By: Mark Glennon*
Whether you know nothing or everything about Illinois’ state and local fiscal crises, take a moment to digest these two charts published by the Wall Street Journal today. Every high school in the state should be devoting a class to them, and every paper should have them on the front page. After you look at them, take a moment to consider how our political establishment is responding.
Focus on the top line in both charts. They aren’t complicated. They show how much of total revenue collected by the State of Illinois and the City of Chicago is now being consumed by payments on pensions and other debt, and how much worse it would be if proper amounts were being paid.
You read the charts right. For the state, about 25% of revenue now goes towards pensions and other debt, but that would jump to over 50% if proper amounts were being paid. For Chicago, about 34% of revenue is already being consumed by those payments but doing it right would take over 60%.
The charts are based on the work of Michael Cembalest, Chairman of Market and Investment Strategy for the asset-management arm of JPMorgan Chase & Co. Wirepoints, alone in Illinois, has been reporting that work consistently for over five years, trying to call attention to it and similar work by ourselves and others.
The implications are catastrophic. No government can provide a reasonable level of services when it is burdened so heavily by legacy pension and other debt. That’s especially true for governments with tax burdens already as high as Illinois and Chicago’s. Similar numbers apply to many other towns and cities across the state.
The charts are based on the assumption that investments set aside to pay pension obligations will earn 6% per year, which is generous. Many financial experts say a lower assumption should be used, which would make the numbers worse. The “Costs” shown in the charts include pensions, retiree healthcare for pensioners (both of which are constitutionally protected in Illinois) and interest on bonded debt (though that interest is a very small part of the problem). The numbers for the additional amounts that should be set aside assume that unfunded liabilities would be amortized over 30 years in level payments.
How is the Illinois political establishment responding?
Here’s the central message now being blasted across the state by proponents of a $3.4 billion state income tax increase on high earners: “Illinois is in a $3.2 billion financial hole. A Fair Tax could fix that and reverse the damage.” That’s an epic lie. The “hole” isn’t $3.2 billion. It’s roughly a quarter of total revenue according to this work, which is consistent with our own numbers — about $10 billion — and that’s just at the state level. The new $3.4 billion will go down a nearly bottomless pit.
Much of the Illinois press plays along with the deceit. Nothing to see here. Don’t scare the children. The sky isn’t falling. Nothing a little tax increase won’t solve.
Pension or retiree healthcare reform? No, not one dime of that is needed according to most of our politicians, including Illinois Governor JB Pritzker and Chicago Mayor-elect Lori Lightfoot. They’ve all ruled out the state constitutional amendment that would be needed for that.
Illinois politicians may carry on in their alternate universe, but the national press is waking up.
Learn more about Illinois and Chicago’s pension crisis:
- Illinois state pensions: Overpromised, not underfunded
- Overpromising has crippled public pensions: A 50-state survey
- Illinois’ other debt disaster: $73 billion in state retiree health insurance benefits
- Emanuel’s call for a constitutional amendment shouldn’t be narrowly construed
- Chicagoans, pensioners: Beware a stock market shock
- Moody’s vs. Illinois politicians: $100 billion difference in pension debts