Your State's Pension Liability

[gauss]

BTW - This is the first time I have seen a "Hot Topic" thread. I am happy to see new tools to help manage discussions in addition to the pig.

Kudos to the developers/moderators/staff.

-gauss

 

[Mulligan]

The SS opt out makes me curious. I wonder if there is any correlation between the states with well funded plans and the being in the SS system? I ask that because my state is well funded and we all had the opportunity to pay into SS. I didn't care much for this in my 30's, but today I am glad that others had more wisdom than I.

What I have noticed is that both Detroit and Illinois (along with several lesser government institutions) are having pension funding problems and also opted out of SS. So, the poor workers not only have their pensions at risk, but they never had the opportunity get the one pension backed by the folks who own the money printing press. Not so good.

I would suspect there is more correlation between the pension systems to rely on the legislature making yearly appropriation dumps into the system as opposed to govt systems like mine where the money is distributed to the school and then the school has to make the mandatory match contribution when it is deducted from employees check. Less chance of being tempted to delay, as it has to go in. This system simply mimics the way SS receipts are collected except it goes into a trust fund.
In my system anyways, the members (not government entity) took a one time vote in the 1950s or so on whether to opt in or not into SS and decided not to.
However, the KC and STL pension systems are a hybrid SS/Pension. Their pension sucks to put it eloquently and they rarely get COLAs while we get an annual one. Who knows....



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[Running_Man]

Moody's today downgraded Chicago 2 notches, that is reality and show the seriousness of the effects of retirement for Chicago and right behind it the state of Illinois. The city has run out of tollroads and parking meters to sell and Moody's is on lookout for further downgrades with Moody's actually stating that :

Our negative outlook reflects our expectation that Chicago's credit challenges will continue, both in the near term and in the long term. Immediate credit challenges include potential draws on liquidity associated with rating triggers embedded in the city's letters of credit (LOCs), standby bond purchase agreement (SBPA), lines of credit, direct bank loans, and swaps. The current rating actions give the counterparties of these transactions the option to immediately demand up to $2.2 billion in accelerated principal and accrued interest and associated termination fees. Of this amount, the GO and sales tax revenue rating actions trigger $1.7 billion of potential payments; the second lien water revenue rating action triggers $99 million of potential payments; and the second lien sewer revenue rating action triggers $355 million of potential payments.

The end game for public pension plans that have not been properly contributed to is rapidly coming to a head with the aging of the American population.

 

[steelyman]

Moody's ratings make me think of subprime mortgages.

 

[aja8888]

Moody's ratings make me think of subprime mortgages.

But the subprime mortgage holders were Moody's clients and paying for the ratings on the securities.

 

[ERD50]

Moody's today downgraded Chicago 2 notches, that is reality and show the seriousness of the effects of retirement for Chicago and right behind it the state of Illinois. The city has run out of tollroads and parking meters to sell and Moody's is on lookout for further downgrades with Moody's actually stating that :


The end game for public pension plans that have not been properly contributed to is rapidly coming to a head with the aging of the American population.

Another discussion in that Chicago Tonight show was something about the State allowing Chicago (or other municipalities) to declare bankruptcy. The effect would be that the city could then negotiate the pensions under their control, because if bankrupt, those pensioners would be standing in line with other creditors, so the 'guarantee' would be gone.

States cannot declare bankruptcy, so no effect there. That would be a very rough thing, but it is at least being talked about.

I don't think casinos or a sales tax on service gets them far. Looks bleak. It's a shame. For all this state has to offer - a world class city, a supply of good water (the Michigan Ocean as we call it), great farmland, major transportation rivers on much of it's borders, railroad links, and fantastic weather year round (just testing if you are still reading ) - we ought to be near the top in the nation in terms of financial security.

-ERD50

 

[Mulligan]

Another discussion in that Chicago Tonight show was something about the State allowing Chicago (or other municipalities) to declare bankruptcy. The effect would be that the city could then negotiate the pensions under their control, because if bankrupt, those pensioners would be standing in line with other creditors, so the 'guarantee' would be gone.



States cannot declare bankruptcy, so no effect there. That would be a very rough thing, but it is at least being talked about.



I don't think casinos or a sales tax on service gets them far. Looks bleak. It's a shame. For all this state has to offer - a world class city, a supply of good water (the Michigan Ocean as we call it), great farmland, major transportation rivers on much of it's borders, railroad links, and fantastic weather year round (just testing if you are still reading ) - we ought to be near the top in the nation in terms of financial security.



-ERD50

Too many problems up north, but if Southern Ill wants to be annexed by MO, I am fine by that.


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[eytonxav]

I'm not a lawyer, but I would think this would violate the equal protection clause of the fourteenth amendment. It protects government employees but not private employee's pensions, yet the private citizens will be the ones paying for it through higher taxes. Like I said, I'm no lawyer, but this doesn't seem fair.

I really wonder if having to pick up the tab for the shortfall will accelerate the general population in Illinois to move from the state. If that occurs, who will be left to take care of this already dire situation?

 

[utrecht]

Most people couldn't tell you the funding percentage of their own pension fund. Alot of people couldn't tell you their 401 balance to within 10%. Do you really think people in Illinois know that much about the State pension fund that they aren't a member of? My guess is the ones who do know will just stay and gripe about it. I can't believe large amounts of people would uproot their entire lives and move just because of that.

 

[steelyman]

I really wonder if having to pick up the tab for the shortfall will accelerate the general population in Illinois to move from the state. If that occurs, who will be left to take care of this already dire situation?

My departure from IL was wholly to be in a different place I like very much and have wanted to live in for a long time. IL (as well as other states in that region) has a lot going for it.

