By: Ted Dabrowski and John Klingner

Michael Cembalest’s latest pension graphic captures so much of what’s wrong with Illinois’ collapsing finances. 

The Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management has added the impact of COVID-19 to his chart that captures the true cost of government worker retirements for states across the nation. If Illinois were to pay its true annual costs based on realistic actuarial assumptions, 58 percent of the state’s budget would be consumed by retirements. It’s an impossible burden and by far the worst in the country. 

A quick glance at Cembalest’s graph tells you three things. 

First, just what a mess Illinois was in even before the COVID-19 crisis came along. On a cash basis – what the state was paying, not what it should have been paying – Illinois was already spending more than 25 percent of its budget on retirement costs – the most in the nation. 

Second, it shows how misleading Illinois’ official actuarial assumptions are. Under more conservative assumptions (6% investment returns and a 30-year level dollar amortization), Illinois’ true retirement costs rise to more than 50 percent of the state’s budget. And that was before the coronavirus hit.

Third, it shows that COVID-19’s shutdown will have a bigger impact on Illinois than almost any other state. While most states will see retirement costs consume 1 to 3 percentage points more of their shrunken budgets, retirement costs in Illinois will consume another seven percentage points. Overall, Illinois’ true costs would consume a bit less than 60 percent of the state’s budget after taking the shutdown into account.

No other state, not even New Jersey or Connecticut, comes close to having that much of their budgets swallowed by retirement costs.

The share-of-budget numbers may sound crazy to some, but for those following budgets and actuarial reports, Wirepoints ran the numbers for 2019. We added up the true actuarial costs of pensions and retiree health insurance, added the state’s pension obligation debts, and arrived at 47 percent of the budget. 

Cembalest’s numbers point to a clear fact: Illinois’ choice isn’t between reforms or kicking the can yet again – the crisis is just too big now. The only way to reduce the state’s overwhelming debts is either through reform or bankruptcy.

Sen. Mitch McConnell recently broached the subject of state bankruptcy after a $42 billion bailout request by Illinois’ Senate Democratic caucus. McConnell has taken a lot of heat for his suggestion, but it’s not like Illinois has many options available. Both Gov. J.B. Pritzker and Mayor Lori Lightfoot continue to reject the notion of pension reform in Illinois, while the rest of America won’t go for a bailout of the state’s mismanaged pension funds.

Cembalest supports bankruptcy for states like Illinois and agrees with the opinion of Former FDIC Chairman Walter Isaac, who said in 2016: “The city of Chicago and the state of Illinois should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico. The process would entail about two years of unpleasant headlines, but the city and the state will rebound far sooner and less painfully than if they stay on their current paths.”

Expect the bankruptcy debate to heat up as Illinois’ finances continue to be further exposed. Look for Wirepoints to cover the issue of bankruptcy in more detail soon.

Read more about COVID-19 and Illinois’ finances:

63 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
r neville
3 months ago

In case there was any doubt our friend and former Illinois State Board of Investment (ISBI) Chm. Marc Levine was exaggerating when he told Barron’s Marketwatch: Illinois has become “an insolvent pension plan with a teeny tiny piece of State Government stuck on the end”

Poor Taxpayer
3 months ago

Can you say “PONZI’? It was always meant to enslave the honest hard working taxpayers. It is a good thing that Greedy Cops, Teachers and Firemen do not pay State Income taxes on their HUGE PENSIONS. As I was told by a greedy teacher, If you do not like it you can leave. I did and it was the best thing I have ever done. No state income taxes, No winter weather, Sun and Fun. The only problem in Florida is it is filled with pension money from all over the country (Illinois included). Only a moron would stay and… Read more »

Kane County Frank
3 months ago

But guys, it’s a promise!

