A remarkably clear explanation of Illinois public pension issues.

Blond Boy Crying

There are two things that happen when Illinois’ pension problem gets brought up in my presence.

I start talking.

Everyone in the room’s eyes glaze over.

Some old friends have been known to cross the street when they see me coming.

Dogs bark.

Little babies start to cry.

I can’t quit it.

Crain’s and the Better Government Association provide a remarkably clear explanation of the root of the problem and the current situation.

Bullet points:

  • The median pension in 2017 for retired suburban and Downstate teachers stands at $52,016, the analysis shows, while the median for general state workers is $28,946. For university workers, the median pension stands at $26,101, while for non-public safety municipal workers outside of Chicago it is $9,064.

  • Just five of the 17 pension funds—those managed by the state for public university workers, suburban and Downstate teachers, general state employees, judges and legislators—collectively face an unfunded liability of $130 billion.
  • A recent analysis by the legislature’s economic forecasting arm, a bipartisan body akin to the Congressional Budget Office, vividly illustrates the central role played by the state’s chronic failure to meet its pension funding obligations in the explosion of debt at those five state funds.

  • TRS, the largest of the state’s pension funds, possessed more than $45 billion in assets to cover its pension obligations in fiscal 2016, according to data from the legislative commission. Even so, the commission pegged the cost of long term pension obligations at the fund at more than $118 billion, resulting in a funding ratio of just 37 percent.

  • As a rule of thumb, pension experts generally consider a pension fund healthy if it has on hand at least 80 percent of the financial resources it needs to cover future obligations to retirees. There are some exceptions, but most big pension funds in Illinois are nowhere close to meeting that benchmark, with many in the sub 40 percent category.
  • In fiscal 2016 alone, the state obligation to TRS and the other four employee pension funds it maintained was $6.8 billion, an amount so large it consumed more than 26 percent of the day-to-day operations budget of Illinois government, according to Ralph Martire, executive director of the Center for Tax and Budget Accountability.

    But Martire said only $1.6 billion of that amount, less than 24 percent, was needed to cover the so called normal cost of pensions, benefits actually earned by employees in 2016. The other $5.2 billion amounted to late payment charges.

    “The real problem is a debt-service problem and a tax-policy problem,” said Martire, whose Chicago-based think tank contends Illinois finances are being crippled by insufficient taxes.


Podcast: Hitting Left with the Klonsky Brothers #16.

24 Replies to “A remarkably clear explanation of Illinois public pension issues.”

  1. If only Martire’s explanation could be disseminated in the media day in and day out. His explanation is easily understood. The politicians have made it worse with their stalemates and antics while the obligation grows. Irresponsible.

  2. “A remarkably clear explanation of Illinois public pension issues.” That’s a switch! Maybe, it’s becoming “clear” to the Better Government Association and Crain’s that pensions and benefits aren’t the “drivers” of Illinois’ fiscal woes. It’s a step forward, but approach with caution. We’ve seen too many steps backward in the past.

    1. Ironic, isn’t it Karl. Crain’s does a better job of explaining the facts about public pensions than the public employee unions ever have. Ever.

      1. Fred,
        My response to your question about Crain’s, irony and our teachers’ unions is…

  3. When I’m explaining our “pension crisis” to others, I compare it to mortgages…if I had to come up with the amount I borrowed for my home tomorrow? I’m glad my car is paid for, cuz that’s where I’d be…but I don’t. I pay an agreed amount in an agreed time allotment. If I get behind, I have late fees. But I may be able to come up with a new agreement…and the State can renegotiate the loan. It should. At this time Illinois is in a “balloon payment”, again comparing it to mortgages. Illinois has the ability to change that, but for Gov. Gridlock. Thanks again for a great column.

  4. Is it true, as reported by Wire Points, that a sovereign state may repudiate its debts even though it has no right under current law to file for bankruptcy?

    1. Kvetch,
      Project a little… What would happen to the entire economy of the United States, if states could repudiate their debts? No doubt that there are politicians in each state who would love to do that, but they’re not the brightest stars in the sky.

