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Stuart Loren Profile picture
@StuLoren
Dec 7, 2022 • 28 tweets • 12 min read • Read on X
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1/ This is so abysmal that I had to actually read the Illinois Teacher's Retirement System acturial and valuation reports for the pension's FY 2022 (ending June 30). #Illinois #Pension #Crisis

Summary Report: trsil.org/financial/fina…

Full Report: trsil.org/financial/actu…
2/ Before discussing the TRS pension shortfall, a few things to keep in mind: The TRS unfunded pension liabilities are only a part of the IL state total, and Chicago is in it's own separate pension nightmare. Here are the 2020 figures from Bond Buyer (bondbuyer.com) Image
3/ And as I have highlighted ad nauseum, Illinois and Chicago's pension shortfalls are completely unsustainable. You don't want to be in the bottom right corner of this chart... Image
4/ Illinois' and Chicago's poor fiscal stewardship is why we have the worst rated credit in the country, which means a higher cost of borrowing for us, which means more money going to interest payments instead of state services. For these charts, remember, Bs are bad. Image
5/ And, again, in IL pension's can't default or declare bankruptcy. The two ways out of this are (A) higher taxes (which drive people and businesses out) or (B) implementing policies that support growth to increase revenues and expand the tax base. Of course, we are choosing A... Image
6/ Before looking at the pension stuff in detail, I highly recommend going through this long thread on the current economic environment and what it means for states like Illinois that already have difficult fiscal circumstances (IL analysis begins at #29).
7/ Ok... so the TRS pension. In general, my assessment is: Yikes! I'll be positive though with my first remarks and point out that the returns over the last ten years have been acceptable. Image
8/ The total return is broadly in line with a 60/40 stock/bond portfolio or te S&P 500. TRS has actually slightly outperformed both its assumed rate of return benchmark and is in line with the relevant benchmark indices over a 10-year period. Image
9/ And now for two major problems. First the discount rate. State pensions, unlike their corporate cousins, use an assumed rate of return as the rate at which to discount future liabilities back to present value. Corporates use bond spreads. pionline.com/industry-voice…
10/ All you need to know is that the higher the discount rate, the lower future liabilities. And the lower the discount rate, the higher the future liabilities. Illinois uses a 7% return hurdle / discount rate. Here's a graphic from the report showing a 1% sensitivity analysis. Image
11/ Assuming a 7% forward return is a tall order. I'll keep things simple. 10 years ago, the forward price to earnings ratio of the S&P 500 was 14 (meaning the index price as a multiple of expected earnings). Even after the correction we've had, today it's close to 18. Image
12/ The more expensive entry point you start at, the lower your future returns. This graphic is from the @FT last year, but at 18x forward earnings implies forward returns closer to 5%. And note that despite high valuations last year, the TRS discount rate was also 7%... Image
13/ I should also note that inflation has crushed bond prices this year and all the private investments TRS owns will be marked down. That's not reflected yet in FY returns ended June 30... Point is 7% is a high return assumption with stock and bonds still historically expensive. Image
14/ Another huge problem: The TRS board assumes a long term inflation rate of 2.5%. Here's a short article on why I think long term 2.5% inflation assumptions may be wishful thinking. linkedin.com/pulse/quick-no…
15/ And here's a 149 page slide deck on why I think 2.5% inflation is a byproduct of a different universe we no longer live in. acrobat.adobe.com/link/review?ur…
16/ The 2.5% inflation assumption impacts future costs for the pension. If it's too low, then the pension will have even greater shortfalls. It would be more honest to have more realistic inflation and return assumptions - but it would also show a much larger unfunded liability. ImageImage
17/ If the two biggest future pension liability assumptions are off, it's going to have a huge impact on long term returns, costs and shortfalls (which means more taxpayer liabilities). Remember, this is just TRS. The state and Chicago have other similarly situated pensions. Image
18/ As an aside, and this isn't the fault of TRS invesment professionals, the state pensions are handcuffed by our insane ESG stance that limits exposure to energy/resources (one of the few asset classes that does well in an inflationary environment). ImageImage
19/ The TRS reports I linked to above are dense. Anyone interested, should just read the @Wirepoints summary. Broader point is that our pension system is in terrible shape and will require either herculean returns or more state contributions than forecast.
wirepoints.org/reality-check-…
20/ I've been talking about these problems for awhile and even proposed an idea (that is admitedly tricky to administer) of setting up an "off-balance sheet" arrangement for state pensions. A "bad bank" type model. See below thread.
21/ Again, I highly recommend reviewing this thread on why Illinois and similar states are in trouble in an evironment where interest rates are higher and economic growth is choppy.
22/ There are no free lunches. We have accrued such an insane amount of pension liabilities at the state and city levels that paying it off is a pipe dream.
23/ The choices to get our fiscal mess in order are:

A) Borrow more (isn’t sustainable),

B) Tax more (causes people to move),

C) Declare bankruptcy (isn’t constitutional), or

D) Implement pro-growth policies (grows tax base)

This is IL, so of course we aren't choosing D...
24/ Now to get a little political. I don't expect an honest discussion of any of this with the current crew of leaders currently in office that twist facts and avoid reality to serve their political narratives.
25/ I've been consistent since last year. Illinois' pension and fiscal crisis are huge problems that must be soberly addressed. They won't get resolved until we're serious about improving public safety and implementing pro-growth policies. DM me to discuss
26/ Remember how bad I said everything was yesterday, well it's a lot worse... $139 billion of total unfunded liabilities. TRS was actually the best performing plan last year.