Hank Scorpio
3 months ago

I think they pronounce it “pwomise”

Stan the Man
3 months ago

Men & women promise to love each other through thick & thin…LoL…as they say Promises are ment to be broken..lol

Poor Taxpayer
3 months ago

I promise as soon as the toll road bonds are paid for it will be free for everyone.
Now keep all your promises just like that one.

debtsor
3 months ago
Reply to  Poor Taxpayer

or the lottery will pay for education…

Illinois Entrepreneur
3 months ago

How many times are we going to hear JB tell us “a contract is a contract?”

We should turn it into a drinking game.

Governor of Alderaan
3 months ago

How many times will we hear Jabba say “1+1=2”? I bet zero

NB-Chicago
3 months ago

Ted— to play devils advocate, if the dems can use the pandemic to not only retake the presidency but also take majority in senate (they just have to flip 4 seats)then what stops them from bailing out illinios, NJ, Connecticut, etc bankrupt state pensions? Maybe wp’ers don’t want discuss, but I have no doubt thats what dems from Springfield to Pelosi are gaming for.

Illinois Entrepreneur
3 months ago
Reply to  NB-Chicago

I agree with you, NB. I was talking about this with my wife yesterday. We both feel that this is the endgame. They waited out Rauner for four years — obstructed absolutely everything, including a state budget — and it worked like a charm. They knew they could frame him in such a way that he would not be reelected. They will go back to that strategy at the federal level and see what happens in November. They’re liking the Covid-19 disaster’s impact on their chances (Trump screwed up, people are DYING!), and they know that as soon as their… Read more »

Mike Williams
3 months ago

I also agree. Don’t expect anything to change in Illinois until after the election. if Dems win big then Pritzker and Lightfoot have a path forward, otherwise it’s pretty much game over for Illinois. Do you feel lucky?

Bob
3 months ago
Reply to  NB-Chicago

I am trying not to think like this but we know there is an awful endgame going on with this COVID stuff. Scares the heck out of me.

debtsor
3 months ago
Reply to  NB-Chicago

Trump will win in 2020, hands down. Biden is a credibly accused sexual predator who can barely finish a sentence. The enthusiasm for Biden is close to zero and continues to degrade. Few will leave their home to vote for that man which is why Democrats want mail in voting with nationwide ballot harvesting. A Dem operative can show up at a household and ‘assist’ all three voters with their (D) votes. It’s a lot easier than driving them in a van to the local polling place. This is not fear mongering, this is what actually happened in 2018 and… Read more »

DantheMan
3 months ago
Reply to  debtsor

You’re assuming it’s Biden. I think they will throw him under the bus if his poll numbers start to go down.

debtsor
3 months ago
Reply to  DantheMan

They may dump him, they may not. It might be hard to dump him if there’s no convention (or a virtual convention) and the backroom marijuana smoke-filled conference call magically produces a new candidate. Biden got the overwhelming number of primary votes, and it would make a lot of people really angry if suddenly the party elites thrusted some failed primary contender, or worse, some nobody, onto the ticket. My opinion is that the strategy will be to pick the strongest VP candidate and let them take over the campaign apparatus as Biden remains holed up in his basement bunker… Read more »

Richard Poo Millersky
3 months ago
Reply to  debtsor

Some online articles state Joseph Robinette Biden Jr. will choose Hillary Diane Rodham Clinton or Michelle LaVaughn Robinson Obama. 😮

Michelle says “When they go low, we go high”. 😃

debtsor
3 months ago

Biden/Clinton would be a Titanic sinking of epic proportions.

DantheMan
3 months ago
Reply to  debtsor

“Biden/Clinton would be a Titanic sinking of epic proportions.”

Agree, however Michelle instead of Hillary could supply much needed energy. If she has any interest at all, this could be a dream set-up with the top of the ticket highly likely not to finish more than half his term. She gets to be first female president without, more or less, having to run a campaign. Sweet Deal!

