Ponzi Scheme: What The Chicago Teachers' Pension Would Be Called If It Were A Hedge Fund

Tyler Durden's picture

A long, long time ago, back in 2008 when most of today's hedge fund analysts were still stressing over what to wear to prom, a man named Bernard Madoff was arrested for bilking unsuspecting investors out of $65 billion.  Madoff ran what is traditionally referred to as a ponzi scheme in which new investments were solicited as a means to fund massive redemptions that otherwise would have resulted in a collapse of his fund long before the FBI finally caught up with his scheme. 

But, Madoff was eventually caught and in 2009 he was sentenced to 150 years in prison for his scheme. 

Ironically, many of our states and cities today are running very similar ponzi schemes (aka "massively underfunded pension funds"), using taxpayer money nonetheless, but it's completely legal and not many people seem to notice and/or care. 

Take, for example, the Chicago Teachers' Pension Fund ("CTPF") which has roughly $10 billion in assets to cover $21 billion in future payment obligations.  The fund has to payout roughly $1.4 billion to retirees each year to cover benefits.  That said, in 2016 it actually lost $28 million on it's $10 billion in assets. 

So how did they make up the difference?  Well, the CTPF simply took the $700 million that was contributed to the fund in 2016 from taxpayers and the $192 million contributed by teachers from their paychecks, money that was intended to be invested until those teachers retired, and gave it to current retirees.  Put another way, just like Madoff, the CTPF takes money from 'new investors' (current teachers) and uses it to fund redemptions (benefit payments to retirees) even though the managers of the fund know that current claims don't have a chance of ever being paid in full. 


Now, you could argue that returns in 2016 were not normal which, for the sake of Chicago's taxpayers, we hope is true.  That said, even if the fund earns the 5.6% returns that it's averaged for the past 10 years going forward, it will still have to borrow roughly $850 million from new contributions each year just to cover annual benefit payments. 

As a side note, we would point out that Chicago's teachers have made roughly 1.4% off their investments in hedge funds, on average, over the past 5 years...which is probably just under the 1.5% management fee they pay to those same hedge funds. 


Of course, you could also argue that reducing principal balances could be justified to the extent the number of future retirees is expected to decline versus current retirees.  Unfortunately, that argument is also flawed as the number of current teachers actually exceeds the number of current retirees...not to mention the fact that their salaries, and therefore future benefit packages, are nearly double those of current benefit recipients.

Source:  Chicago City Wire.

Of course, like most financial grenades with a huge tail risk, the devastating consequences of America's failed public pensions will not be addressed until it's already too late.  Unfortunately, with ~$5 trillion in underfunded pension obligations in the public sector alone, the pension catastrophe will be too large for even America's overly generous taxpayers to bail out.

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BullyBearish's picture

chicanerygo...nuff said

auricle's picture

People cant be bothered until it directly affects them. Boomers are going to get crushed. 









DumpsterFire's picture

Well, social security was a ponzi scheme from the start and that is going on 82 years.  Fucking FDR signed in 1935 and they made the first payments in..... 1935.  None of the first recipients put anything into it.  It was just an elderly vote grab.  Idiot socialist always run out of other peoples money eventually.

Justin Case's picture

They spent it b/c their calculations of 7% return and a whack of people that paid into it die in accidents, woars, murder, and health reasons. People live longer and cars are safer, so now people live and need hospitals as well as health care and people quit smoking etc. Didn't factor that all in. They shoulda just have invested all the money instead of over paying themselves and burning through it.

knukles's picture

How can funding be worse when stocks are at an all time high and rates all time lows, meaning anything you have in your portfolio has gone way the fuck up in price.

cheka's picture

frbny will bail them out.  just like they did (through jpm) with california's government

as long as they keep pushing the full skype agenda

Déjà view's picture

'Made-Off'...money tree...might be a few truffles remaining...firewood...all up in smoke...

NoPension's picture

Put Bernie in charge of the Chicago Teacher's Pension Fund.

I'll bet anything he can wring a few more years out of it.

alfredhorg's picture

No. Put me in charge of the pension fund.  Why?  I have an actual track record of outstanding annualized gains:


NoPension's picture

No way! It's in a lockbox. I heard it on tv.

Bludklot's picture

The initial SS receipient was a woman from Vermont who lived to a very old age at the time instead of checking out when she was supposed to.

jcaz's picture

Actually, most Ponzis run better than this Chicago piece of shit- they've already had too many artificial infusions......

City_Of_Champyinz's picture

hey i bet the politicians who are not in jail did just great...

NoDebt's picture

Anyone bases their retirement on the promises of lying politicians deserves what they get.

BTW- how the FUCK did they lose money in 2016??  Something about BTFD must be too complicated for their "professional investment managers" to understand.