 

[JoeWras]

Illinois has so much to offer. I grew up there and loved it. I moved away in the 80s before all this blew up for different reasons than politics, that is, my job type was not in demand in IL.

In recent years I have considered a move back to be near family, but this issue of state financing has given me cold feet on the idea. I also don't like literal cold feet that I get in Chicago in winter.

I hope that IL works it out. Too much good in that great state.

That said, I also hope it doesn't become a Greek-like debacle. If IL looks for federal bail out, it could cause some animosity from state to state.

BTW, my dad retired in the late 80s with a union job not in the state system. He complained bitterly at the time about public pensions when he compared them to his non-cola'd version. I didn't understand it at the time, but this brings it to light. RIP, Dad. You were right.

 

[Fermion]

Most people couldn't tell you the funding percentage of their own pension fund. Alot of people couldn't tell you their 401 balance to within 10%. Do you really think people in Illinois know that much about the State pension fund that they aren't a member of? My guess is the ones who do know will just stay and gripe about it. I can't believe large amounts of people would uproot their entire lives and move just because of that.

Well, it isn't only flight of the wealthy. Potential new residents and businesses may decide against moving to the state if the debt burden overhang will be put on their shoulders via taxes. I bet we have more than a few on this forum who place a check in the negative column when making a decision to move to this state.

 

[ERD50]

... Do you really think people in Illinois know that much about the State pension fund that they aren't a member of? My guess is the ones who do know will just stay and gripe about it. I can't believe large amounts of people would uproot their entire lives and move just because of that.

Probably true, but it doesn't take a large number. The ones with the most money, have the most motivation, and the most options. They're the ones paying the most taxes, and likely using the least resources, so they have a multiplier effect.

And once those people leave, taxes must be raised even higher (assuming no other changes) on the remaining people, increasing their incentive to move, and so on. Taken to it's absurd extreme - there is going to be one person left with a really, really high tax bill! It won't be me!

And then you have businesses. Large businesses might be able to swing a deal, because they need an incentive to move here (or simply use this weakness as a negotiating tool). But that deal means they aren't paying the full weight of their taxes. And other businesses may move away (for reasons stated above), and other businesses will decide to open on the border, to take advantage of some of what IL has to offer, but not have to contribute in the same way.

Those are all big negatives, with big multipliers.

And then... with fewer businesses, there is relatively large labor pool, so wages go down. This creates more push for increased minimum wages, which might hurt more businesses, and if that wage is higher than other states, drive more business away.

It's a sad downward spiral.

I think the solution to the problem is better efficiency, and some shared pain. I'm not holding my breath.

-ERD50

 

[steelyman]

There's a phrase often seen that seems a little cliche to me but is good advice in general: "It's better to retire TO something, not FROM something".

 

[Chuckanut]

I think the solution to the problem is better efficiency, and some shared pain. I'm not holding my breath.

-ERD50

+1

The idea that "Your half of the boat is sinking" never made much sense.

 

[Sunset]

Yes, you have quite the mess in Illinois. The pension mess and four of your last seven governors have been incarcerated! (as of 2013). Not many other states can make that claim.

My sister has a home there and they can't wait to get out once my BIL retires in a couple years. I suspect that ultimately we'll hear a giant sucking sound of people leaving, which unfortunately exacerbates the problem.

Not only that, but the State tax was raised a few years ago to 5% to help pay off some of the debts, however instead the debts continued to rise.

Now the tax rate has been lowered to 3.75% by the new governor, since the increase only really went to increased spending.

My belief is the tax rate will need to jump to 10% and they will need to tax all pensions to pay off these generous (pay + pension promises) made in the past. This will be constitutional, as the retiree's get their pension at the full amount, then have to pay taxes on it, the actual pension is not reduced.

Count me in as one of the sucking sound makers

 

[Sunset]

Most people couldn't tell you the funding percentage of their own pension fund. Alot of people couldn't tell you their 401 balance to within 10%. Do you really think people in Illinois know that much about the State pension fund that they aren't a member of? My guess is the ones who do know will just stay and gripe about it. I can't believe large amounts of people would uproot their entire lives and move just because of that.

For the people who do pay attention, they will quickly realize the 2011 number of Unfunded Liability/Capita: $6,505 is complex.

Since a good portion of folks in IL are poor, it means the folks who have saved for retirement/have a good job will be paying the poor folks share.

So the people with lots of savings could easily face an extra charge of many multiples of that number. Personally I will not be paying $6K or $30K for some folks pension plans when I don't even have any pension.

What I save in paying will generously more than cover the cost of a move

 

[Dash man]

Eventually, the constitution will need to be modified again to undo the unintended consequences. Hopefully the Illinois economy will not be in a death spiral before then.

 

[theoldcoach]

It's never a crisis until it's a crisis. Here is an excerpt from a report about the history of pensions in IL done by the IBHE in 2013.

"Before the 1970 Illinois Constitutional Convention, the pension rights of most state and local employees, for whom participation was mandatory, could be modified or abolished by the legislature at any time. At the time of the Convention, the Pension Laws Commission reported that SURS was 47% funded, General Assembly Retirement System (GARS) 68.5%, State Employees Retirement System (SERS) 43%, Teacher Retirement System (TRS) 40% and Judicial Retirement System (JRS) 32.3%. Noting the difference in the level of GARS funding and that of the other plans, public employees successfully lobbied for inclusion of the Pension Clause."

I am sure that the combined ratio in 1970 was higher than the current ratio, but this shows that the crisis is far from new. Legislators knew it then, and chose to continue underfunding. Actuarial data suggests that Tier II is OVERfunded. The $100 billion question is how to do we get from here to the long run of actuarial data?