Richard Poo Millersky
3 months ago
Reply to  debtsor

If COVID-19 is still around in November, people might not open their doors to anyone, including Democrats. 😑

Mick the Tick
3 months ago

Let’s play a game I like to call, “Is it more likely that ….”. Is it more likely that the Illinois real estate tax on a modest $200,000 home will be $10,0000 or the Illinois government will cut public pensions? Is it more likely that a modest $200,000 home with an annual tax of $10,000 will increase or decrease in value? Is it more likely that people leaving Illinois (and other high debt states) will cause home values in low debt states to increase or decrease? With each year that passes, is it more or less likely that Illinois residents… Read more »

DantheMan
3 months ago
Reply to  Mick the Tick

Wirepoints and it’s comments often discuss how Illinois steals your home equity thru taxation. What is not often discussed is the impact of the Illinois exodus on other states. It increases demand in those destination states increasing home values. When someone in Illinois finally says, “Enough. I’m outta here.”, they may be shocked that the equity they have from their Illinois home is no longer enough for something similar in another state that was less expensive than Illinois a few years ago.

Stan the Man
3 months ago
Reply to  DantheMan

Believe me there are alot of other places that would be better than Hellinois. I would rather lose that equity to starting fresh than to keep getting tax and giving it away without receiving any benefits.

Joe Blow
3 months ago
Reply to  DantheMan

sometimes you just have to take a loss and move on to another investment… bag holding forever isn’t a good plan on a loser investment like Illinois real estate

Kay S
3 months ago
Reply to  Mick the Tick

If you want to see taxes in Illinois in action, go drive down 394 and the border between Illinois and Indiana. The Indiana side can’t keep up with home construction while the Illinois side sits empty. Our governor’s inherited wealth explains why he can’t balance a budget and make hard decisions to cut the budget. We can definitely live without some of those essential “services.” One thing the quarantine did was show how people can work from home and not have to be in Illinois. How long until more people move to Indiana with 10% of our property taxes. Indiana… Read more »

Illinois Entrepreneur
3 months ago
Reply to  Kay S

Awesome comment.

s and p 500
3 months ago

This is like the last line of “Some Like it Hot” (“Nobody’s Perfect”.) You can tell the union people the state is $250 billion in debt, every new tax dollar will go to pensions, the pension fund just lost 5 years of gains, people are leaving the state, you can’t fix pensions with more can-kicks and more CAFR-cooking, etc. The answer is likely to be “we faithfully paid 2.5% of our salaries into the system” or “the stock market will bounce back” or “it’s only a problem if everybody retires at once”.

Deep in the Heart
3 months ago
Reply to  s and p 500

I’m hoping that my few remaining friends/family in the far SW suburbs come on down when they’re finally fed up or retired, which comes first. In Texas, there is no state income tax. And when you attain the age of 65 or if you’re handicapped (any age), the school portion of your real estate tax is frozen for as long as you reside in the home. That’s about 50% of the total bill.

Plus, we have a better governor.

O'Daniel
3 months ago
Reply to  s and p 500

State bankruptcy can’t be legislated if the Democrats continue to control the House next year. Even if Republicans control everything AND enable state bankruptcy, I doubt it could be forced on any state. Does anyone think Illinois would do whatever it might take to take advantage of state bankruptcy?

My guess would be that two conditions would have to exist: pension funds at 0% funded and the state shut out of bond markets. How fast can we make that happen?

Rick
3 months ago
Reply to  O'Daniel

Time to class action sue the rating agencies for colluding with government in keeping ratings institutionally investable thus creating a bond market people flock to for the rates and guarantee that taxpayers come last. Effectively rating the very instruments they create. Until Moodys, Fitch and s&p feel some real pain, nothing Will change. Investors love it when Illinois is “just above junk” and Moodys will fix the books every year to make that happen.

Bob Out of Here
3 months ago
Reply to  Rick

Have you ever seen The Big Short? Look on youtube for “The Big Short (2015) – FrontPoint Partners confronts Morgan Stanley Risk Assessors and S&P” As the lady in it says “if we don’t give them what they want, they go to our competitors.”

