STUMP » Articles » Illinois Budget and Pension Buyout: Much Ado About Awful » 7 June 2018, 03:31

Where Stu & MP spout off about everything.

Illinois Budget and Pension Buyout: Much Ado About Awful  


7 June 2018, 03:31

The Illinois budget passed last week, and signed by Illinois Governor Rauner this week, is a sham.

Shamtacular, one may say.

And the shammiest of shamtaculars is what happened with pensions.


Reuters: Savings from Illinois’ pension buyout plan could fall short

CHICAGO (Reuters) – Illinois might not be able to bank on all of the $423 million in much-needed pension savings from a buyout plan included in a fiscal 2019 budget that received final approval in the state legislature on Thursday, government finance experts said.

The budget for the fiscal year that begins on July 1 calls for bond-financed buyouts of pension benefits after past attempts to cut retirement benefits were tossed out by courts on constitutional grounds.

MORE BONDS?! Dear lord.

The fact that buyouts would be voluntary raised concerns about the feasibility of the projected savings.

Illinois is struggling with an unfunded pension liability that has climbed to $129 billion after years of skipped or actuarially inadequate annual state contributions to its five retirement systems. Those contributions are projected to grow from $8.43 billion in fiscal 2019 to just over $10 billion by fiscal 2023, according to a state legislative commission report.

Under the buyout plan, current workers could cash in the 3 percent compounded cost of living adjustment (COLA) owed them in retirement for 70 percent of the value and a reduced 1.5 percent COLA. The state would also offer vested former workers 60 percent of the value of their pensions if they choose to end them.

Steve Malanga, George M. Yeager Fellow at the Manhattan Institute, a conservative think tank, called the savings from the buyouts “speculative.”

See, people like Steve Malanga are professional on this subject.

I’m not, at least not on my blog.

The normal term for these “savings” is: bullshit. The piece has info about a prior public plan buyout:


So far Missouri is the only state to offer pension buyouts to former workers, according to Keith Brainard, research director at the National Association of State Retirement Administrators. He added he is unaware of any states buying out COLAs.

Of the 17,005 former workers in the Missouri State Employees Retirement System, 3,740 applied for a lump sum payment, resulting in a first-year saving of about $2.5 million and a projected long-term reduction in state contributions of nearly $90 million, the pension fund reported in January.

Now keep in mind, that was a complete buyout of pension promises, not simply whacking at the COLA.

The Missouri buyout was offered only to ex-employees not already retired, but vested in the system, and I think there was some sort of cap on the buyout as well. I mean, if you had 30 years of experience, and could get a full pension once retired, you weren’t offered the buyout. I’m not going to dig into the details of the Missouri buyout.

But it turns out I was wrong about the Illinois buyout stuff — evidently, there was more than just COLAs involved.


Via Capitolfax: A document showing the pension changes.

There are four pieces, and the fourth part has no impact re: costs.

Let’s look at the other three parts.

Part 1 -

Tier 1 Pension Buy-Out for Vested, Inactive Members

Offers a pension buy-out in an amount estimated at 60% net present value of assets to all Tier 1 members who have a vested pension but are no longer active members of SERS, SURS, and TRS.

Estimated Savings: $41M

A maximum of $1 billion in bonds over the course of 3 years will be issued to pay for this proposal and the 3% COLA buy-out.

This is the part equivalent to the Missouri offer – a buyout of those in the oldest benefit level (aka richest benefits), as a lump sum, and if they take it, that is off the books.

Note – they assume only $41 million in savings from this. That’s nothing compared to the over $100 billion hole.

Part 2:

3% COLA Buy-out

Provides retiring Tier 1 members an option to have their automatic annual increases calculated at 1.5% in exchange for an accelerated pension benefit payment equal to 70% of the difference between the actuarial present value of the automatic annual increase under the Tier 1 provision (3.0%) and the actuarial present value of an automatic annual increase of 1.5 %.

Estimated Savings: $381.9M

A maximum of $1 billion in bonds over the course of 3 years will be issued to pay for this proposal and the buy-out for vested, inactive members.

$382 million? That’s a bit more like it, but with the $41 million in part 1 (if we think those numbers are real), that doesn’t even get us to a half billion. And they’re going to issue up to $1 billion in bonds to cover this less than $1 billion in supposed savings.

Note: the Illinois pension hole is much larger than $100 billion, and that’s using official numbers (which may be a bit optimistic).

Okay part 3:

Reduce Spiking Cap to 3% from 6%

Reduces the salary spiking cap from 6% to 3% starting in FY 19. Any pension costs due to a salary increase over 3% would be covered by the local employer.

