The Dumpster Fire of Illinois Public Pensions is Still Smoldering

[imoldernu]

The subject is fascinating, as solutions are so open ended.

Though the thread points to Illinois, the problem is nationwide. A search for
"Can a state declare bankruptcy", brings up many articles.

Here's a relatively recent article that widens the subject to include local as well as state problems. Much food for thought, and a look ahead to the longer term effects on all stages of government.

https://www.investors.com/politics/editorials/bankrupt-public-employee-pensions-the-next-big-financial-crisis/

Possibly a consideration for younger FIRE members when choosing future moves... not only for themselves, but for their families. Consider future tax considerations and level of services to be provided by local and state governments. Not a "this year/next year" question, but for a 20 to 40 year retirement.

A follow up, on an included link to Pew Charitable Trusts is here:

https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2018/04/the-state-pension-funding-gap-2016

All above and beyond what we want to know, but for me, one more reason why I'm glad to be old.

 

[rk911]

i retired from municipal govt (IMRF), my wife retired from state govt (SERS). we contributed to both our retirement snd SS.

 

[Rianne]

For example, "A lot of people think that public service is free". You can always find "some guy on the internet" saying stupid things, but I honestly don't think the average IL taxpayer thinks that way. We recognize that we need to pay for services and infrastructure, etc. If you actually think your fellow IL residents believe that, I can see where it would affect your thinking on the issue.

OK, solutions/effects, and the past is the past:

Just like with Social Security, I'd like to see whatever changes are needed now, so that the future is secure. IIRC, a modest increase in SS taxes now will keep it stable in the future. But if they wait, those increases become higher, and will be more objectionable to more people.

As I said earlier, I'm fine with some IL tax increases, and some cuts in services (where it can be done w/o long term consequences) if it is coupled with some real long term solutions. Unfortunately, those solutions won't come without some pain (or they would have been done already). But at this point we have to play the cards we were dealt.

I'd look to model it after the PBGC - over time, roll in some caps on pensions. This way, the little/mid guys/gals won't be hurt at all. Unlike PBGC, it could be graduated rather than a hard cap - say on the amount above $X, you get 75% of original, above $Y 50%, above $Z 25%, etc. Let the actuaries figure where these points need to be. Combined with tax and service adjustments.

edit/add: This would require an IL constitutional amendment, as would a graduated income tax. I'm fine with both, if it leads to a solution.

We can't wish the problem away. But I can move away, which is more and more likely. But that won't help the IL pensioners. Do you really want to drive me and my money away?

-ERD50

When you put your name on the ballet, put ERD50 in ( ). I'll canvass for ya, make calls, put your sign in my yard. I'll feel like "I really know this guy!"

 

[Koolau]

Thanks. In that light, I will try to address this post (and skip any reply to an earlier one, OldShooter handled that just fine):




May I suggest it might help you to get past the emotional aspect of this and focus on solutions and impacts if you rethink some of this.

For example, "A lot of people think that public service is free". You can always find "some guy on the internet" saying stupid things, but I honestly don't think the average IL taxpayer thinks that way. We recognize that we need to pay for services and infrastructure, etc. If you actually think your fellow IL residents believe that, I can see where it would affect your thinking on the issue.

And "we all have gold plated pensions". I don't know how all the pensions across IL are set, but I think it is fair to say that many of them are far more generous than most private pensions. I don't know whether that rises to the level of "gold plated", but it does come into play when taxpayers are asked to pay even higher taxes to support something beyond what they have received.

And "I worked 30 years for Chicago outdoors in the heat and brutal winters." And many people have done this, and won't receive a comparable pension. If you look at the BLS site on top 10 most dangerous jobs, you will see a lot that are not generally associated with a pension at all - farm workers, fishers, loggers, truck drivers, landscape supervisors, etc.

OK, solutions/effects, and the past is the past:

Just like with Social Security, I'd like to see whatever changes are needed now, so that the future is secure. IIRC, a modest increase in SS taxes now will keep it stable in the future. But if they wait, those increases become higher, and will be more objectionable to more people.

