STUMP » Articles » Illinois Asks for $10B(+) for Pensions -- Most Disgusting COVID-19 Bailout Yet? » 19 April 2020, 16:32

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Illinois Asks for $10B(+) for Pensions -- Most Disgusting COVID-19 Bailout Yet?  


19 April 2020, 16:32

Earlier this year, I said I would lay off Illinois for this year, and focus on states/localities closer to home.

Well, you can either say I lied, or that events have gotten away from me.

Because Illinois [or, rather, a specific set of Illinois politicians] have had the most crass COVID-19 bailout request of all:

Hey Feds, Please Bail Out Decades-Worth of Illinois Fiscal Irresponsibility

Of course, the total “ask” was a lot bigger than $10 billion, and some of the requests are in line with other bailouts. It’s not crass to ask to have at least some relief caused by shutdowns and the need for financial help in covering medical costs.

I do not want to write about that.

First, let’s go to the New York Times, where Mary Williams Walsh covers the public finance beat.

She tweeted:

As I tweeted back, Illinois seems unlikely to me to get this. At all. I have another post on public pension bailouts in general, but today I feel like solely beating up on Illinois.

It deserves it.

But first, let’s go to the actual source breaking the story: Wirepoints.

The Specific Request from Illinois

On Friday, Wirepoints published this: Illinois Senate Democrats Seek Massive Federal Bailout for State, Going Far Beyond Coronavirus Impact – Wirepoints

Wirepoints has obtained a copy of a letter detailing a federal bailout request sent by Illinois Senate President Don Harmon (D-Chicago) in substantially similar form to all members of the Illinois Congressional Delegation. The letter, which is reproduced below, was sent on April 14 on behalf of Harmon’s 40-member Democratic caucus, which holds a majority in the Illinois Senate.

The requested bailout is galling in scope and shameless in purpose – a clear attempt to use the pandemic as cover to get federal money to pay for Illinois’ pre-pandemic fiscal mismanagement, particularly of its pensions.

The Democratic caucus seeks well over $41.6 billion, including important crisis-related relief such as $1 billion in public-health aid to minority communities and unspecified amounts for increased Medicaid reimbursements and hardship payments to health care facilities.

They posted the full letter there, so you can read the specific items in the list. I don’t want to treat with all the points, just the pension-related ones.

Here are the pension-related pieces of the letter: [I added emphasis in one part]

$10 billion in pension relief, directly for the state’s retirement systems: Illinois largest liabilities are its unfunded pension liability at $138 billion and other post-employment benefits liability at $54 billion. Illinois law has put the state on a path to fund the pension liability in a manner that is actuarially sound, and the state has been following the payment plan set out in that law. In a normal year the size of those payments crowds out funding for services and programs. Clearly this will not be a normal year and that crowding out effect will be exacerbated by significant revenue losses. I would ask that the federal government: 1. Provide direct cash assistance to the pension systems; or 2. Offer a low interest federal loan to aid Illinois in our efforts to restore and maintain retirement security for public sector workers, many of which are on the frontlines of this pandemic battle.
$9.6 billion in direct aid to municipalities: In cooperation with the Illinois Municipal League (IML), I request $9.6 billion in direct, unrestricted aid to municipalities to distribute on a per capita basis. Municipalities are doing their part by enforcing stay-at-home orders and providing other needed services, but they anticipate unbearable revenue losses as a result of the crisis. Those losses will dramatically impact municipalities’ abilities to fund retirement systems for the police, firefighters and other first responders providing emergency services during this COVID-19 outbreak. This assistance is critical in aiding municipal governments provide for the safety and well-being of the constituents and employees they serve.

I will address these two “asks”, and comment on what might be the most appropriate level of bailout for these two, specific items.

Comment from an Illinois Actuary

Next up, some comments from Elizabeth Bauer, a pension actuary in Illinois who writes about retirement issues at Forbes: And So It Begins: Illinois Is First In Line For State And Local Pension Bailouts

It would seem, readers, that I am lacking in imagination.

After all, I had sitting in draft form, some thoughts on public pension bailouts. Essentially, they went like this:

“Will states and localities with severely underfunded pensions start to call for federal bailouts due to the pandemic? No – or not directly. Instead, we’ll likely see disputes over the form that federal aid to states should take — should money be doled out purely in proportion to population? In proportion to the impact COVID-19 has had on their economies (would benefit states more when they clamp down tighter)? In proportion to their pre-COVID-19 spending (would benefit states which were already bigger spenders)? Sufficient to cover new budget holes (would create moral hazards by encouraging irresponsible spending)?”