Admin
3 months ago
Reply to  O'Daniel

I think a Dem governor going to the House to say they need it would do it. Maybe NJ or CN. It would never be forced on any state, just an option.

O'Daniel
3 months ago
Reply to  Mark Glennon

If so, Pritzker would be just the guy. He doesn’t need to be re-elected and he has several places to hide out (Hyatt-out?). Did you know that the World’s Largest Pitchfork is in Illinois? https://www.tripadvisor.com/Attraction_Review-g35779-d10538439-Reviews-World_s_Largest_Pitchfork-Casey_Illinois.html

Admin
3 months ago
Reply to  O'Daniel

Ooh, that Pitchfork thing is good! Thanks.

bagelgirl
3 months ago
Reply to  Mark Glennon

Is it possible for the pension systems to file bankruptcy instead of having to file for the entire state government?

The Truth Hurts
3 months ago
Reply to  bagelgirl

No.

debtsor
3 months ago

Not the way it’s structured now. I’ve suggested in the past, that if the state were to spin off the pensions into separate entities, the pensions themselves could then file bankruptcy. In IL, the pensions are basically state agencies; in other states, the pensions are separate quasi-municipal corporations that could in theory file bankruptcy with permission from the state.

The Truth Hurts
3 months ago
Reply to  debtsor

There is no restructuring them into a separate entity. They were promised by the state. The state would never be able to pass off that debt to some other quasi-municpal organization for its’ current members. The courts would stop it before it could ever get close to happening.

debtsor
3 months ago

” The courts would stop it before it could ever get close to happening.”

Depends which court…..Corrupt Ed Burke’s wife’s court? Of course.

A federal bankruptcy judge at 219 S. Dearborn? Maybe, maybe not.

The 7th Circuit? They’re all for it! The 7th Circuit would bend over backwards to allow it to happen.

It’s all a long shot, of course, but it’s my good idea, and I like it.

The Truth Hurts
3 months ago
Reply to  debtsor

You are one of the only ones. I have not heard any respected individual or organization believe that is a viable solution. A legend in your own mind.

debtsor
3 months ago

“I have not heard any respected individual or organization believe that is a viable solution. ” You’re right because no one has suggested this as a solution. Other states like WI incorporate their pension funds. They are separate from the state. And those funds in theory can go bankrupt. IL could find a way to incorporate their funds and pull some bankruptcy trickery. The reason it’s not viable is because it’s not politically viable but I believe it’s legally permissible. It’s less crazier than the proposed dissolution of the state, followed by the immediate formation of New Illinois, and rejoining… Read more »

JimBob
3 months ago
Reply to  debtsor

I haven’t seen any authority for the pension trust itself to file for Chapter 9 bankruptcy. One object would be to fairly allocate the trust assets on hand, so that all members would get something rather than retired school superintendents depleting the fund. Is one of your ideas to split the plan in two, between those already retired and those still working? Technically, the union no longer represents those who are retired. One could say the pension trust is a third-party beneficiary of any agreement between the union and the city so that the trustees might be obligated to sue… Read more »

debtsor
3 months ago
Reply to  JimBob

Yes, all issues to work through, as with any bankruptcy. Chapter 9 doesn’t have much law.

The Truth Hurts
3 months ago
Reply to  debtsor

The debt is the states obligation. There is no way to transfer that obligation. You’re proposing establishing a law to transfer that debt without the consent of the party owed the debt. Sure the state could try it. In order to do that there would be hearings in the general assembly. They would outline the purpose. Questions would be asked about the said purpose and how they new pension plan could file bankruptcy. As soon as a law like that would pass the unions would immediately seek a temporary restraining order and have the law overturned in state court. It… Read more »

