Thread by @meepbobeep

So popping out of earlier discussion thread

Chicago MEABF is one of the city pension funds. A 2017 stress test was done meabf.org/assets/media/5…

Here are the results I see in that report: they tested multiple historical scenarios (2008 financial crisis, Black Monday, etc.) as well as some simple scenarios (flat market)... and projected to 2022. So it's just a five-year stress test. Why five years?

Because that's what the client asked for.

Not because it makes much sense for a pension fund whose promises extend decades.

But let's see the result from some of those scenarios

Here are projected fund levels under selected scenarios

the three worst in this graph: 2008 financial crisis, flat market, and Black Monday. All three showing asset death spiral behavior

What's an asset death spiral? Here you go:
stump.marypat.org/article/151/pu…

An asset death spiral is when balance sheet weakness manifests itself in something really serious: a lack of cash flow to cover promised benefits.

So you have to sell off assets to cover liabilities cash flows... and cannot earn out of a hole

Having to sell off assets to cover liability cash flows is not necessarily a bad sign -- if your liability is shrinking.

If the liability growing, or even level, it's a horrible sign.

Here is an official bullet points from the report:

"- Given the negative cash flow profile of the Fund, there is a risk of severe impairment. Most significantly, a repeat of the 2008 financial crisis could reduce the assets to less than $1 billion over a five-year period. "

The projection started out at $4.1 billion in 2017 -- ending up at less than $1 billion in 2022 in this projection is extremely bad. It would be going to pay-as-you-go not long after 2022 in such a projection.

That stress test does not really show the fund would not run out in a reasonable time frame -- just not in 5 years

@threadreaderapp unroll