As I said earlier, I'm fine with some IL tax increases, and some cuts in services (where it can be done w/o long term consequences) if it is coupled with some real long term solutions. Unfortunately, those solutions won't come without some pain (or they would have been done already). But at this point we have to play the cards we were dealt.

I'd look to model it after the PBGC - over time, roll in some caps on pensions. This way, the little/mid guys/gals won't be hurt at all. Unlike PBGC, it could be graduated rather than a hard cap - say on the amount above $X, you get 75% of original, above $Y 50%, above $Z 25%, etc. Let the actuaries figure where these points need to be. Combined with tax and service adjustments.

edit/add: This would require an IL constitutional amendment, as would a graduated income tax. I'm fine with both, if it leads to a solution.

We can't wish the problem away. But I can move away, which is more and more likely. But that won't help the IL pensioners. Do you really want to drive me and my money away?

-ERD50

In theory, I agree with your thinking. We DO need to pay for services.

The problem is that you have to trust the same folks (maybe different names - but the same folks) who engineered the problem in the first place. It's always "We gotta address this problem (finally), so you all send in your money to meet the immediate issue and, trust us, we'll figure it all out in a year or three."

Just one exhibit A is the way we "fixed" SS back in the 80's. We front load the payments then drop the ball on the actual fix. I could site others, but it would bring out Porky. Naturally, YMMV.

 

[Nords]

+1
From my personal experience, that's how the military and the feds do it. No such thing as "spiking".

I don't know the details on the federal pension, but one of the reasons that the military went to the High Three pension (1980) was explicitly to reduce pension spiking. It was a big deal at the time because we all thought annual inflation of 5%-10% was the new normal.

The military spike wasn't very big, but people would stay for a pay promotion (or a longevity pay bump) and retire as soon as they'd satisfied the minimum time requirements.

When I retired under the "Final Pay" system, the military had just given my entire rank a "retention pay raise" of over 5%. I went on terminal leave six weeks later but that 5% pay raise (indexed to the CPI) will last for the rest of my life. I'm glad that I got it, because it almost made up for all those years of paying me less than I was really worth. And for some of the unpaid overtime.

In 2007 when my spouse was finishing her Reserve contract, DoD extended the pay tables out to 40 years and added a bunch of longevity pay raises at 30 years. ("To retain senior leaders.") However it also ended up boosting her Reserve pension by over 10%. She filed for her Reserve retirement (also Final Pay) less than a year later but will enjoy the benefit of that 10% raise for the rest of her life, too.

 

[Greencheese]

As a millennial living in Illinois (for now) the issue to me is that the individuals who made the decision to under-fund the pensions and benefited from lower than necessary taxes are not the ones being asked to fix the problem. Currently it seems that all solutions focus on extracting more money from individuals like me instead of pushing solutions onto those who made the decisions in the past. Things like benefits offered on day 1 not being changeable irk me as such promises are not available to individuals who work in the private sector.

I've spoken with several late 20's/early 30's professionals in Chicago and the general consensus is that Chicago is a great market to earn money in for now but most individuals who have options do not plan to remain long term. Afterall the appeal of Chicago is you can make near coastal city income levels while paying midwest cost of living expenses, it certainly isn't nature or the weather. It appears Illinois will not make any major tax changes until 2022 but by then the population loss may continue to accelerate to the point its painfully obvious the state is following in the long and slow path towards a Detroit style bankruptcy. Nearly 50% of high school graduates are opting to go out of state for college and most parents are actively encouraging their kids to look outside the state and never come back. The Chicago area housing market never recovered like many other large cities so clearly the market is also quite sluggish on the state and city as a whole for people moving into the region.

This ponzi scheme will come crashing down, the question is can it last another 30 years or will a market downturn sink the ship sooner than later?

 

[JoeWras]

Nearly 50% of high school graduates are opting to go out of state for college and most parents are actively encouraging their kids to look outside the state and never come back.

But people are very loyal to family. I find midwest families really try to stick together. This is one thing keeping Chicago alive.

