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.”
Read more about COVID-19 and Illinois’ finances:
- COVID-19: Seven facts that tell us Illinoisans can and must get back to work
- COVID-19 pushes nation’s weakest pension plans closer to the brink: A 50-state survey
- Open Illinois’ economy: Recessions and depressions kill
- Reopen the Economy While Protecting Those at Risk or Face Another Great Depression
- Illinois Senate Democrats Seek Massive Federal Bailout for State, Going Far Beyond Coronavirus Impact