From the Illinois Commission on Government Forecasting and Accountability:

cgfa.ilga.gov/Upload/1122%20… ImageImage
27/ Also presenting actuarial smoothed returns (blue bars) is misleading. Returns are whatever the market does. All these plans had a down FY 22 and post-June 30 they will likely be down more as their private holdings get marked down by a lot. So unfunded liabilities will rise. Image
28/ To my point on “smoothing” returns, see below. Though required by state law, this makes no sense as you can’t “smooth” out the dollars you owe beneficiaries every year. I’m sure many institutional investors would love to report smoothed 5-year returns for 2022… Image

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More from @StuLoren

Stuart Loren Profile picture
Nov 27, 2023
1/ Some working thoughts: Much of human history is a story of tribal allegiances and conflict. For an exploration of the scientific reasons we may be hardwired for tribalism, I’d recommend renowned biologist E.O. Wilson’s The Social Conquest of Earth.

amazon.com/Social-Conques…
Image
2/ The tragedy of modern America is that we are undermining the achievement of a society in which we were united by ideals instead of what are often divisive group dynamics. If we’re decreasingly bonded by our national heritage, we risk social upheaval.

axios.com/2023/07/25/mil…
Image
3/ The US is special - and was unique for its time -
in that it was founded on ideals, and not ethnicity or religion. Despite the inherent contradictions between these ideals and the realities of early American society, the ideals are no less worthy of admiration and aspiration. Image
Read 9 tweets
Stuart Loren Profile picture
Jun 14, 2023
1/ News today that CPS budget will remain steady at $9.4b in FY 2024. But more notable is that CPS will use its taxing authority to increase property taxes 5% in Chicago to help funding. At this rate, CPS and the city will just own all our houses soon…

cps.edu/about/finance/… Image
2/ In the private sector, when demand for your product or service declines 20% over a decade, you usually get some sort of restructuring that includes right-sizing costs. But in the public sector?… Image
3/ To be clear, I appreciate and respect teachers. My wife was once a teacher in CPS and I benefitted immensely from quality public education. But it’s fair to ask - as city tax payers - what we’re getting in return for this spending increase.

H/T @Wirepoints & @illinoispolicy ImageImage
Read 10 tweets
Stuart Loren Profile picture
Mar 15, 2023
I want this post/comments to be respectful. I just read the below on crime in Chicago in which the author suggests residents' perception of crime has a racial element. While I respect the author's opinion, I would like to offer up a different perspective.
chicago.suntimes.com/columnists/202…
Below is an excerpt from the author's piece. Again, I can appreciate that others in the city have had life experiences that would lead them to think this. Perhaps it is sadly true in many cases. But I can speak for myself at least that my concern about crime is not rooted in race Image
My concern about crime - and I think the concern of many - is that my family has been endangered as public safety has deteriorated. If you have children and those children are put in harm's way, as mine have on several occasions, I think your views/focus on public safety change.
Read 9 tweets
Stuart Loren Profile picture
Mar 14, 2023
Thread on economic and fiscal reality for Chicago. These goals are laudable. I share them. I bet most residents do. But it’s wrong to claim “the resources exist” and that a better Chicago is a matter of “political courage.” Sadly, Johnson’s plans would mean political calamity. Image
Let’s start with city resources. As I’ve highlighted, we pay an obscene amount to our underfunded pension plans, which state law prevents reforming (short of a constitutional amendment). The $2.6b for FY 2023 is over 20% of city expenditures.

chicago.gov/content/dam/ci… Image
Pensions are a “fixed cost” - meaning they have to be paid. It’s not a discretionary spending item like most city services. And when you add in other fixed costs (like interest payments on debt) Chicago is at 43.4% of the budget (per S&P Global). spglobal.com/ratings/en/res…
Read 24 tweets
Stuart Loren Profile picture
Mar 6, 2023
Something I want to return to… Brandon Johnson saying his tax plans won’t drive people out of the city. Aside from lacking in economic common sense, it reveals that he’s unaware of the real economic problem Chicago faces.

cbsnews.com/chicago/news/m…
While we should worry about driving residents / businesses out of the city, we need to focus on bringing people back in. Higher taxes (including on commuters) won’t do that. Here’s how Chicago ranks per a Berkeley study in downtown recovery. 50% vs 2019. downtownrecovery.com
And here are Chicago Metra and CTA commuter statistics courtesy of @biancoresearch. Not great! People aren’t coming downtown for work or entertainment. That’s a lot of lost economic activity.
Read 11 tweets
Stuart Loren Profile picture
Mar 5, 2023
So if we’re gonna have a convo about the company you keep… Brandon Johnson’s biggest backer is the Chicago Teachers Union. Yes, wouldn’t it be great if the CTU had more of a say in city policy? We’d enter a new dawn of socialist nirvana where we don’t need police or finance.
Do we really want a candidate beholden to the CTU? They’ve spent close to $2.5m backing him. He’s their man.
I love teachers - so much that I even married a former teacher! But the Union? Not so much. It’s done wonders for the city… Thanks to their noble work, most public school students are years behind in their educational development. School stopped, but pensions for sure didn’t.
Read 8 tweets

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