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Illinois Pension Crisis


It’s just the math. Simple math, actually.

Start with the five, state-sponsored pensions, though that is just the start.

Officially, their unfunded liability is about $130 billion. “Unfunded liability” means the shortfall in the amount the pensions should have on hand today in hopes of having it grow to meet the obligations that will be owed to state workers as they retire.

For some perspective, that $130 billion would be the state’s entire revenue for about 3 1/2 years.

However, no reputable financial economist believes the official numbers are accurate because they are built on unrealistic assumptions. Nobel Prize-winning economists William Sharpe and Eugene Fama say the real numbers are two or three times as bad as the official numbers. “It’s a crisis of epic proportions, Sharpe has said. “This is crazy.”

It gets worse

The state is obligated to pay healthcare, too, for its retirees. The present value of that liability (adjusted down, that is, to reflect that it doesn’t have to be paid today) is another $50 billion, officially, but that number too is probably badly understated. And healthcare is an entirely unfunded obligation — nothing is set aside to pay it.

Then there are the local and municipal pensions — over 600 of them in Illinois. Most towns and cities, including Wilmette, have their own separate pensions for police and fire. On average, they have set aside only about half of what they should have to meet pension promises already made.

If you live in Cook County there’s much more for all the other overlapping jurisdictions: Taxpayers here are obligated for separate pensions of the county itself, plus, Cook County Forest Preserve and the Metropolitan Water and School District. If you’re in Chicago, add the four city pensions and another for the Chicago Public School district. They’re all far beyond dangerously underfunded.

It’s through this consolidated, overlapping view that the numbers really become bleak. The true liability combined, statewide, approaches $300 billion. Per household, including other debt, Chicagoans are on the hook for over $80,000 each. Most Chicago households just don’t have the ability to contribute much towards that. This leaves households with any means having a liability of many hundreds of thousands of dollars.

The Legal Noose We Are In

The Illinois Supreme Court has delivered firm, clear interpretations of the provision in our state constitution that says pension benefits cannot be “diminished or impaired.” Put simply, no benefit reductions can be made. That’s not just for retirees, or for benefits already earned. Pension benefits promised at the time a state worker was hired also cannot be reduced. That includes healthcare benefits. These rulings apply to the state pensions as well as all local pensions.

So, the “unfunded liabilities” you always read about cannot be reduced under our constitution. These debts are entirely for work already performed. Switching to a new system, such as a 401(k)-style program, can only be done for new hires and doesn’t reduce unfunded liabilities.

This leaves only two possibilities for reducing the pension debt Illinois faces:

  • A constitutional amendment deleting our pension protection clause, or
  • A federal bankruptcy proceeding.

The first option, a state constitutional amendment, may not work for legal reasons. It would still be challenged as a violation of several parts of the United States Constitution, which would take many years to litigate. In any event, no effort is being made to amend our state constitutional pension protection.

This leaves only a bankruptcy proceeding in federal court. Bankruptcy would trump the Illinois pension protection clause and allow reduction in pension promises made.

The Bankruptcy Code allows for towns and cities – not states – to file for bankruptcy but only if their state has authorized it. Illinois has not authorized it in contrast to Michigan, for example, where Detroit was authorized to go into bankruptcy and reduce its pension debt.

As for Illinois itself, bankruptcy isn’t now an option under federal law. However, bankruptcy-for-states could be authorized by Congress, though legal challenges would be made.

The Hole Deepens Every Day

For most of Illinois pensions, the unfunded liability grows deeper every day. This is  because employees and the government don’t contribute enough to fund the growing liabilities. The annual contributions by the state for its pensions, and by municipalities for their pensions, are set by state law. But they are way too low. This is the primary reason why, each year, you read that unfunded liabilities have grown by billions — or tens of billions.

You will often hear Illinois politicians bragging to the effect that “we made the pension contributions the actuary said were needed.” No! They are referring only to the actuary’s calculation of what the state law says they had to contribute, which is much less than those same actuaries say is needed to properly fund the pensions.



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