I left in the mid 80s to pursue a career in tech. Almost all of my extended family (first cousins) have stayed -- until now. At retirement, they are all bailing. Their parents threatened, but stayed. This generation is leaving, and sometimes the kids and grandkids come with.

In retrospect, my problem finding a job in tech in the 80s was an early symptom of the issue. The leaders were too busy playing with money to deal with the pensions, unions, etc. They were not recruiting new companies to the area. I guess they thought Motorola was enough for a demographic of 8 million.

Contrast Massachusetts who was recruiting tech at the time. That has paid off.

 

[Breedlove]

Watched a video on the Chicago Mob during the 1950s , 1960s and 1970s . They needed money to build Las Vegas to what it is today and the banks were refusing loans . So the Chicago Mob went to their friends the Teamsters . Bye Bye Pension plan . Pension Plans are almost a thing of the past , not trying to be snarky . When I moved from Ohio to Texas years ago very few Texas companies had pensions , now fewer . Every company I worked for that had a pension , when the market went down suspended contributions and reduced the plans. But kept up the 401k . Now why it was because a pension always guaranteed a set amount of payout . A 401k ...you are on your own.

 

[ripper1]

As a millennial living in Illinois (for now) the issue to me is that the individuals who made the decision to under-fund the pensions and benefited from lower than necessary taxes are not the ones being asked to fix the problem. Currently it seems that all solutions focus on extracting more money from individuals like me instead of pushing solutions onto those who made the decisions in the past. Things like benefits offered on day 1 not being changeable irk me as such promises are not available to individuals who work in the private sector.

I've spoken with several late 20's/early 30's professionals in Chicago and the general consensus is that Chicago is a great market to earn money in for now but most individuals who have options do not plan to remain long term. Afterall the appeal of Chicago is you can make near coastal city income levels while paying midwest cost of living expenses, it certainly isn't nature or the weather. It appears Illinois will not make any major tax changes until 2022 but by then the population loss may continue to accelerate to the point its painfully obvious the state is following in the long and slow path towards a Detroit style bankruptcy. Nearly 50% of high school graduates are opting to go out of state for college and most parents are actively encouraging their kids to look outside the state and never come back. The Chicago area housing market never recovered like many other large cities so clearly the market is also quite sluggish on the state and city as a whole for people moving into the region.

This ponzi scheme will come crashing down, the question is can it last another 30 years or will a market downturn sink the ship sooner than later?

And do you know how that Detroit style bankruptcy turned out for public employees

 

[samclem]

A 401k ...you are on your own.

And "you own your own." You can take it with you to the next job, nobody is going to raid it, you know exactly how well it is funded and what it is invested in, and you can take your own steps to make sure it lasts as long as you need it, it is in your control.

 

[gwraigty]

And "you own your own." You can take it with you to the next job, nobody is going to raid it, you know exactly how well it is funded and what it is invested in, and you can take your own steps to make sure it lasts as long as you need it, it is in your control.

And someone can inherit the leftovers.

 

[Chuckanut]

And "you own your own." You can take it with you to the next job, nobody is going to raid it, you know exactly how well it is funded and what it is invested in, and you can take your own steps to make sure it lasts as long as you need it, it is in your control.

I would love to see 401k improved and beefed up to reflect today's realities of the market. The guy who first thought them up has stated, IIRC, that the 401k was designed to be a supplement to a pension plan not a replacement for it. As such he thinks it needs to be revised since it is replacing pensions.

https://www.newsmax.com/finance/trevorgerszt/401k-retirement-sole-support/2017/01/10/id/767859/

"Recently these early champions of the 401(k) scheme told the Wall Street Journal the accounts were never intended to replace pensions, nor to serve as a retiree’s entire source of income once they left the workforce. More than thirty years later, these one-time advocates are coming clean about the shortcomings of your 401(k)."

 

[jazz4cash]

Curious to see a newsmax link here. On further inspection the critique of 401k recommends a diversified portfolio including gold. And the author happens to be a gold IRA expert!

 

[Rianne]

Nearly 50% of high school graduates are opting to go out of state for college and most parents are actively encouraging their kids to look outside the state and never come back.