Justin Case's picture

Pensions are pretty limited to what they can invest in. They mostly support Gov't debt instruments. LoL

knukles's picture

No.  Used to be but not anymore.  Public funds are some of the largest investors in hedge funds, VC and the like, let alone get rich schemes from brothers in laws.
It's a fucking free for all with taxpayers funds.

dr kill's picture

Maybe Jon Corzine could help them out. He's a big Democrat, and he's had lots of experience losing money.

therover's picture

Yeah...doesn't he want to start up a hedge fund betting against Trump's policies ? 

Maybe he would only charge a .75% management fee.

Speaking of which, those cocksuckers get their 1.5% no matter what the fund returns. 



Bytor325's picture

Free Jon Corizine....oh wait

kumquatsunite's picture

ha ha you have no idea how right you are on "management fees." Worked for a client *long story* who told his clients that their management fees were 2%, but if the clients were smart enough to READ the paperwork they would have figured out that the fees were 22 to 25%. Little bit of difference eh? (These were Big Big Money accounts).

Crash Overide's picture

"BTW- how the FUCK did they lose money in 2016??  Something about BTFD must be too complicated for their "professional investment managers" to understand."


Probably still being bent over on derivative trades from 2008...

Municipalities were cleaned out by Wall Street

chubbar's picture

We knew this years ago. I think the elites plan for most of us to die before these plans blowup. I'll note that the pension managers don't seem to have any issue with skimming 10mil a year from the fund in admin costs, which is probably why they aren't that interested in blowing the whistle on the ponzi scheme.

Freddie's picture

Let them eat (kosher) cake.

skinwalker's picture

Things get pretty interesting when large numbers of cops realize their pensions can never be paid.

yogibear's picture

At that point the cops revert to criminals.

Twee Surgeon's picture

Now that, Sir, is Proof that Brevity is the Soul of Wit. A Single word Cannonball of Truthyness.

pparalegal's picture

That is exactly what happened when Rome went bust.

CHoward's picture

I had to stop reading when I saw this was about Chicago.  Why?  There's ZERO good news about that zoo.

all-priced-in's picture

Is this the pension that "invested" some pension assets in bonds issued by the city of Chicago - proceeds of the bonds were used to shore up a shortfall in the same pension?


I am sort of cash so I loan you some money and you give it to me so I can pay my bills.



NoPension's picture

Sweet. I'm writing myself a check tomorrow.

MrSteve's picture

You're close to the truth: Chicago has been selling long-dated bonds to cover annual budget shortfalls. A classic remortgage the house to buy lunch scheme.

Maybe it will be like the Teamsters' pension where everybody just takes a huge haircut because there is no money.

WTFUD's picture

PenZion? Good luck with that!

VWAndy's picture

 They should vote themselves big pay increases. Then they could make it up on volume!

buzzardsluck's picture

Again with small fucking pictures that nobody can read

YourAverageJoe's picture

If Chicago existed in Biblical times, it would be called Sodom.

Megaton Jim's picture

No, that would be San Francisco!

pitz's picture

Remember kids, those returns were in a low interest rate environment that plumped up most assets, including stocks, bonds, and especially real estate.


If/when rates return to something more historically resembling 'normal', those returns are likely to plummet. 

kenny500c's picture

Taxpayer bailout, we can only hope it is the City of Chicago taxpayers since they approved of this scheme by virtue of their votes and not the U.S. taxpayers.

chubbar's picture

It won't matter. By the time this pension plan blowsup the dollar will be crashing along with all the markets. They can print all the trillions they want and it won't buy a fucking thing. No lawsuits though. As Greenspan famously said (paraphrase), they can pay all the entitlements but can't promise what that money will buy. In other words, they will print the shit out of the dollar as necessary. FYI, there are over 100 trillion in out year obligations unaccounted for in the budget forecasting.

kenny500c's picture

I thought that too but with all the printing already done you would think inflation would be over 10%/yr right now. But excess production, deflation and bankruptcy seem more likely now, imo.

NoPension's picture

I wonder how much State pension money flows to retirees in Florida?

1st rule should be...." move out of state, 50% cut "

Just make shit up. Fuck em.

Pvt Joker's picture

Trump has threatened  to  send in the Feds to Chicago.  Everyone freaked out think he meant send Federal troops into black neighborhoods.  However ,  this issue is where he should send in the Feds, like the SEC and Treasury.  Investigate every aspect of Chicago's financing including the representations made  about their muni bonds.   You will see everyone from the Mayor on down scurry like rats when an old bldg is demolished in my fair  city.   The bond funds that hold this one ply will be dumping left and right and drive interest rates into double digits.   You want to hurt Chicago?   This is where you hit them because it will cut off their borrowing ability which they need just to stay afloat.   This will put chi town between a rock and hard place.  At that point Trump can say "You wanna talk about that Sanctuary City thing?   With money at stake the City will give up its illegals in a flash.  

panamared's picture

That fund will collapse during the next downturn when everyone rushes in and does the equivalent of a bank run on their retirement funds.

Ohhhh what crimes we'll reap in their tears. Those infantile tears of fools.

pparalegal's picture

No need for a downturn. You are talking about city of Dallas pension fund 2017.

yogibear's picture

Getting what it deserves.