[more at link]

And, again, pleas for money are not a surprise, given the news yesterday that the state’s revised budget forecast is for a drop in revenue of $2.2 billion in FY 2020 (ending June 30) and $4.6 billion in FY 2021. But $2.2 billion and $4.6 billion are a far cry from $41.6 billion.

Yeah, that’s different by about a factor of 10, isn’t it.

New York Times Coverage of the Request

I linked to this in the tweet above, but let’s look at the NYT coverage from Mary Williams Walsh: Illinois Seeks a Bailout From Congress for Pensions and Cities

Illinois needs more than $40 billion in relief from the federal government because of the coronavirus pandemic — including $10 billion to help bail out its beleaguered pension system, according to a letter the Illinois Senate president sent to members of Congress.

The letter was shared with Gov. J.B. Pritzker, also a Democrat, who said this week that the federal government should provide more funding to states. Messages left for State Senator Bill Brady, the minority leader, were not immediately returned on Friday evening. Democrats hold 40 of the State Senate’s 59 seats.
Last week, the National Governors Association said states needed “unrestricted fiscal support of at least $500 billion.”
Though Mr. Harmon pointed to the pandemic as the reason Illinois needed help, the problems with its pension system far predate the coronavirus. It is considered by experts to be one of the worst funded in the nation.

Heck, by its own measurements, with still fairly sunny assumptions, Illinois pensions overall are some of the worst-funded in the nation.

Doesn’t need an expert to see that.

COVID-19 Did Not Create Illinois’s Bad Pension Position

As all sources point out, Illinois’s pensions were in a bad position before COVID-19 hit. If you are new to this subject, or even if you’re not and want a refresher, let me run down the highlights of how Illinois is in such a bad situation (especially compared to other states), using posts I have done before.

There are multiple components, and I am going to pick what I consider the largest drivers of the underfunded pensions:

  • Deliberate underfunding, by a lot, over decades
  • A deliberate choice to not allow any changes to the pension benefit formulas [via their 1970 state constitution]
  • Baking into the pension benefits some very iffy aspects: 3% automatic COLA (cost-of-living adjustments), spiking (with very little against it)

Many of these aspects are shown in other states, too, but it’s the toxic mix of all of them at once that’s the killer. California’s Calpers, for example, has had an increasing unfunded liability; but they do not allow the deliberate official underfunding. It’s no surprise that, while Calpers has had a decreasing funded ratio since 2000, they’ve not fallen off the cliff the way Illinois pensions have.

Let’s address these three items in order.

Illinois’s Decades of Underfunding of Its Pensions

Some years back, I combined the state-level pension funds, and made a graph as to the causes of the growth of the unfunded liability:

I will update this graph later, but it’s not really improved much since then. For fiscal year 2016, the unfunded liability of these five plans [this does not include Chicago plans!] totaled $126 billion. Yes, with a b.

The largest single component driving the unfunded liability for these five plans (covering state employees, judges, General Assembly members, teachers [outside Cook County/Chicago], and state university employees) is that the state chose to underfund these pensions. Out of $126 billion in unfunded pension liabilities in fiscal year 2016, $52 billion is due to decades of deliberate underfunding.

To make this more clear, here is a graph showing the percentage components of the unfunded liability.

You can go back to my “geeking out” post to see me arguing that change in actuarial assumptions shouldn’t be counted, but let’s ignore that aspect for right now.

Without quibbling about the little stuff — at least 41% of the unfunded liability was due to deliberate underfunding of the pensions.

That’s huge.

Especially in an unfunded liability of over $100 billion.

Illinois Doesn’t Allow Changing Pension Benefits, Even for Service Not Yet Rendered

I’m going to reach back to 1970, when Illinois got itself a shiny new constitution (and the last time it did so. Yes, the state constitution has been amended since then.)

The key text:


Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

Over the years, this has been interpreted by the Illinois Supreme Court to mean:

I know there’s more, but let’s stop there. Given this simple language and the court history, it’s made it very easy for me to predict that every pension reform gets knocked down by the courts in Illinois.

The Illinois governor, J.B. Pritzker, has been calling for a state constitutional amendment to allow for graduated income tax rates [also forbidden by the 1970 state constitution].

It has been mentioned several times before that if the constitution can be amended in such a consequential way to allow for the increase in taxes in an uneven way, then it sure as heck can be amended to reduce the pension benefit burden on state taxpayers.

Aspects of the Pension Benefit Formulas That Make for High Costs

The following is definitely not exhaustive (if exhausting). Above, I mentioned the 3% per year COLA. That is fairly high, especially since it’s not based on fund performance or recent actual inflation behavior.