JimBob
3 months ago

Pensioners and public employees would retain their claim against the state. I don’t think we are talking about extinguishing that debt. You have already cited authority that when the pension trust runs out of money it remains the state’s obligation. The pension trustees would do what fiduciaries always do — they’d marshal the money for the benefit of all beneficiaries under the supervision of the court. (Trustees may want to get off the hook as to whom they should pay when there’s not enough to pay everyone.) I expect they’d protect both the retired members and the active employees who… Read more »

debtsor
3 months ago
Reply to  JimBob

I like your analysis, I think that the state first has to get into bankruptcy, which is a huge obstacle. Secondly, I don’t think that pensioners would be a secured class. The IL constitution says they have a contractual right. It doesn’t say that it’s secured by this or that. It just says contract right. So they get at the back of the line like every other secured creditor. Their pensions would likely be cut significantly. Pensioners would be wise to take it. There’s no political will to cut their pensions to near zero (like in some corporate bankruptcies) but… Read more »

The Truth Hurts
3 months ago
Reply to  JimBob

“They HAD the security of assets in trust, but those assets are gone.” The assets have no bearing on their contract. In fact the courts have already ruled that pensioners have no right to any set level of funding. Hence the lack of enforcement of a true actuarial payment over all these years. The pension funding levels are more of a report card for the financial health of Illinois not the pensioners themselves. As far as where pensioners line up when there isn’t enough money, that will be decided by the Illinois courts. When Illinois first runs low on money… Read more »

debtsor
3 months ago

It depends which court is making those decisions, state vs. federal. And if it’s state, yes, you are right. If it goes mitch mcconnell’s way, the bankruptcy (or federal receivership) courts will look at things much, much differently.

The Truth Hurts
3 months ago
Reply to  debtsor

So which is it? States are sovereign and could do whatever they want or they need federal help? Not to worry Scotus has decided that issue as well. Mitch won’t be deciding that one. “[w]hatever the propriety of a State’s binding itself to a future course of conduct in other contexts, the power to enter into effective financial contracts cannot be questioned. Any financial obligation could be regarded in theory as a relinquishment of the State’s spending power, since money spent to repay debts is not available for other purposes. Similarly, the taxing power may have to be exercised if… Read more »

debtsor
3 months ago

“These are not words that guarantee a state a right to federal bankruptcy protection.”

But bankruptcy specifically overrides any contract clause. Otherwise what is the point of bankruptcy?

If you’re telling me that the only solution is more taxes, you are wrong. This is not overriding the laws of physics. These are mere words on a page that interpreted literally would allow for the insolvency of a sovereign entity. There are plenty of other solutions, creative solutions, they just need the details worked out.

The Truth Hurts
3 months ago
Reply to  debtsor

The constitution specifically forbids states from impairing contracts. Bankruptcy law allowing a state to override a contract would be challenged in the courts. I’m not stating how the courts would rule but I’m letting you know it is no guarantee. I’m not sure if you would find too many people that would disagree that state bankruptcy would end up before SCOTUS. Would the courts allow the federal government to dismiss debts of a sovereign state? Do they even have such ability? Would the courts use precedent when deciding if a state has the power to alter a contract? Per United… Read more »

Admin
3 months ago

Truth, while you are right that it would be challenged, the Contract Clause is not a serious objection to state bankruptcy. The federal bankruptcy power, express in the constitution, clearly trumps the Contract Clause and bankruptcies break contracts every day, both private sector contracts and municipal governments in Ch. 9.

The Truth Hurts
3 months ago
Reply to  Mark Glennon

Mark, there are many people that agree with you. There are also others that don’t. Whenever you are talking about one constitutional amendment trumping another amendment you will have challenges. There is no precedent for allowing states to go bankrupt and it’s cited as one of the reasons it has never been added to the code. There really is no point in arguing the merit as it wont be decided by either of us. My point all along has been that there is no magic bullet as we truly don’t know how the courts will rule. Even if bankruptcy is… Read more »