      First of all, if a state defaults and could declare bankruptcy, what would happen to the value of its bonds? Aren’t the biggest bond holders banks? What would happen to those banks? Crash? What would happen to the other private bondholders? Bankruptcies? There are many private vendors who have contracts with states? What would happen to those vendors’ businesses? Crash?

      If all 50 states could declare bankruptcy, what would likely happen to the country? Mega-Crash? Talk about a house of cards that would make a real house of cards the very model of stability! Is it somewhat clear why states can’t and should never be able to declare bankruptcy, regardless what Wharton says?

      By the way, the State of Illinois, as all states, have remedies at their disposal: All states have the power to tax; they also have the power to re-amortize their debts over longer periods. Illinois has a terribly regressive tax system that’s at the root of the State’s debts. Our General Assembly, governor, and an informed electorate can also change that, if they had the vision, wisdom, and courage to stop using taxation* as a cudgel to beat each other to political death. Unfortunately, vision, wisdom, and courage in relation to Illinois politics are the oxymorons of oxymorons.

      (*The gang that’s particularly egregious at using taxation as a weapon is the Republican Party, because it’s one of the ways it foments outrage within its largely uninformed base. Outside of collecting big bucks from wealthy donors to finance their campaigns, everything the Republican Party does to stay in power is directed toward fomenting some kind of phony “outrage” to get its “aggrieved” voter base to the polls. It’s a very effective slight of hand for which the unsuspecting, uninformed, Republican base falls every time. The Democratic Party is anything but a model of perfection, but agree or disagree with its legislative program and leaders, manufacturing phony outrage Republican-style is not in the Democrats’ bag of tricks. The only kind of outrage Illinois Democrats create under Madigan and Cullerton from time to time, like Tier II pensions, Sb 1 — the 2013 unconstitutional pension cutting legislation, or the latest Barbara Flynn Curry incarnation, are not phony. Unfortunately, they’re very real, though immoral, ineffective, unimaginative, unconstitutional, and counter-productive, if not suicidal. Just ask Pat Quinn! On second thought, don’t ask Pat Quinn. He still doesn’t realize what hit him in 2014. Vision, wisdom, and courage in Illinois politics? HaHaHa… LOL What’s so funny???)

      1. I’m not endorsing debt repudiation. “I’m just sayin'” that when the pension funds run out of money, when the state’s deficit grows, when citizens refuse to vote for the amendments needed to permit graduated income tax rates, when the dentists and the retired teachers are no longer getting paid, then great hordes of these people will sue the state. If the state is permitted to use the bankruptcy code then that is probably the direction in which matters will head. But if states can’t go bankrupt and don’t have money and can’t raise money, then repudiation is about all that’s left.

        The learned ones who publish on this topic aren’t supporting repudiation … they are simply saying that it’s a bad practice that the federal courts have endorsed Smoking hurts the lungs; auto and jet emissions hurt the atmosphere. Politicians who say they’re environmentalists are too cowardly to raise gasoline taxes and taxes on air travel. Bad stuff continues to happen because selfish people elect opportunists who won’t do what’s needed to keep problems from getting worse.

        I guess what “you’re sayin'” is that once people (even legislators) understand the trajectory of destruction that would follow debt repudiation they surely won’t go that route. I can’t prove that you’re wrong but unthinkable things have happened and seem to keep on happening.

    1. See Wharton prof — http://knowledge.wharton.upenn.edu/article/how-to-stop-states-from-borrowing-too-much-money/
      ‘This doctrine dates at least to the 19th century. The idea is that because the American states aren’t thought of as sovereigns, they can reject any claims to pay debts. They can simply walk away from them. In other words, they don’t need a bankruptcy mechanism.
      The way this works is that if someone sues a state for a debt, say on a bond, the state can decline to be sued. So, there’s no remedy. The upshot is that states can already walk away from debts if they want to. They don’t need a bankruptcy mechanism …’ February 2017

    2. Kvetch,
      I’m glad that you’re not advocating “debt repudiation.”

      “But if states can’t go bankrupt and don’t have money and can’t raise money, then repudiation is about all that’s left.” Is this some kind of inevitability? Can’t raise the money? — Or won’t raise the money? There’s a difference.