On top of that, there’s spiking: where employees boost their initial pension benefits through higher-than-expected pensionable salary the last couple years before retirement. The main issue is that whoever spikes the benefits is generally not paying the full costs — often this is with the collusion of the local employer. Make local teachers happy, for example, by boosting their last year of work by 10%… there’s a fine, but it’s inadequate to cover the increase in benefit costs.

Wirepoints did some research on public pensions comparing the cumulative growth in total pension promises against cumulative growth in state GDP. You may not agree that’s a fair comparison, but even so, the state GDP is essentially what gets taxed [and the reason states are having revenue issues with the COVID lockdown.]

Let’s ignore that — let’s see how much Illinois total pension liabilities grew, year-over-year, for decades:

A compound annual growth rate of 8.8%… well, asset growth definitely hasn’t kept up with that, but even if assets grew at 8.8% per year, not putting enough in every year means that the gap keeps growing. Ugh.

Trying to Bail Out the Ocean

The prior governor, Rauner, attempted to reduce spiking, but Pritzker undid that.

That said, all the Rauner-driven pension reforms were puny. They had to be, because of all the court cases mentioned above.

I did a visualization of the theoretical reduction in the unfunded liability here:

The little blue sliver represents 0.5% savings. That was under the Republican Illinois governor Rauner, in 2018, and that was just the proposal. I don’t care to look up what actually passed. Or if anything actually got saved.

NOTE: Rauner was not involved in all the pension reforms that got struck down. There was Quinn and Squeezy the Pension Python (thanks for the grim laughs, Quinn), Rahm Emanuel tried getting Chicago pensions dealt with (and some of the Illinois Supreme Court cases were striking down reforms he asked for) and in his post-mayoral days he’s on the side of amending the Illinois state constitution.

In any case, to reduce Illinois pensions in an orderly way will require amending the state constitution, and being realistic about what’s sustainable.

Best Wishes For a Bailout

In my post Public Pension Watch: Illinois Reform Goes Down (as Expected), I wrote:

You will not be allowed to change way current retirees’ benefits increase, until total disaster supersedes constitutionality. In which case the law is irrelevant.

Reality always wins over law.

I wrote that back in 2014. Now, even if Illinois does not get $10+ billion for its pensions, it’s not at complete disaster. Yet.

In another 2014 post, Public Pensions Watch: Illinois Law v. Reality

The unions think they’ll always get theirs.

And they will.

Right up until they don’t.

This is a chance to think through what will really be able to persist, not only through the current crisis, but for decades to come. It had already been shown before the crisis that the Illinois pensions were unsustainable. As with when they issued pension obligation bonds, asking for $10+ billion (drop in the bucket) is another attempt to dodge actually dealing with the problem.

There are many potential sustainable pension systems, such as what Wisconsin does, not so far away. It is not a purely defined contribution plan – it does provide lifetime income for participants – but it allows benefit payments go down when times are bad. By allowing benefit payments to fall, Wisconsin makes it easier to recover from market downturns and insures that the fund can persist and provide a true guarantee.

Illinois, with its ever-increasing benefits and its ever-decreasing ability to pay for them… well, that doesn’t provide any kind of adjustment to allow for longevity of the pension fund, now does it.

As for what’s due to Illinois for COVID problems, if you want to argue the need for a bailout, it seems reasonable to start with the extra costs [unemployment insurance, Medicaid claims, tech costs for schools, PPE for first responders, etc.] as a basis for bailout numbers. Maybe you can ask for making up for lost revenue…. but note, neither of these items tie to pensions per se.

And definitely not tieing to pensions that have been deliberately underfunded for decades. Yes, they’re in a bigger hole than before. You should have expected some kind of market drop after a decade+ of a bull run in the stock market.

As the Wall Street Journal reports, many states are looking to reduce costs elsewhere, by nixing all sorts of things like teacher raises and property tax rebates. States mentioned: Virginia, New Jersey, Tennessee, Washington state.

You think they will be happy with perennial profligate Illinois getting a huge chunk of change specifically because they’re been irresponsible?

It’s not other states’ problem that Illinois is hovering over junk status for their bonds. Grabbing Wirepoints’ chart:

Hmmm. Yes. It wouldn’t shock me if Illinois were solidly in junk territory by the end of the year. It’s not just the pensions that they’ve shorted for years. There’s also the unpaid vendors, which has been a long-standing problem.

I assume there may be some additional assistance for states and local governments in upcoming Congressional bills, but paying for Illinois’s pensions is going to be a very hard sell.

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