Illinois Pension Ruling Sets Stage for Riots…Everywhere

What can a state government do if it owes its retired workers vastly more in pension benefits than it will ever be able to pay? The answer, as far as the Illinois Supreme Court is concerned, is that the state will simply have to squeeze blood from a stone when the inevitable fiscal crisis hits. And it surely will, since the gap between tax revenues and pension obligations is conservatively estimated at $111 billion. Illinois doesn’t have that kind of money lying around, and probably never will. So what then? My expectation is that the court’s decision last week invalidating cost savings implemented in 2013 will eventually lead to rioting in the streets and a civil war that pits taxpayers against public-employee unions.

Unions Won’t Budge

From a political standpoint, the irresistible force and the immovable object have been set to collide. The public-employee unions won’t budge, especially now that the state’s highest court is on their side, rejecting even such modest budgetary measures as might have averted bankruptcy. The justices wouldn’t even countenance scaling back a COLA that has been compounding at 3% since 1989. For its part, Illinois will be able to claim, with blunt honesty, that the money simply isn’t there. The predictable “compromise” will be a court order effectively requiring Illinois to raise taxes until there is enough money to support the retirees more or less forever. Well before then, however, taxpayers will begin to exit Illinois with the urgency of North African refugees fleeing ISIS. Even now, one out of every four dollars that Illinois workers pay in taxes goes toward pension benefits for the state’s retired workers.

Can you see where this is leading? Trouble is, there are probably at least two dozen other states whose pension assumptions are nearly as shaky as those of Illinois. Indeed, when the Great Pension Bust that is surely coming starts to unfold in California, New Jersey and New York, it will make the fiscal problems of Illinois look like a hill of beans. To put things in perspective, consider the budget woes of Flint, Michigan. To remedy a recurring annual deficit of about $20 million (and growing), the city has slashed services and amenities almost to nothing.  Even so, the long-term structural budget problem – chiefly the shortfall between tax revenues and pension obligations for retired city employees – reportedly exceeds $500 million.

As Flint goes, so goes the nation?

  • Bc May 19, 2015, 5:23 am

    This can only end one of two ways. Govt prints to dilute the currency do every debt is paid in full with Monopoly money or bad debts are written off but money purchasing power is intact. I predict both. Printing out the wazoo plus haircuts galore. There will be some admixture of $100 gallons of milk plus bankruptcy, defaults, and haircuts for every creditor. This will work technically speaking. So let’s get started. Dragging this out is a big mistake.

    &&&&&&&&

    “Government prints to dilute” is not even a theoretical a possibility, BC, much less a likelihood. To fully understand why, I would suggest that you read Adam Fergusson’s “When Money Died,” which describes the Weimar hyperinflation in much greater detail than you will find on the web.
    RA

  • Lin May 16, 2015, 3:40 am

    Hi Guys, I remember in High School the dumbest kids in the class, General academic courses only,not academic wanted to be education majors ! Lol Lol ,no wonder the kids are soo dumb. I left beginning of Jr year, took the Ged + headed straight to college. I’m seeing lots of Illinois tags here in Ga as well.

  • Jason S May 15, 2015, 1:29 am

    Traveler, you want more good news? At least with the CalPERS system it is the local city/municipality (i.e. their tax base) that is on the hook. With CalSTRS (the teacher’s pension system) the entire state’s tax base is on the hook. It is estimated that they are currently somewhere between $5 and $30 billion under funded and growing since they have an IRR of 7.75% in their actuarial formulae. I am glad that I am leaving California before the fiscal seismic event truly sinks California into the Pacific.

  • mava May 12, 2015, 8:56 pm

    Public employees simply do not deserve any pension. They will not get any, in the confirmation of my statement above, as the nature itself will reject them.
    The question is, however, will we allow these nasty creatures to destroy the rest of the world or will we let them slip into wherever they have come from with peace?

  • Traveler May 12, 2015, 6:43 pm

    Good timing. I bring you an update from the city of San Bernardino, California which declared bankruptcy nearly 3 years ago:

    The city was in a dogfight with Calpers, the state public pension giant off and on during this period. Calpers dug its heels in from the beginning and now they will get paid in full. The city will finally publish a bankruptcy exit plan this Thursday, 5/14 that will include that provision. Yesterday, a federal judge threw out a bondholder lawsuit to get the same treatment Calpers is getting. So again, as in the Detroit and Stockton bankruptcy cases, the bondholders get screwed while the existing pension benefits mostly stay intact. Left remaining on the San Bernardino table are negotiations with their unions to reduce the pension benefits going forward. Those negotiations are not going well: talks with the firefighters union have broken down while the police union has not signed off on portions of the exit plan that affect its members. So we can expect this circus to keep going for several more months, but since we now have at least two recent federal court decisions that supported pension agencies against city/state governments trying to make cuts, I’d suggest that the precedence for the priority of pensions over bondholders is pretty well established. So we’re going to get that irresistible force vs the immoveable object effect.

    I should think the immediate impact across the country is that future bond issues for “troubled” cities are going to have raise interest rates a lot to compensate for the risk of getting screwed by the pension liabilities.

