In the Chicago Tribune today, there’s a story written by Elizabeth Campbell about the Illinois pension situation with the headline “Every person in Illinois owes $11,000 for pensions, with no fix in sight.”
The article touches on many of the important themes I discussed last September in a post about an eventual Chicago or Illinois bankruptcy.
Those themes include the following:
1. The Illinois pension problem is unimaginably large.
Three years ago Tuesday, the Illinois Supreme Court struck down the state’s attempt to cut its employees’ pension benefits to chip away at a retirement-system debt that’s swelled to almost $11,000 for every man, woman and child.
2. As time goes on, the Illinois pension situation will worsen due to the rules of compound interest.
Illinois failure to address its pension crisis has resulted in further deterioration of the state and cities’ financial condition, exorbitantly high borrowing costs, and an inability to address other critical needs at the state and local level,” said Laurence Msall, president of the Civic Federation, a Chicago nonprofit that tracks state and municipal finances. “Time is not your friend when your liabilities are compounding and your revenues are not.
3. Illinois politicians are utterly incapable of solving the problem. The best they can hope to do is kick the can down the road and delay the day of ultimate reckoning.
There hasn’t been any progress made,” Dick Ingram, executive director of the Illinois Teachers’ Retirement System, the state’s largest pension. “It’s a case of the numbers have gotten so big that nobody honestly really knows what to do.
4. As the end of the road (bankruptcy) approaches, Illinois residents should expect to see higher taxes and the state should expect to see credit downgrades.
The longer the state doesn’t address the pension crisis, the closer Illinois gets to taxes that are overly burdensome, to credit downgrades, to not paying pensions or even bond defaults, said Richard Ciccarone, president of Merritt Research Services.
Unfortunately, the pension situation in Chicago is no better than the Illinois pension situation. Moreover, other states and municipalities outside of Illinois have similar pension funding problems, although not to the same extent as the underfunding disaster in Illinois and Chicago.
When the next stock market downturn occurs, I expect that we will see a lot more articles like this. The pension situation across the United States is way worse than everybody thinks it is because most pension investment return assumptions remain far too high.
And, eventually, I still expect that will see a Federal bailout. The state of Illinois can’t print money to make its pensions whole, but the U.S. Treasury can and probably will someday.