's picture

I'm happy to donate one bullet a piece to those who want out.

RafterManFMJ's picture

Tragedy will abound.

HILARITY will abound.


The Ram's picture

Well, collapse is like force feeding the 'red pill' to everyone.  Sooner or later even stupid school teachers and public employees both Federal, State, and Local must know the reality of their existance.  Even the the 'brilliant' generals and admirals in the Pentagon will be forced to swallow the red pill.  Hopefully, we will live through it, but if not, know that the world has been delivered a mass enema that certainly will cleanse the bowles.

Eddie Baby's picture

If you live in Chicago, get out while you can.  It's ground zero of the zombie pension apocalypse.

Joe Mama 3's picture

Houston.......some parts ....fuck that a lot of h town looks like some India shithole neighborhood, and not just the people, the whole street, the buildings, the bilboards, etc..........

kenny500c's picture

Raise local taxes, after all the voters approved this scheme.

Don't try to pass it off to the Federal taxpayers.

alfredhorg's picture

Exactly.  I have no sympathy for pensioners.  If a janitor can save and invest until his net worth is $8 million, then anyone can:

DCVoyeur's picture

Yes and another guy won 30 million in a lotto then anyone can.

alfredhorg's picture

And yet another guy beat the best investing minds of Harvard, Yale, and Columbia for ten years while crawling through mud in a North Dakota trash dump:

red1chief's picture

If it looks bad now, just wait until the derivative bubble pops. Illinois pensions are loaded with illiquid "Pay to Play" Ponzi-style managed funds. 

biker's picture
biker (not verified) Mar 31, 2017 6:38 PM

Faster with a cut to federal funding for sanctuary classification the pensions will be affected with a reduction of city staff(teachers,police,city workers), pension cuts and the blaming of the poorest as the reason for a increase in local taxes.



SilverRoofer's picture

Fuck em

They voted for all that shit let it crash I don't give a shit

Being Free's picture

The Fed has our back.....?

Bill of Rights's picture

What's the Fed sitting on in vested reserves again? $4 plus Trillion?

Wage Slave 927's picture

Shitcago will just get their friends in Springfield and in black robes to order another statewide "temporary" tax hike.

RafterManFMJ's picture

The smart and productive are already fleeing ShitCongo and Illinois ahead of the tsunami ... poor, poor ticks. On whom will you feed?

rockstone's picture

"No, really. We will pay you nearly 100% of the salary you're earning when you quit working at 55 for the rest of your life. Think of it, the rest of your life and you still get paid w cost of living increases. It's gonna' be great. I'm a labor leader and I know the politicians so you know it's money in the bank.. Sign here. Good luck."


Paracelsus's picture

   Two points:   1) A firesale of assets is a one-off, selling the family silver. And it tends to depress the prices in

a downward spiral. And 2) Hedgies and others smell blood in the water, and start shorting, just like in 2008.

It will only take one big default. We've had lots of small ones. Stockton, Vallejo, Mammoth Lakes, San Bernardino.

Chicago needs to dust off the Chapter 11 books and get cracking. And what of Puerto Rico? Fixed? Greece? Next up, Italy!! 

directaction's picture

I don't know about you guys, but I find this information to be both great news and hilarious.
Let Chicago burn. The sooner the better. 

Formula382's picture

So true.  My dream come true would be the entire state to just slide into the ocean.  In fact, both coasts are useless IMO, they've destroyed a great nation.  

grunk's picture

Karma called.

He said he'll call back.

Sledge-hammer's picture
Sledge-hammer (not verified) Mar 31, 2017 8:28 PM

If you are a Chicago municipal worker, you better be stealing lots of office supplies.  Those office supplies will be the only tangible pension benefits you will see.  

Offthebeach's picture


Sincerely,  The Fed.


"....The Federal Reserve System Retirement Plan is a governmental defined benefit plan that is qualified under Section 401(a) of the tax code. The Plan provides retirement benefits for virtually all employees of theFederal Reserve Board and ReserveBanks."

VWAndy's picture

 When the fiat magic runs out its going to suck. Until then party on right.

dexter_morgan's picture

But they have the dough to make sure all the illegals get their free shit and an ID card to boot.

hooligan2009's picture

yep, the hunch backs of notre merde can get sanctuary with the evil angel emmanuel and he will take money from those that work hard and piss it away on those that commit crimes.


hooligan2009's picture

excellent presentation.

my bet is that the fund runs out of cash in three years. you can massage the numbers pretty easily to get there.

question: if this was a public corporation with sales, revenues and profits what would be its share price? i will give you a clue, it would not be very high and neither would its P/E because it would be BANKRUPT.

now, if the members want to sell to a fund manager for a slightly more secure future, they would find their pensions cut by 90% with a small chance of an uplift if things go well - as it is, the fund is not "well", it is near death. some "black night" needs to inject 15 billion dollars right now, followed by another 15 billion dollars in the next ten years to correct THE NEXT FUCK UP.

Able Ape's picture

Whoopsees, who woulda seen that comin'?  But, but...ain't gubernmint spoozed to take of uz folks?  Yeah, they'll take care of you alright; they'll drop you off at the cleaners....

EX-floor hedger's picture

Any suggestions as to how I can short my house in Chi-Raq?


Formula382's picture

Sell it, move south.  No need to short your old home when you'll be reaping huge rewards of better weather, less congestion and taxes and being around people that smile for a change.


I'm from Chicago, it's a shit hole, no more, no less.  

chosen's picture

What's worse, Illinois or California?   Answer:  Illinois.  At least California has Silicon Valley to pay for all the stupidities of its Democratic government.