JimBob
3 months ago

So you are postulating no change in federal law so the state can’t file for bankruptcy, right? And ignoring Chicago we are assuming there are no assets in the state teachers pension fund. So retired teachers sue for pension installments they have not received. Do they sue the state or the [empty] fund? It seems to me there were some situations where Calpers cut back benefits in situations where the government entity was unable to pay what Calpers believed necessary for the entity to pay its “share.” As to creditors vs those having no legal right to money, what about… Read more »

debtsor
3 months ago
Reply to  JimBob

Our IL constitution says that it is a contract right. It doesn’t say anything about that contract being secured by assets of the state. The pensioners will say their pensions are a right, a benefit, not a contract, and has to be paid in full, because it’s a benefit. Not sure how good that argument is, when the plain language of the con. amendment says contract.

debtsor
3 months ago

“You’re proposing establishing a law to transfer that debt without the consent of the party owed the debt. ”

Debts are assigned all the time. Old GM, New GM. Ever heard of it?
J Crew is assigning all its debts to its lenders and they taking control of the country

Now try that on a state level with a few tweaks.

You’re right the political will for this idea is close to zero, as is the political will to make ANY changes to the pension plans.

But math is king and the state will ultimately default either way.

The Truth Hurts
3 months ago
Reply to  debtsor

Debts are assigned all the time. Old GM, New GM. Ever heard of it?”

You are talking about debts from bankruptcy. The state does not have that option. You are stating that you would assign the debt to another group before bankruptcy and then afterwards the new group would apply for bankruptcy. Do you seriously not understand the problem with your argument? You would need to get congress to allow states to file for bankruptcy first. At that point there would be no need to transfer it to another group such as new Illinois.

debtsor
3 months ago

“You are stating that you would assign the debt to another group before bankruptcy and then afterwards the new group would apply for bankruptcy. ”

Easy – pass a law that says “all past, present and future pension obligations shall be transferred from the various pension agencies to a new quasi-municipal corporation to be called Illinois Pension Funds”. Done. Illinois is a sovereign state, it can do as it wants.

There is no fool proof plan to take care of IL’s pension problems. This is just one particular option.

The Truth Hurts
3 months ago
Reply to  debtsor

“Illinois is a sovereign state, it can do as it wants.”

If it could do as it wants then the state would have been able to reduce pensions years ago. The state tried to make that argument and the Illinois Supreme Court kicked it to the curb. So your grand idea has already been proven to not pass constitutional muster. Thank for playing. Start thinking of a new idea.

debtsor
3 months ago

The pension is a contractual obligation that shall not be impaired. And transferring the contractual obligation from a state agency to a separate state funded quasi-municipal organization does not diminish the state’s contractual obligation. Other states have this set up – where an entity separate from the state handles pensions. This is not some new, crazy, whacked out novel idea. The new entity filing bankruptcy, well, that trumps any contract clause in our IL constitution. We’re not trying to overcome the laws of physics here. These are man made problems, legal problems, that can be overcome with man made solution.… Read more »

James
3 months ago
Reply to  debtsor

The court’s sworn duty is to uphold the laws; its not to pander to the mobs who cajole, threaten or otherwise try to push through their point of view for personal polltical reasons representing the “common sense” of a particular moment in time. The “Penson Clause” has been IL law since 1970, and they simply read the plain language of it and rendered the only legally-based decision that was credible in that the “Pension Clause” gave no clearly expressed way to do otherwise. Their decision may well be “wrong, wrong, wrong” to you and many others, but it was one… Read more »

debtsor
3 months ago
Reply to  James

James, was citizens united decided wrong too? But wait, it’s the law of the land! What about Roe vs. Wade? That was right at the time, and I can’t wait, I just can’t wait, for the SCOTUS to admit is was wrong, and overturn Roe vs. wade. ” Their decision may well be “wrong, wrong, wrong” to you and many others, but it was one defending and upholdling a law which allowed no exceptions to it.” Yes, and unjust law that allows for greedy pensioners to bankrupt the state and make us #50 in finances. BUT IT’S THE LAW, RIGHT?… Read more »

Admin
3 months ago

Truth, you are right. The state cannot just assign away it’s debts any more than you or I can. Somebody else can assume them, but the asignor stays on the hook.