By: Ted Dabrowski and John Klingner
If you thought Illinois was already up to its neck in pension debts, just wait until the impact of the Coronavirus is tallied up. The stock market’s meltdown and collapsing interest rates mean the shortfall for Illinois’ five state-run pension funds is about to jump. Moody’s most-recent calculation before the crisis totaled $241 billion.*
That shortfall will jump to over $310 billion in 2020, according to Wirepoints calculations, if current conditions hold through the funds’ fiscal year end in June.
The increase is an additional $15,000 on top of the $90,000 “shadow mortgage” every Illinois household is already on the hook for. (See more: Illinoisans overwhelmed by a ‘shadow mortgage’ of pension debts.)
Moody’s recently estimated the impact the market correction will have on pensions across the country. The agency’s report shows that total pension shortfalls nationwide will “exceed $6 trillion, rising between 40% to 50% compared to fiscal 2019 measurements. [The shortfalls] would amount to around 30% of 2019 US GDP.”
While Moody’s did not report any numbers for individual states or municipalities, the news is particularly troubling for Illinois. The state, Chicago and many of the state’s struggling cities were already suffering from the nation’s worst pension crisis, both in terms of outright shortfalls and on a per capita basis (see Appendix 1), even before the virus hit. In fact, some Illinois pension funds – those with dramatically low asset-to-payout ratios – were already set to face liquidity problems over the next few years.
Now the market crunch, assuming it holds, will send Illinois’ state-level pension debt up to an estimated $312 billion.
Wirepoints arrived at that figure by using the same assumptions Moody’s used to arrive at its national figures. That included:
(1) Discounting the future pension payouts of the state’s five pension funds (see Appendix 2) using a 2.76 percent discount rate, the same rate used by Moody’s on March 20, 2020. By comparison, the discount rate in 2019 was 3.51 percent.
(2) reducing Illinois’ overall asset base by Moody’s expected average investment losses of 21 percent, as of March 20, 2020.
To be clear, the $312 billion calculation assumes the above discount rate and market losses still prevail on June 30, 2020. Actual results, of course, will be quite different depending on how the current crisis plays out.
The rating agency’s summary of events so far offers a grim outlook for pensions everywhere:
“Recent US public pension investment losses, which we estimate are approaching $1 trillion, stand to severely compound the pension liability challenge already facing many governments. At the same time, the economic fallout from the coronavirus is reducing revenue levels and threatening the ability of state and local government entities to afford higher pension costs.”
But the biggest warning for Illinois comes from Moody’s comments on potential credit ratings:
“Without a dramatic bounceback of investment markets, 2020 pension investment losses will mark a significant turning point where the downside exposure of some state and local governments’ credit quality to pension risk comes to fruition because of already heightened liabilities and lower capacity to defer costs.” (emphasis added)
Illinois had no room to weather any pension losses before the virus hit. And now the state expects to suffer a multi-billion, multi-year hit to its revenues.
If the market doesn’t recover quickly, Illinois is likely looking at a junk bond rating. That’s going to have a lot of consequences for pensioners and ordinary Illinoisans alike.
*The state says the official shortfall for its five state-run funds is just $137 billion.
Read more about the impact of the Coronavirus on Illinois:
- Don’t Let States Rob COVID-19 Funds to Bail Out Pensions
- As the crisis deepens, keep an eye on Illinois’ unpaid bills
- Bad Public Pension Bailout Ideas Now Surfacing
- What next for Illinois?
- State of Illinois provides first look at possible revenue impact from downturn
- ‘Act of God’: Illinois Teachers Get Full Pay, Pension Accrual While Schools Are Closed
- Will Recession Revive Discussion of Municipal Bankruptcy and Bankruptcy-for-States?
- Stock market meltdown, collapsing bond rates will wreak havoc on Illinois’ weakest pension plans