That's interesting. I just heard this on the news.
https://www.1470wmbd.com/university-of-illinois-increases-faculty-as-enrollment-rises/

 

[Texas Proud]

As a millennial living in Illinois (for now) the issue to me is that the individuals who made the decision to under-fund the pensions and benefited from lower than necessary taxes are not the ones being asked to fix the problem. Currently it seems that all solutions focus on extracting more money from individuals like me instead of pushing solutions onto those who made the decisions in the past. Things like benefits offered on day 1 not being changeable irk me as such promises are not available to individuals who work in the private sector.

I've spoken with several late 20's/early 30's professionals in Chicago and the general consensus is that Chicago is a great market to earn money in for now but most individuals who have options do not plan to remain long term. Afterall the appeal of Chicago is you can make near coastal city income levels while paying midwest cost of living expenses, it certainly isn't nature or the weather. It appears Illinois will not make any major tax changes until 2022 but by then the population loss may continue to accelerate to the point its painfully obvious the state is following in the long and slow path towards a Detroit style bankruptcy. Nearly 50% of high school graduates are opting to go out of state for college and most parents are actively encouraging their kids to look outside the state and never come back. The Chicago area housing market never recovered like many other large cities so clearly the market is also quite sluggish on the state and city as a whole for people moving into the region.

This ponzi scheme will come crashing down, the question is can it last another 30 years or will a market downturn sink the ship sooner than later?

From what I read you are wrong.... they have tried a number of times to fix it but all have been defeated in court... seems someone from the side that wants pensions was smart many years ago and had it put into law it cannot change... kinda hard to get past that until you change that law...

 

[JoeWras]

That's interesting. I just heard this on the news.
https://www.1470wmbd.com/university-of-illinois-increases-faculty-as-enrollment-rises/

They've never had a lack of applicants. A slight tweak of 1/2 pt on the ACT could adjust the numbers. And maybe more are accepting the offer when faced the daunting tuition of the alternatives.

Speaking of which... Since U of I will be offering free tuition soon, I doubt that enrollment will be a problem.

https://admissions.illinois.edu/commitment


And more on this program, which states the best students have not been staying.

For years, Illinois universities have watched as thousands of the state's best and brightest students headed elsewhere for college.Lured by generous scholarship offers, and spooked by the state’s budget stalemate and rising tuitions, Illinois students have increasingly pursued their higher education in other states. Enrollment has slid, and Illinois is losing far more local students to other states than it is attracting nonresidents to attend college here.
Now, the University of Illinois and a bipartisan group of lawmakers want to change that.
On Monday, the University of Illinois at Urbana-Champaign is announcing a free tuition and fees program for admitted Illinoisans whose family income meets or falls below the state median.

https://www.chicagotribune.com/news/ct-met-illinois-students-public-universities-20180824-story.html


So, there is contradictory information out there. What is fact, is that Illinois *is* starting a free tuition program next fall.

 

[RenoJay]

I see the creation of a "Chicago/Illinois Dollar" in the future, followed by Zimbabwe-style inflation.

There won't be any inflation with the Chicago/Illinois Dollar. According to the new and exciting "Modern Monetary Theory", a municipality that prints its own currency can print money ad infinitum with no ill effects. What could possibly go wrong??

 

[marinauser]

While Illinois courts have essentially prohibited any reduction of current retiree and current employee health care and pension obligations, that only impacts those employees and retirees. Illinois could have and should change these plans for new hires who, today, are hired at wages that often could not be attained in the private sector. But that will not happen since the unions control the politicians through political donations. Not one effort in the Illinois house or senate has been made to restrict these benefits for future employees so that the problem continues to snowball. I agree that only an utter failure of the state and the city of Chicago will bring about any change through bankruptcy. At some point, as with any socialist state, taking 100% of the money from those that work will not be enough to support the rest of the population and the pyramid collapses.