    For those who don’t really understand the problem, it is this: in a fully mature pension system, for every active employee on the payroll, there could be 2 to 4 inactive persons receiving a pension now or due to receive one in the future. In effect, the taxpayers could be supporting 2 to 4 persons for every active position on a government payroll. Add to this the miniscule returns, the lack of employee contributions, the pension spiking practices and the early retirement ages; we can see that the total picture is unsustainable. Won’t matter how much Ma and Pa Teacher jump up and down and stamp their feet, the arithmetic doesn’t lie as Denninger likes to put it.

    Private companies saw this coming back in the 70’s and the 80’s, hence they got themselves out of the pension business over the years.

    &&&&&&

    Great information, Traveler! Thanks for weighing in. RA

  • Jim L May 12, 2015, 1:37 pm

    I was wondering what all of those Illinois license plates were doing in SW Pennsylvania the last few years. Now I understand. They are selling and getting out while they can!

  • Jackie May 12, 2015, 5:38 am

    What’s the big deal? After all, the O regime is funding ISIS, or ISIL as they like to refer to it, by the gazillions! Surly these Maxist freaks can just print up some dough for old worn out retired good honest workers in Amerika now, right?
    O needs to declare a fatwa or some s**t like that to get ‘er done 🙂

  • shropster May 12, 2015, 2:59 am

    For Rick Ackerman:
    I am one of those who retired at age 57 after 30 years of teaching HS science and math because I had to. I was unfortunate to believe I should teach and not entertain. The conflict that I faced from those who were upset by this made my life as a teacher unbearable. My fellow science teacher was beloved by his students and the administration as he caused no one to be upset. His average grade given to his student was a “B”. He gave homework, but didn’t collect it. He just checked off whether or not a lab report was turned in. Any essay or problem on a test was for extra credit.

  • Meatdawg May 12, 2015, 2:21 am

    Sooooooo, the “solution” is to keep taxing the PRODUCTIVE members of society so the gov’t workers (tax parasites) can enjoy a fat paychecks, & retirement benefits that private-sector employess can only dream of. How long will the people tolerate spoiled gov’t workers that milk the taxpayers dry. Enough is enough, ban ALL gov’t unions now ! They are a blatant conflict of interest.

  • Nickname May 12, 2015, 1:29 am

    LOL! Unions got what’s coming to them for bankrupting cities and citizens all across this nation.

    I can only laugh at the comeuppance.

  • Archy Cary May 12, 2015, 12:02 am

    We’re witnessing the pending collapse of progressive liberalism in city, state and federal fiscal (and for the FED, monetary) policies. It will be ugly. It only awaits some catalyst to begin.

  • Marty May 11, 2015, 9:46 pm

    For Mike: Given the abysmal state of educational achievement across the nation at the hands of these supposedly ‘dedicated’ and ‘highly-educated’ teachers, if people were still rewarded for their demonstrated performance in this country, teachers would be lucky to be making ‘minimum wage’. A large portion of high school graduates today are not simply unemployed, they’re literally unemployable.

  • Bill May 11, 2015, 8:53 pm

    But there’s money, and full medical services, for all the the illegal immigrants that walk across our borders. The unions deserve what’s coming because they have remained silent on illegals taking jobs and services away from Americans. Until they speak up and insist that our borders be sealed and all illegals extradited, they should shut up.

  • Rick Ackerman May 11, 2015, 8:52 pm

    I am posting the following on behalf of ‘Peter P’, with my response appended:

    That’s strange Rick. In New York, the public pension system is one of the healthiest in the nation. Currently, I believe it has investments worth somewhere between 150 and
    200 billion dollars. Not a penny of that money is from the taxpayers.

    If Tom Dinapoli doesn’t prepare for the coming stock market meltdown, then I expect its worth to be drastically reduced. However, for now, all is good.

    I guess Illinois does things differently. I know it stands among the worst, insofar as its public pension system’s health.

    &&&&&&&

    Regardless of what has been reported, Peter, I simply don’t believe that the pension plan of any city, county or state could be in “good shape”. How could it be, when public-sector workers retire at 55, often at 70% or more of their peak pay? (And did I read somewhere that NYC pays employees who dispense subway tokens a package worth $110k?)

    Further to the point, how could public employees’ retirement prospects be so much brighter than those of private-sector employees? It’s not as though Illinois — or any other state, for that matter — invested workers’ savings more wisely than private savers. What being in “good shape” implies is the absurd belief that taxpayers will postpone their own retirements to make it possible for public employees to go sailing into the sunset at the ripe old age of 55. Working stiffs in the private-sector, particularly the multitudes who won’t be able to retire until they are 70 if at all, will go to war before they let this go on for another ten years.

    As to sums of $150B-$200B supposedly socked away by New York, even if this money actually exists, and even if it doesn’t vanish in the next Financial Crash, that’s just chicken feed compared to what Baby Boomers were supposed to have inherited before they found themselves squeezed at both ends by soaring tuition costs and $70k/year assisted living care for their folks (whose nest eggs have failed to generate anywhere near the income that had been predicted ten years earlier).

