Death Spiral of Chicago Firefighters’ Pension Plan Due to Flaw in Accounting Standards, Says Former Actuary Theodore Konshak

Death Spiral of Chicago Firefighters’ Pension Plan Due to Flaw in Accounting
Standards, Says Former Actuary

Former actuary Theodore Konshak has issued a research report on the December 31, 2014
actuarial valuation of Chicago Firefighters’ Pension Plan.  He believes
that the plan has been in a death spiral for over ten years.  He blames
this and the financial problems of other public sector pension plans on a flaw
in Government Accounting Standards Board (GASB) Statement No. 27.
 

The City of Chicago has never fully paid the Annual Required Contribution for the
Chicago Firefighters’ Pension Plan.  A portion of the Annual Required
Contribution is always missed. This missing annual contribution miraculously
disappears from sight and is not separately accounted for.   But
these missing annual contributions are only hidden from view and are actually
amortized like a fixed rate home mortgage over 30 years.
 

These missing annual contributions are broken down into smaller payments which are
spread over the following 30 years. The impact in the initial years will be
minimal and will not even be noticed.  Officials may be lulled into a
sense of false security that the failure to make full payment has little or no
consequence.  As the years pass, the number of these missing annual
payments and the number of resulting 30-year amortizations start to
accumulate.  The result are larger and larger Annual Required
Contributions.  And larger and larger missed annual payments.  It
becomes a spiral where these larger Annual Required Contributions and the
larger amounts of missed annual payments feed the growth of one another. 
This accelerates into a death spiral.   

“As the fire investigators of the Chicago Fire Department might determine the
cause of a fire to aid in the prevention of future fires,” says Mr. Konshak,
“Chicago teachers might avoid a similar fate by examining the charred remains
of the Chicago Firefighters’ Pension Plan.”

Previously, Mr. Konshak had issued a research report on the Chicago Teachers’ Pension
Fund.  Mr. Konshak encourages the math and science teachers in the
Chicago Public Schools to take a more active role in examining and reviewing
actuarial valuation reports.  Including the Chicago Firefighters’ Pension
Plan.  Successful battles against pension reductions in the private
sector have been waged by engineers who developed some proficiency in the
underlying math.

“Using the financial rule of thumb contained in the research report,” says Mr.
Konshak, “Chicago teachers would have a better understanding of how their
pension contributions are calculated, the importance of these pension
contributions being paid in full and how they can be improved.”
  

Missing contributions should have been labeled as being due and unpaid.  Every
year there should have been an expectation of payment of these missing
contributions plus interest.  If there is no such demand for missing
contributions to be paid with interest, the Chicago Teachers’ Pension Fund
will ultimately find itself in the same position as the Chicago Firefighters’
Pension Plan.   Some arrive there sooner.  Some arrive there
later.  

For further information, review the attached copy of this research report or
contact Theodore Konshak at (920) 497-2414.  Previous research of Mr.
Konshak reported in the syndicated column of financial reporter Jane Bryant
Quinn can be located through a Google search of her name and his name of
Konshak.