      What’s left? Let me repeat: “…the State of Illinois, as all states, have remedies at their disposal: All states have the power to tax; they also have the power to re-amortize their debts over longer periods.”

      Your conclusion: “I guess what “you’re sayin’” is that once people (even legislators) understand the trajectory of destruction that would follow debt repudiation they surely won’t go that route. I can’t prove that you’re wrong but unthinkable things have happened and seem to keep on happening.”

      — Certainly, mankind is capable of all kinds of self-destructive behavior, and I’m not so naive to think that we, as Americans, are immune from it. Quite the contrary: Our most recent example of self-destructive behavior is putting Trump into the White House and entrusting Republican arsonists with control of all three branches of the Federal government. In addition, there’s also the randomness (?) of “the law of unintended consequences.” I get all that.

      I would hope that wiser heads would rule and would never allow states to repudiate their debts. If by some (slim?) chance states were allowed to do it, the reverberations throughout the world’s economies would be equal to the “nuclear winter” after a nuclear war.

  5. Most academics are opposed to the idea of sovereign immunity, however it seems to be a matter that the federal courts will decide (not elected Illinois judges) — ultimately a decision will rest withTrump’s Supreme Court. Stanford Law Review in 2001 noted:

    “Sovereign immunity is not fading from American jurisprudence; quite the contrary, the Supreme Court is dramatically expanding its scope. In Alden v. Maine, the Court held that sovereign immunity broadly protects state governments from being sued in state court without their consent, even to enforce federal laws.’ In Seminole Tribe v. Florida, the Court greatly limited the ability of Congress to authorize suits against state governments and to override sovereign immunity.’ The Court applied this principle within the past couple of years to bar suits against states for patent infringement” and for age discrimination.” Although all of these cases involve suits against state governments, the Court has indicated no willingness or likelihood of relaxing the sovereign immunity of the United States government.”

  6. Agent Orange went to Wharton. After reading that Wharton needs to join Trump U in the scrap heap. Sue for a refund if you went there. This guy had no clue about Illinous

  7. Based on news reports it is for current workers. It requires more money and cuts any kind of COLA they have to zero. They have a combo plan with a smaller DB than ours plus a 401k type plan.I’m the other hand that make more generally.I would certainly say the FBI and CIA are.

  8. For those fond of digging into the legal issue of debt repudiation, see: New York Law Journal (11-7-16)

    [L]egislative changes have spurred pension-related litigation, with the Contracts Clause of the Federal Constitution often serving as the principal shield against reductions or eliminations of promised pension rights. U.S. Const. art. I, §10, cl. 1 (“No State shall … pass any …Law impairing the Obligation of Contracts.”) This provision was designed to safeguard legitimate expectations of contracting individuals, like public employees, against repudiation by a state government. Courts applying the Contracts Clause look to whether (1) the challenged law impairs a contractual relationship, (2) the impairment is substantial, and (3) it is necessary to serve an important public purpose. Under numerous state constitutions, public pensions are deemed contracts. When a state impairs its own contracts, as is often the case with pensions, the impairment is scrutinized more closely. Review is also heightened if the impairment is severe. Only in dire economic circumstances, and only as a last resort, may governments completely abrogate their contracts. The bankruptcy in Detroit is a notable example of a fiscal crisis requiring a municipality to cease paying its pension obligations. The situations in New Jersey and California typify more recent attacks and prompt concern.

    How close is Illinois to “dire economic circumstances?”

    1. “How close is Illinois to ‘dire economic circumstances?”

      Answer: Is being the 5th largest economy in the United States “close to dire economic circumstances?”

  9. U.S. News has Illinois at #29 (see https://www.usnews.com/news/best-states/rankings). The bond ratings are declining based on the budget stalemate which does not reflect economic strength so much as political dysfunction. Unless Illinois can convert enough wealth to cash and then liberate it from its owners, it will fall further behind on funding pensions and meeting its obligations to citizens. Whether Illinois is 5th or 29th it’s not paying its creditors nor funding its pensions. But if you see this as a rosy picture, then, well, it’s good to meet an optimist. A glass half full rather than half empty. Perhaps we should start to describe pension trusts as half-full rather than 50% funded.

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