Estimated savings: $22M

So let’s add up these estimated costs: 41 + 382 + 22 = $445 million in lightening of the balance sheet for pensions.

Of an over $100 billion hole. Let me just use that $100 billion – the savings are supposedly less than 0.5% of the current problem.

That’s essentially a sneeze in public finance.


Storytime: when I was in elementary school, the IBM PC came out along with a dot matrix printer. My dad worked for IBM, so we had both in our house. I don’t think any of the other kids in my school did.

So here’s what I did with my privilege: I decided to write a BASIC program to print out one million Xs, on the contiguous dot matrix printer paper, and then we’d pull the sheets of paper out to see how big that was.

I’m not going to do that to you (fwiw: I remember I had 80 characters per row, and the thing, with the spacing I had, I believe it was 50 rows per page — so 4000 Xs per page. So it was 250 pages – with pages 11 inches long, so stretched out it was about 230 feet. Less than a football field.)

But let me show you what 0.5% looks like: the orange is 99.5% and the blue is 0.5% -

Maybe you don’t like vertical – here’s horizontal:

Again, it’s the blue part.

You think that’s big savings?

Separately – of the 230 feet of 1 million Xs, 0.5% would be 1.15 feet. Does that sound substantial to you?


Additional comments from an Illinois politician:

  • UPDATE *** From Rep. Mark Batinick (R-Plainfield)….

There are a lot of misconceptions about the pension buyouts. Let me clarify a few things:

Is the only savings the “haircut” annuitants take to get the lump sum?

No. Depending on the system, we have an expected rate of return of 7-7.25%. Therefore the unfunded portion of the shortfall grows at that amount each year. By bonding to buy people out of the system we are saving interest costs because we can sell bonds at less than 7% right now. The spread between 7-7.25% and whatever we sell the bonds for is additional long term savings.

Will anyone take the buyout?

When I introduced HB4427 in Jan 2016, buyouts had only been done in the private sector. But since then, Missouri passed a bill very simliar to the HB315 I filed last Jan. That bill is for vested inctives. In Missouri there was a 22% take-up rate. That is the take-up rate that is being used.

What is done with the money?

It does need to be rolled into a qualified retirement account. It will not be immediately taxed by the Feds. But, once it is in the account the annuitant can do with it whatever it wants to do.

What about negative-selection?

The reason there is a “time-window” for these buyouts is to limit negative selection. People have to decide quickly. Plus, at a haircut of 30%-40% we would have to have a whole bunch of sick people in the state to have to plan lose money.

Believe that if you will… especially since they’re going with the Pension Obligation Bond logic.


No, not me.

Jane the Actuary, aka Elizabeth Bauer, responds: No, Illinois Hasn’t Solved Its Pension Crisis

What’s the Catch?

First, the pre-retirement lump sum buyout takes advantage of financially vulnerable people.

The buyout of terminated vested former employees is at terms that are a significant disadvantage to those employees. Even in ordinary circumstances, the “liability” that the state uses is based on an interest rate equivalent to expected return on assets. When a private pension plan provides a lump sum payout, they use bond rates, which are lower, and which give workers higher lump sum payouts. But the program to be offered by the state reduces benefits even further, by taking what would have been (not really) actuarially fair lump sums and reducing them with a 60% factor — a reduction which would not be permitted in private-sector plans.

This means that the program won’t appeal to people who do their math and determine, wisely, that this is a bad deal financially. But it will appeal to those who are financially vulnerable and need of an extra cash infusion now, regardless of how much retirement income they’re sacrificing later. Now, in the case of Missouri, the average payout was $14,000, which suggests that these were fairly small accruals to begin with, and, heck, one could further justify the whole thing by saying that these benefits were far more generous than these (former) employees “deserved” in the first place — but, much the same as relying on lottery revenues which prey on the poor, it’s still an ethically questionable method.

Second, the COLA buyout is an invitation to anti-selection.

Anti-selection, for those who are unfamiliar with the term, refers to people gaming the system in various ways. Do you know that you’re in poor health and buy life insurance or health insurance? That’s anti-selection, and that’s why life insurers have medical exams to try to catch any health issues, and why health insurers conventionally had restrictions on pre-existing conditions, and why the ACA attempts to mitigate the problem with limited enrollment periods. With respect to this sort of buyout, anti-selection means that those people who are in poor health and who expect to die early, will be the first ones to take this buyout, boosting the actual average longevity of the remaining group, and raising the actual long-term cost of the benefits.

