At the Oct. 10, City Council meeting I expressed my concerns on our City’s pension situation. I previously expressed my concerns in October 2009 and again in September 2012, and the situation continues to get worse. This is not a good situation for our policemen, firemen, taxpayers, and our children. I recognize that discussing pensions is similar to talking about your recent root canal or colonoscopy; people don’t want to hear about it, but the procedures are critical to your physical health. Pensions are critical to our community’s financial health.

The current stated unfunded liability for the Police Fund is about $114 million. The Fire Fund is unfunded by almost $90 million. Said another way, the “Pension Debt” just for the Police and Fire Funds is $204 million. But that understates the actual liability due to “accounting gimmicks” allowed for public pension funds. The real debt is at least $208 million and likely much higher. That’s more than $6,000 for each and every household in Evanston.

I appreciate the work our policemen and firemen do in our community, and they should be confident that they will receive a fair and sustainable pension. Taxpayers should feel that we are being treated equitably. No one benefits when pensions are poorly funded.

I recently attended a talk by Nate Silver, the acclaimed founder of FiveThirtyEight analytical website. One key takeaway from his talk is the importance of thinking probabilistically. Few problems can be addressed from a binary perspective; Yes/No; Right/Wrong. One of the keys in addressing future problems is to understand the underlying assumptions and consider a range of outcomes and the likelihood they will occur.

As I learned about pensions in Evanston starting in March 2008, and became aware of this growing problem at Cook County, City of Chicago, and the five State pension funds, I became concerned and disappointed in our public leadership. The conduct of public officials towards public pension funds at all levels of government in Illinois is irresponsible and the implications are problematic.

Evanston’s pension situation will likely get worse in the near future. Demographics are working against the funds. More policemen and firemen are going to retire in the next 5-10 years.  People are living longer. The actuaries keep updating mortality tables and other assumptions, and the unfunded liability increases. Both pension funds assume a 6.5% rate of return, which is likely too high by at least 1%. The overstated expected rate of return means that the unfunded liability is actually understated, and that more money needs to be contributed to properly fund the pensions. In addition to this year’s $18.4 million pension contribution, the City would have to add another $4 million if they assumed a 5.5% rate of return instead of 6.5%. That’s why there’s a reluctance to use a more realistic rate of return assumption.

A common mistake people are making is they’re extrapolating historical investment returns from 30 and 40 years ago into the future. But here’s the problem. 35 years ago, the 10-year bond peaked at over 15%, and today it’s about 1.7%. We have just enjoyed one of the biggest bull markets in bonds in history. Mathematically these returns are very, very unlikely to happen again in the foreseeable future.

Also, think about what the Federal Reserve has been doing for the last several years; low rates and easy monetary policy have greatly benefited financial markets, and in the last eight years the stock market is up over 40%.  And yet our unfunded liability continues to grow. Investment returns will likely be lower over the next 10+ years as the Fed becomes less accommodative and interest rates head higher over time.

City Council has a responsibility to properly fund the police and fire funds. Pension bills don’t go away. The pension debt grows because compounding works 24/7, and every day they ignore or understate this issue, it gets worse.  When the 2008 Pension Committee published its report, unfunded pensions were $146 million. Today the amount is $208 million, and growing. Our children and grandchildren will ultimately pay this bill. Instead of leaving them with nickels and dimes in their piggy bank, we’re going to leave them with a big I.O.U. Is this what we want to do to our children and grandchildren? Our country has given each generation a better opportunity, and I hope that we will continue this American tradition.

In summary, Evanston’s Police and Fire pension funds are very poorly funded today at under 50%, demographics are a headwind,  and future returns on assets will likely be lower than projected. This problem is not going away, but will likely only get worse.

Jim Young served on the Mayor’s Blue Ribbon Committee for Fire and Police Pension Funds.