EDITOR’S NOTE: This is the last part in a three-part series on the Detroit bankruptcy.
Please name the city that New York Times’ authors Monica Davey and Mary Walsh are profiling here: “The pension fund for … teachers stands at risk of collapse. The city’s four funds for other retired city workers are short by $19.5 billion. At least one of the funds is in peril of running out of money in less than a decade. And starting in 2015, the city will be required by the state to make far larger contributions to the funds, which could leave it hundreds of millions of dollars in the red …”
The paragraph describes Detroit, right? No, instead, it’s my hometown of Chicago, the nation’s third largest city, home to countless quality museums, classic brownstones and other world-renowned architecture, most of it constructed after the Great Fire of 1871.
Frank Lloyd Wright designed private residences there. Daniel Burnham produced the Chicago City Plan in 1909 and led a fight to prevent development along the Lake Michigan shorefront, ensuring that miles of unobstructed view would be enjoyed by current and future generations. Even Chicago cemeteries mix form with function: Graceland Cemetery may be one of the world’s most beautiful and famous final resting places.
But Chicago’s pension system, like many others in the U.S., is in financial peril. “The financial woes of Detroit, which last month became the nation’s largest city to file for bankruptcy protection, dwarf the financial issues here (in Chicago),” says the Times. “But as Detroit makes it way through the federal court system, other cities, including Chicago, are wrestling with overwhelming pension liabilities that threaten to undermine their capacity to provide municipal services and secure their futures.”
The article also cities pending pension issues in Philadelphia, Charleston, W.V. and San Jose, Calif.
Chicago’s pension problems are exacerbated by the fact that the Illinois state legislature controls the city’s pension fund, and the state itself is in dire financial trouble. According to a study by the Pew Charitable Trusts, Chicago’s pension obligations “were funded at 36 percent by the end of 2012 … Federal regulators would step in if a corporate pension fund sank to that level, but they have no authority over public pensions.”
Illinois Governor Pat Quinn threatened to withhold the paychecks of state legislators until the crisis was effectively addressed. And Chicago Mayor Rahm Emanuel is on record asking for reductions in pension promises, but unions like the Fraternal Order of Police are fighting any such cutbacks.
Investors have approached Illinois paper (bonds) with great caution for several years now, and probably with good reason. Caution might also be a watchword when considering munis issued by any of the other aforementioned cities. Bond values will eventually rebound, but meanwhile investors should carefully screen muni offerings for their portfolios.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, chartered financial consultant and accredited investment fiduciary, is the founder of Arbor Wealth Management, LLC, (850-608-6121~www.arborwealth.net), a fee-only registered investment advisory firm located near Sandestin. Arbor Wealth specializes in portfolio management for clients with $250,000 or more of investable assets.