LOL Chicago (debt $63,525 per Chicago household)

[fskimospy]

I would advise you not to quibble about the semantics of "liabilities" versus "debts", especially since your rent "liability" example was the precursor to the discussion.

With that being said, a pension obligation is a legitimate obligation that must be accounted for in the present. The City of Chicago has essentially entered into an employment contract whereby the employee performs work for some amount of present wage plus some additional amount of deferred compensation (the pension). Presumably, had the employer not offered the deferred compensation the employee would have required a greater amount of immediate compensation. In that regard then the temporality of the payment is irrelevant; the fact that the employee fulfilled their end of the agreement by performing the work means that the employer is required to fulfill their part by making the deferred payment.

Now, a portion of those future deferred payments may be attributed to work not yet completed (i.e. general labor in 2012). There is certainly a case to be made that those expenses should not be counted as they have not yet been incurred. The counterpoint is that they are likely to be incurred: the odds of the City of Chicago ceasing to exist in 2012 are slim. From a GAAP standpoint that counterpoint may not be completely persuasive, but from a Gov't and managerial accounting standpoint it certainly is.

You're right that my rent example was a bad one. What I was trying to illustrate is that debts far off in the future are not the same as debts that we need to deal with today. If you owe someone $65,000 over the next 30 years, that's a lot different than owing them $65,000 today.

Anyways, point well taken.

 

[sactoking]

Although those arguing with eskimospy on this point are technically correct, in the spirit of the matter I agree with him (and more or less against my original post's link which, while correct, is kind of disingenuous). So, yes, Chicagoans may owe this but without also stating their likely income over the same period of time the money means nothing. The figure would change, rather pointlessly, if the contract was out to 40 years, or 50.

Would it not be logical to assume that since the projection includes only known debt costs and doesn't contemplate debt accelerating (delta debt = 0) that delta income would also = 0, or that (delta debt)/(delta income) = 1 so that any increase in debt is met with a corresponding increase in income and the reverse?

Really what that link states is that the city will need to take in $X above and beyond any spending over the next Z years, ceterus paribus. It can bring in $X/Z per year or it can bring in $X when Z= 1 and run a balanced budget for the remaining Z-1 years, but in either case $X in today's dollars will be needed above and beyond normal spending levels to fund known past and future expenses.

 

[sactoking]

You're right that my rent example was a bad one. What I was trying to illustrate is that debts far off in the future are not the same as debts that we need to deal with today. If you owe someone $65,000 over the next 30 years, that's a lot different than owing them $65,000 today.

Anyways, point well taken.

And I definitely can see what you're saying, that the Net Present Value of the future debt is not equal to the future debt itself. I don't see where it's clear whether the ~$100 billion is NPV or FV. If it's FV I wholeheartedly agree that the NPV should account for estimated inflation, COLA, interest earned, etc. and will affect the number (maybe down, maybe up depending on econometric factors used).

 

[OCGuy]

You all have been trolled by Dmcowned...

 

[rudder]

Liabilities are different than debts. In particular, liabilities over long time frames such as 30 or more years are WAY different than debts. Not only do future liabilities not incur interest, but they actually acrue negative interest, as $63,525 will be a lot less money in 30 years than it is today.

Comparing the two is simply inaccurate. Period.

I would advise you not to quibble about the semantics of "liabilities" versus "debts", especially since your rent "liability" example was the precursor to the discussion.

With that being said, a pension obligation is a legitimate obligation that must be accounted for in the present. The City of Chicago has essentially entered into an employment contract whereby the employee performs work for some amount of present wage plus some additional amount of deferred compensation (the pension). Presumably, had the employer not offered the deferred compensation the employee would have required a greater amount of immediate compensation. In that regard then the temporality of the payment is irrelevant; the fact that the employee fulfilled their end of the agreement by performing the work means that the employer is required to fulfill their part by making the deferred payment.

Now, a portion of those future deferred payments may be attributed to work not yet completed (i.e. general labor in 2012). There is certainly a case to be made that those expenses should not be counted as they have not yet been incurred. The counterpoint is that they are likely to be incurred: the odds of the City of Chicago ceasing to exist in 2012 are slim. From a GAAP standpoint that counterpoint may not be completely persuasive, but from a Gov't and managerial accounting standpoint it certainly is.

Excellent reply sactoking.