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Officer Down

Monday, March 25, 2013

PENSION: Illinois hits a sorry milestone

 In stacks of $100 bills, that amount would weigh 10 tons. It's enough to buy Boeing Co. and Kraft Foods Group Inc. combined, with a few billion left over for dessert. In the second Austin Powers movie, Dr. Evil stole a nuclear weapon and demanded $100 billion from the whole world.

--Don't worry about a thing folks.
Governor Bumblin' Stumblin' Quinn, Mike Madigan, John Cullerton, and Tom Cross have everything under control.
Why do you think the state legislature went on vacation?--
Duke

Story at Crain's Chicago Business


By Paul Merrion
March 25, 2013

Sometime this month, Illinois probably exceeded $100 billion in pension debt, a sorry milestone in
the state's long slog to fiscal hell.

Illinois would be only the second state to reach the 12-digit mark. But California, the previous epic fail, has a much larger tax base and is on the mend.

Pension statistics tend to make eyes glaze over, and the $100 billion moment is an unofficial, back-of-the-envelope calculation. But it's an undeniably big and potentially symbolic number as state legislators wrestle with the shortfall in money owed to current and future retired teachers, judges, state workers and even lawmakers themselves.

“We've been saying, 'Hey, we have almost $100 billion in debt' “ for months, says Illinois Sen. Daniel Biss, D-Evanston, a leader in the pension reform effort. Nevertheless, “it's a hell of a number.”

In stacks of $100 bills, that amount would weigh 10 tons. It's enough to buy Boeing Co. and Kraft Foods Group Inc. combined, with a few billion left over for dessert. In the second Austin Powers movie, Dr. Evil stole a nuclear weapon and demanded $100 billion from the whole world.

More important, the ransom for the state's pension debt comes to $7,767 for every man, woman and child living in Illinois, or more than $21,100 per household.

The exact date for reaching $100 billion depends on how state retirement investment funds have performed, which won't be known until well after the end of the state's fiscal year on June 30. “Anytime the markets do well, we're going to do well,” says William Atwood, executive director of the Illinois State Board of Investments.

The rule of thumb used by Gov. Pat Quinn and others calling for reform is that the state's unfunded pension liabilities are growing by $17.1 million per day and will reach $100.8 billion by June 30. At that rate, the $100 billion threshold would be crossed in mid-May.

But that calculation assumes unfunded liabilities were $94.6 billion last June, based on actuarial asset values, which average investment gains or losses over several years. Based on the more commonly used fair market value of assets, the state's unfunded liabilities were $96.8 billion in mid-2012 and would have hit $100 billion in January with a growth rate of $17.1 million a day.

However, funds have been outperforming their actuarial growth rate, which means unfunded liabilities are growing less than $17.1 million a day. Split the difference between January and May and the $100 billion mark would be reached sometime in March. Of course, if the funds perform really well this year, there's a chance the mark would be pushed into the future.


The larger question is whether a $100 billion shortfall provides any more motivation than a $96.8 billion one.

“I don't think that number will shake the lethargy of the General Assembly,” says Rep. Jack Franks, D-Marengo, who favors faster action on reform. “It becomes a statistic where it doesn't mean anything, it's just so big.”

Despite some progress, there's no endgame in sight. The Senate last week passed part of a reform package pushed by Senate President John Cullerton, D-Chicago, but it rejected a bill sponsored by Mr. Biss, which mirrored reforms advancing in the House. On Thursday, the House passed a different bill addressing one piece of the puzzle.

The most immediate problem for Illinois is the debt's effect on the state's credit rating, which is approaching the lowest investment grade. First, it raises the cost of the $800 million the state plans to seek in the bond market next week. If it goes any lower, the state's bonds will be off limits for many large, institutional buyers that can't buy securities rated that low, which will drive up interest rates.

The state's pension and budget woes also are dragging down the credit ratings of the city of Chicago and state universities, which depend on a steady flow of state funds.

But the key measure of creditworthiness is not the size of a state's pension debt but the size of that debt relative to the state budget and the state economy.

Hitting $100 billion “isn't all that relevant,” says Ted Hampton, vice president and senior analyst at Moody's Investors Service, a New York credit rating agency that has downgraded the state four times in the last four years. But compared with the size of Illinois' budget and gross domestic product, “it makes the state an outlier among its peers.”

Rhode Island, for example, a state that enacted drastic reforms for its troubled system in 2011, saw its pension debt hit more than 50 percent of its annual state budget and nearly 9 percent of the state's gross domestic product. At $100 billion, Illinois pension debts stand at about twice annual state expenditures, including capital spending, and more than 15 percent of its annual economic output.

“In the last couple of years, we've seen the Legislature and the governor repeatedly fail to muster the political willpower to make meaningful changes,” Mr. Hampton says. “If the state fails to take meaningful steps to address this problem, we will take action.”

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