State and local governments make bad financial decisions all the time…
On Tuesday we explained how public pensions have promised to pay $4.7 trillion they don’t have. And there’s no way to close the gap. It would require every man, woman, and child in the United States to fork over $15,000.
Our analysis struck a nerve with some readers. So today we’ll dig further into the pension crisis by looking at Illinois...
• Illinois’ pension system is the worst shape of any state…
Illinois only has 22 cents for every dollar it has promised to pay its public employees, according to think tank State Budget Solutions.
Reuters explains that Illinois got itself into this mess through “years of skipping and skimping on contributions and sweetening benefits for a mainly unionized workforce.”
The Wall Street Journal points out that Illinois’ financial position keeps getting worse.
[Illinois’] pensions are underfunded by $111 billion—a 500% increase from 1995 and up 75% in the past five years. About one in four state tax dollars already finances pensions, which is more than Illinois spends on education.
And failing to set aside enough money is only part of the problem. The Wall Street Journal continues:
Less than 40% of the increase in the state’s unfunded liability since 1995 is due to inadequate payments. The rest is due mainly to benefit growth and faulty actuarial assumptions such as investment rate of return.
“Faulty actuarial assumptions" means Illinois expects to earn an an extremely high rate of return on its investments. As we explained yesterday, U.S. public pensions expect to earn 8% per year on average. That’s a wildly optimistic assumption, even in a “normal” investing climate.
And we’re not in a normal investing climate. The Fed’s zero interest rate policy has made it practically impossible to earn a safe, decent return. States have virtually zero chance at earning 8% per year today. The average public pension earned just 3.4% last year.
• Illinois’ pension system is a slow motion train wreck…
And its government refuses to fix it.
In May, the Illinois Supreme Court overturned a landmark 2013 pension reform law. The law would have lowered payments to some pensioners. It was a small step toward fixing a broken system.
But the Illinois Supreme Court struck the law down because Illinois’ constitution says pension benefits promised to public workers cannot be “diminished or impaired.”
In other words, Illinois public pensions are “untouchable.”
• To recap…
Illinois doesn’t have anywhere near enough money to keep the promises it has made to public employees.
And…
It is illegal for Illinois to not pay what it has promised to public employees.
We see two possible outcomes here…
One, Illinois will have a full-blown pension crisis. Its pension liability will grow and grow until it eats up all tax revenue and bankrupts the state government.
Two, taxpayers will be on the hook. This is the most likely outcome. As a taxpayer, you’re the backstop for these promises. Governments don’t produce any money. They can only extract money from their citizens as taxes.
On Tuesday we explained how public pensions have promised to pay $4.7 trillion they don’t have. And there’s no way to close the gap. It would require every man, woman, and child in the United States to fork over $15,000.
Our analysis struck a nerve with some readers. So today we’ll dig further into the pension crisis by looking at Illinois...
• Illinois’ pension system is the worst shape of any state…
Illinois only has 22 cents for every dollar it has promised to pay its public employees, according to think tank State Budget Solutions.
Reuters explains that Illinois got itself into this mess through “years of skipping and skimping on contributions and sweetening benefits for a mainly unionized workforce.”
The Wall Street Journal points out that Illinois’ financial position keeps getting worse.
[Illinois’] pensions are underfunded by $111 billion—a 500% increase from 1995 and up 75% in the past five years. About one in four state tax dollars already finances pensions, which is more than Illinois spends on education.
And failing to set aside enough money is only part of the problem. The Wall Street Journal continues:
Less than 40% of the increase in the state’s unfunded liability since 1995 is due to inadequate payments. The rest is due mainly to benefit growth and faulty actuarial assumptions such as investment rate of return.
“Faulty actuarial assumptions" means Illinois expects to earn an an extremely high rate of return on its investments. As we explained yesterday, U.S. public pensions expect to earn 8% per year on average. That’s a wildly optimistic assumption, even in a “normal” investing climate.
And we’re not in a normal investing climate. The Fed’s zero interest rate policy has made it practically impossible to earn a safe, decent return. States have virtually zero chance at earning 8% per year today. The average public pension earned just 3.4% last year.
• Illinois’ pension system is a slow motion train wreck…
And its government refuses to fix it.
In May, the Illinois Supreme Court overturned a landmark 2013 pension reform law. The law would have lowered payments to some pensioners. It was a small step toward fixing a broken system.
But the Illinois Supreme Court struck the law down because Illinois’ constitution says pension benefits promised to public workers cannot be “diminished or impaired.”
In other words, Illinois public pensions are “untouchable.”
• To recap…
Illinois doesn’t have anywhere near enough money to keep the promises it has made to public employees.
And…
It is illegal for Illinois to not pay what it has promised to public employees.
We see two possible outcomes here…
One, Illinois will have a full-blown pension crisis. Its pension liability will grow and grow until it eats up all tax revenue and bankrupts the state government.
Two, taxpayers will be on the hook. This is the most likely outcome. As a taxpayer, you’re the backstop for these promises. Governments don’t produce any money. They can only extract money from their citizens as taxes.