 

[ripper1]

While Illinois courts have essentially prohibited any reduction of current retiree and current employee health care and pension obligations, that only impacts those employees and retirees. Illinois could have and should change these plans for new hires who, today, are hired at wages that often could not be attained in the private sector. But that will not happen since the unions control the politicians through political donations. Not one effort in the Illinois house or senate has been made to restrict these benefits for future employees so that the problem continues to snowball. I agree that only an utter failure of the state and the city of Chicago will bring about any change through bankruptcy. At some point, as with any socialist state, taking 100% of the money from those that work will not be enough to support the rest of the population and the pyramid collapses.

I'm not sure what kind of healthcare benefit state employees get but most city of Chicago retirees pay fully for their health care. That benefit was taken away a few years ago. Oh wait they do offer an annuitant and spouse a plan from bc/bs that cost 2700 dollars a month.

 

[rk911]

my wife receives a pension from one of the state systems in Illinois. prior to medicare she did receive state provided healthcare at no premium cost to her but not because it was a retirement benefit. retirees in her system were charged a premium based on a sliding scale of their years of service. she had 37-yrs of service which equaled no premium cost.

 

[Just_Steve]

All I know is my union in NY took a 3 year contract with 0%, 0%, 0% raises. Why you may ask? Well to pay retiree health care. Nothing is free.
I wonder how many contracts in Illinois/Chicago were signed with lower percentages or give backs to secure their health care?

 

[NoiseBoy]

While Illinois courts have essentially prohibited any reduction of current retiree and current employee health care and pension obligations, that only impacts those employees and retirees. Illinois could have and should change these plans for new hires who, today, are hired at wages that often could not be attained in the private sector. But that will not happen since the unions control the politicians through political donations. Not one effort in the Illinois house or senate has been made to restrict these benefits for future employees so that the problem continues to snowball. I agree that only an utter failure of the state and the city of Chicago will bring about any change through bankruptcy. At some point, as with any socialist state, taking 100% of the money from those that work will not be enough to support the rest of the population and the pyramid collapses.

Illinois did enact some pension reforms for new employees starting in 2013. They include changes to how the COLA is calculated and caps on pensionable earnings. Taken together, they help bend the curve a bit, but they are too little too late IMHO to prevent insolvency of the State's primary pension plans at some future date. Based on some recent reading, I think the biggest risk to the plans is a prolonged period of negative equity returns because some of the portfolios (funding levels?) are not high enough to survive both a sustained portfolio loss and continued pension payments.

 

[ziggy29]

Based on some recent reading, I think the biggest risk to the plans is a prolonged period of negative equity returns because some of the portfolios (funding levels?) are not high enough to survive both a sustained portfolio loss and continued pension payments.

Well, I remember a decade years ago after the near meltdown of the global economic markets, and many of us were noting pension plans with unrealistic expectations on return rate given the appropriate asset mix for a pension plan. Some were basing benefits on assumed returns of 8%.... and sometimes more! Some of them have reduced their assumptions, and maybe subjected new hires to them, but not all have done that, at least as far as I'm aware.

It doesn't take a lot of bad economic weather to ground a voyage that requires almost nothing but sunny skies as far as the eye can see.

 

[ripper1]

Some here I calling for doomsday for public employee pensions. I believe from what we have seen so far in major cities like Detroit and Stockton there has been not much of a haircut for them. I believe Detroit employees took a 5% hit and no COLA. I think the police and fire took even less of a hit. It appears creditors mostly were hit hardest. Does anyone have any examples of where the public employees lost everything or mostly everything?

 

[Texas Proud]

Some here I calling for doomsday for public employee pensions. I believe from what we have seen so far in major cities like Detroit and Stockton there has been not much of a haircut for them. I believe Detroit employees took a 5% hit and no COLA. I think the police and fire took even less of a hit. It appears creditors mostly were hit hardest. Does anyone have any examples of where the public employees lost everything or mostly everything?

I am not going to look to see if my memory is gone or still there...


I do remember reading about some city in Alabama or maybe Georgia (well, somewhere down south) where they took a big hit... not sure if it qualifies for mostly everything... but I can tell you that if I had a pension and I lost even 50% of it I would say I lost 'mostly everything'...