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Illinois and Greece, Two of a Kind?

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Illinois is Similar to Greece – Broke

Illinois is like Greece in one obvious way: It over promised and under delivered on pensions and has little appetite for dealing with the problem.

Illinois, with a population of 13 million (Greece has 11 million, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen.

According to the Civic Federation, a budget watchdog, Illinois has piled up a whopping $111 billion in unfunded pension liabilities (see chart below), in addition to $56 billion in debt for health benefits for pensioners.

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The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’ bond rating is the lowest of all the states, which means dramatically higher borrowing costs.

When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana.

It’s Actually Worse than That:

Whereas most other states follow the rules set by the Governmental Accounting Standards Board (GASB), which, however imperfect, require some budget discipline, Illinois has mostly ignored them.

In 2013 the state paid $2.8 billion into its pension fund for teachers, one of its five pension funds, but GASB rules would have required a contribution of $3.6 billion, says Joshua Rauh, a professor of finance at Stanford University. According to Mr Rauh’s calculations, Illinois’ true unfunded pension liability is $250 billion.

All the other calculations, he says, are based on over-optimistic assumptions. For example, the state assumes an average annual return on its investments of 7.75% over 30 years. But according to Mr Rauh, it has only a 25% chance of achieving gains of that order. I think that it has zero chance of earning that rate of return. If they earn less than 7.75% it means the state would need to fund that much more money to afford the liabilities.
Projections:

Illinois budget issues:
Budget deficit 2015: $322 million
Revenue reduction 2016: $3.64 billion
Mandatory spending increases 2016: $1.93 billion
BUDGET DEFICIT 2016: $5.90 BILLION

Imagine a household with a $100,000 income, but $130,000 in expenses (and growing faster than income) and $250,000 in credit card debt and no assets.

It only survives until the lenders (credit card companies for individuals, bond buyers for the state) quit loaning money to them.

Lawmakers promised more and more benefits to retired teachers, police officers, firefighters, and other government workers over the past decade; meanwhile, the pool of money to pay these pledges was neglected. It would be a difficult task to reduce these benefits.

Public employee unions are a powerful force in heavily Democratic Illinois, and they have not only clout but the law is on their side. The contracts that grant retirement benefits to public employees are guaranteed by the state constitution, the unions argue. Such promises must be kept.

Insane Pension Values:

Most people have less than $100,000 saved for retirement, but many government employees receive $75,000 per year or more (indexed to go up every year) guaranteed lifetime income when they retire. That’s more than double what most people receive from social security.   Fantastic medical insurance benefits are also part of the benefit package that was promised to government workers. The problem is a combination of the rich benefits promised and the fact that the state did not save close to the amount of money that was needed to pay for these.

When this has occurred in the private sector (United Airlines), companies file for bankruptcy when they do not have the money to pay the promises and then they start over with a new, more manageable agreement.

Now there are some cities doing the same thing, most notably, Detroit. Detroit just filed for bankruptcy. Here’s how it got there.

Where is the money going to come from to pay these liabilities?

It’s just not there. When our state income tax was raised from 3% to 5%, the problem (tax rates are now 3.75%) was not solved. The state’s citizens have not been pleased with this and are skipping town.

Illinois has ranked among the top states that people are leaving according to United Van Lines’ annual National Movers Study. According to the data, Illinois ranked third in the nation for states that have the most households packing their belongings and moving on to greener pastures. This marks the sixth year in a row that Illinois has been in the top five for states with the most residents heading outbound. So what does this all mean for Chicago?

End Game

For now the unfunded liabilities continue to mushroom, the state’s credit rating continues to get worse and at some point the finances will implode completely. AT SOME POINT, NO ONE WILL LOAN TO THE STATE OF ILLINOIS.

THIS IS WHEN IT IMPLODES.

I believe the only way out would be some sort of federal government bailout (using federal tax collections) or where possible, transferring many projects and services to private businesses. Bankruptcy is not an option for the state, but it would be for Chicago.

 Do you agree?  What and when do you think the outcome will be?

 

Related Blog Posts:

The 2015 Illinois Budget Is Ridiculous, and Here’s 15 Reasons Why

Public Pension Crisis

Chicago Finances in BIG TROUBLE- The Blue State Reckoning

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