Now, if this were an actuarially fair buyout, based on a true actuarial value, without the reduction factor or the high interest rate (relative to the corporate world), you might get a diversity of takers, including those who believe their expenses will decrease from year to year, as they reduce their traveling or eating out, for instance, but who want to spend some cash up-front, say, to pay down debts, pay off their mortgage, buy a second home, or the like. You might get those who think they can do better in the stock market.

But since this isn’t actuarially fair, again, this is far more attractive to those who know they’d have not benefitted much from the COLA adjustment in any case. To be sure, the degree of antiselection is unknown, and may be balanced out by some number of healthy, long-lived people who want to take the cash now (see #1, financially vulnerable people), but it’s unlikely we’ll see the forecast savings actually materialize over the long term.

Third, it is not yet clear to what extent the calculation of the savings from these buyouts were the result of genuine actuarial analysis versus a back-of-the-envelope calculation.
Oh, and, don’t forget: the projected savings is a drop in the bucket compared to the overall $130 billion shortfall.

I can answer what I bolded, very easily: given the speed that this went through the Illinois legislature, just as with the Tax Cuts and Jobs Act of 2017, even if actuaries were involved, this would be a very rough estimate and not a full work-up.

But actuaries are often wrong, especially if the valuation assumptions are given to them by politicians.

So that miniscule 0.5% savings could be even smaller.


Let’s see what rating agencies/analysts said: Grading on the Illinois scale: a flawed budget beats no budget

CHICAGO – With the ink still drying on Illinois’ fiscal 2019 budget, Gov. Bruce Rauner defended the $38.5 billion package as a “balanced” bipartisan compromise that moves the state in the right direction despite its flaws.

Municipal bond analysts offered a tougher assessment after their initial relief that the state passed a budget at all, while secondary market traders saw the bright side, bidding up Illinois paper.

“At least the lies are bipartisan this time,” Municipal Market Analytics wrote in its weekly market commentary.

The new budget is “at least 3-4% reliant on one-time revenues and aggressive assumptions while mostly ignoring the vendor payables and long-term pension funding crises,” according to MMA.
Municipal market traders rewarded Illinois with a steady narrowing of spreads. “This is a credit positive for the state which risked its investment grade rating last year after failing to adopt a spending plan on time,” Bank of America Merrill Lynch said in its Municipals Weekly commentary published Monday. “We expect the rally to continue.”

Budget watchdogs zeroed in on the budget’s flaws, challenging assertions that it is balanced and chiding lawmakers for putting off needed work, while municipal analysts say it’s clear the budget is designed to get lawmakers through the election cycle with the state’s low investment grade rating intact.

Only one of the three rating agencies – two of which rate the state at just one level above junk – have so far issued formal commentaries.

“Timely enactment of a fiscal 2019 budget in Illinois is consistent with the stable outlook S&P Global Ratings currently maintains on the state’s credit rating” of BBB-minus, analysts wrote Tuesday. “While the emergence of a more collaborative budget process has potentially constructive credit implications, the substance of the package largely represents an extension of the status quo.”

What happened with Illinois bond spreads as they approached a budget.

Nobody’s ecstatic, and nobody’s particularly sad.

Lots of people are skeptical on the savings and critical of the additional costs.


Funding for Kim Jong-un’s Hotel Found in Illinois Budget. U.S. – N. Korea Summit Back On. – Our suggestion for The Onion

The most recent obstacle to the summit between President Donald Trump and North Korea’s Kim Jong Un in Singapore has been removed.

As initially reported in Washington Post last week, cash-strapped North Korea expected difficulty paying for Un’s hotel during the summit, and the United States had been looking looking for a discreet way to cover the bill while saving face for Un.

State Department officials, mindful of North Korean pridefulness, worked days to find funding safe from public scrutiny. “We needed a dark, dark source,” according to a department spokesman, and the president personally intervened with very firm instructions. “Just find one of those shithole places like I talked about before, tell them to pay for it and get Rocket Boy his hotel,” Trump reportedly ordered.

The spokesman said, “We then noticed the news of a 1,200 page budget being submitted to the Illinois legislature for an immediate vote with no review or inspection. That will work, we thought, so we convened a conference call with with Illinois legislative leaders from both parties. They were very cooperative. We hadn’t even gotten to saying what the cost would be when they said, ‘Yeah, fine, whatever.‘”

Party leadership quickly penned the needed provision and inserted it into the budget.

I suppose the Illinoisians can look to California and New Jersey to laugh at their absurdities… as a New Yorker, I can only chortle under my breath…and plan on paying my next tax bill.


Links skipped above, but of interest for those wanting to dig into Illinois finances and pensions:

$172 million, huh?

I might make the suggestion that the “savings” in the pension proposals are more on the order of what they’ll be paying for the shrine to Obama.

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