    A friend of mine, retired from teaching in NJ, wrote a guest commentary here a while back that described the plan covering her and her ex-teacher husband. They retired at 55 and receive guaranteed benefits that at today’s interest rates would require a nest egg of nearly $2M to equal. The very nice thing for them is that, unlike wage earners in the private sector, they don’t even need much of a nest egg, since their benefits are guaranteed rather than paid for with interest income. RA

  • Henry May 11, 2015, 7:23 pm

    Mike, there are lots of us who “deserve” more. My field is electronic / software engineering. Some of us, who had very heavy and hard (compared to teachers) class loads at college can’t even find a job right now because jobs have mostly been outsourced to India, etc.

    I know the teaching profession is suffering, but it’s not just them. Nothing is reasonable or fair anymore. People, corporations, politicians have been short sighted for so long that there’s no longer a way out.

  • Mike May 11, 2015, 5:43 pm

    Mickey does not understand that teachers are the ones that make the least money. They all have degrees any many have several master degrees. They should be making twice the money they are today.

  • Wayne May 11, 2015, 4:42 pm

    The state truly is the great fiction where everyone tries to live off everyone else.

    I live in Chiraq [Chicago] and can tell you that most of the commercial areas look like they have been pepper bombed by NATO! Just as Rick says the FED will NOT raise rates, I can tell you that pension driven tax deficits will NOT be paid, there simply isn’t enough productive power or a tax base to support the exorbitant and parasitical demands of the public sector union that have zero basis in reality.

    Most I know have already fled the collapsing state of Illinois, and many more are considering it, myself included. As John Jay stated, Detroit is the future, something that I have been howling for years only to be met with shouts of derision.

    Unfortunately it is only a matter of time, my bags are packed and I am ready to escape from Chiraq, one more tax increase and I am out of here! Terrible demographics, worse weather, zero industry, decadent culture, I know I will stay for a 5% and increasing state income tax, some of the highest serf taxes (property taxes) in the nation, and an ever expanding corrupt bureaucracy with invincible ignorance and insatiable greed.

  • mickey May 11, 2015, 4:39 pm

    I lived thru the past 40 years in Illinois. EVERY time a teachers union contract expired they threatened to strike. The local school boards, local residents, caved quickly even though everybody knew the funds were not there and most residents were already bitching about high taxes. So the school boards gave the unions a 2-3% pat increase and these wild promises that could not be kept. The union leaders and board members knew it and the teachers, if they did not see it, should not have been teaching our kids. To this day the retired teachers I know do not understand what’s happening. Mostly simpletons. Ya cannot squeeze blood out of a turnip and there is no such thing as a free lunch.

    That’s how we got to here.

  • twocanpete May 11, 2015, 4:26 pm

    I live in eastern Iowa and believe me people from Illinois are already fleeing here by the thousands. We have had dozens of families move into my little town of 7,000 alone. Illinois has stopped paying for their free medical care and they are coming here with federal free-rent vouchers in hand. Crime is soaring and politicians are already threatening to increase property and sales taxes on Iowans to pay for the skyrocketing costs of Illinois refugees, but no one wants to address the source of the problem.

  • John Jay May 11, 2015, 6:20 am

    What will the outcome of all this be?
    In a word…………….Detroit!
    Those citizens who can see what is coming will simply flee, if they are prescient, or be driven out if they are not.

    An ever expanding spectrum of taxes will drive out the private sector, and subject the remaining homeowners to property taxes that will hammer the price they can sell their house for.

    That has already happened in an old industrial town in Connecticut, named Bridgeport.
    Once a manufacturing powerhouse, it is Detroit on a smaller scale.
    One old house I saw for sale on a RE website for
    67k had property taxes of $6,700 a year!
    A 10% annual tithe to the municipal government!

    Why?
    Because every year property taxes have gone up, even as jobs there vaporized.
    The most enlightened citizens of Bridgeport fled decades ago, to outlying towns with much lower property taxes, or to another State entirely.
    Those who hesitated, were, predictably, lost.

    If the trend continues, the result will be Feudalism,
    where modern vassals will become tenants of the new nobility, Government!

    The FSA/GSA army has reached critical mass.
    Be warned.
    Be ready to flee!

  • Sigmund Fraud May 11, 2015, 3:33 am

    There are at least two basic issues at the root of this mess. One is that the pension investment plans are based on a putative return of 7-8% which is now arithmetically impossible to obtain. The other is that public servants should never have been allowed to unionize. If I recall correctly, FDR himself stated as much in written comments around the time the New Deal labor legislation which enabled public unions was passed. The reason is that public unions are a dysfunctional construct, because the public unions organize to elect the public executives and legislators who determine their salary and benefits. The spawn of this incestuous collusion is now, as predicted by FDR, revealed to be a monstrosity.

  • Frank May 11, 2015, 1:56 am

    As Michael Savage says, “liberalism is a mental disorder.”

  • Tony Nobaloney May 11, 2015, 12:39 am

    No money for the working and retired stiffs but plenty for the slackers and illegals. No problem there, eh?

    What a wonderful country we have as we now pit the middle class against the middle class.