We pension pessimists are actually pension villains — the hardball folks happy to cut pensions, starve retired teachers, steal from cops, and so on. We villains overstate pension shortfalls so government will cut them off.  Right?


Consider instead if it might be the deniers — those who say the pension and fiscal crises are manageable, mostly through tax increases — who are really endangering pensions of rank and file municipal workers.


Illinois was broke long before the “Illinois is Broke” campaign began.  Insolvency was apparent to anybody half good with numbers who took some time to look at them.  I, for one, wrote ten years ago that state government is “handicapped by the crushing reality that the state is broke.”  Politicians don’t say things like that because they would have to suggest harsh remedies — which would cost them their office.  The media long ignored the story because they thought pensions and budgets were “too boring.”  That’s what I was told even three years ago when I tried to publish a piece that laid out the numbers. That piece is reprinted below and still provides a good summary of the crisis (though the numbers are worse now), but most publications weren’t interested.  They continue to miss it because they uncritically spew numbers the state publishes, as we regularly point out on this site.


Deniers stoke pensioners into believing higher taxes can solve most of the problem. But look all you want for any proposal that will raise enough revenue to make any real difference. You need no financial expertise, just look for it.  It does not exist. Illinois increased individual rates 66% last year with little effect. The reality is that raising taxes will barely dent the problem — even if you raise them a lot on high earners, however fair that might be.  And there’s a real question about whether any additional revenue at all will come from a tax increase because we may be driving too many taxpayers out of state, as we’ve said here.


Corporate taxes?  Corporation’s don’t pay taxes, they collect them — from employees, shareholders, suppliers and customers.  That’s fact, not theory.  And it’s Economics 101 that they collect them regressively: Poorer people pay more.  More importantly, the fight to keep employers from moving to lower tax states is an almost daily story, and it’s a problem with no solution.  Corporations will continue to shop for the best deal they can get when relocating or expanding, and Illinois has no choice but to bid against other states. To continually tell municipal workers that corporate taxes are a big part of the answer is particularly irresponsible.


I know from my initial training  doing reorganizations and insolvency that ultimately this will be about “payment priorities.” That is, who gets shortchanged and who doesn’t when there’s not enough money for everybody?  Let’s look at this as an insolvency and think about payment priorities.  Most state bondholders will get paid in full first because a tough payment priority is already the law for general obligation bonds, and most other bonds are secured by mortgages on specific tax streams.


I, for one, hope to see rank and file pensioners also get some level of priority.  I mean those who work until a true retirement age, get a reasonable pension that bears a fair connection to their lifetime earnings, etc.  Most rank and file pensioners fit that — they are looking at an average pension of maybe $35 – 55 thousand per year, and that’s all they have because they were kept out of Social Security, 401Ks and IRAs. Chicago’s Southside  is full of retired firefighters like that (and I am related to about one million of them).


If you’ve done insolvency work you also know that it’s critical to start with the right numbers, collected objectively.  Underestimate the problems and your plan will fail,  returning you to insolvency fast. Insolvent companies and their lenders usually bring in a new team to assure that residual viewpoints, emotions and biases are eliminated.  Illinois, instead, chooses blinders.  The state publishes dishonest numbers that understate the problems and naive voters lap them up.


The longer we delay facing reality the more likely it becomes that even those rank and filers will have their pensions reduced.  That’s because another rule of insolvency work is “do it early, fast and decisively.”  Illinois mocks that rule and the longer we ignore it the less all stakeholders will get.


Springfield, unions and other deniers, it’s time you level with municipal workers.  Tell them that it’s worse than they know, that higher taxes won’t nearly fix the problem, and that we need to start looking at drastic solutions.  And do it fast.


Mark Glennon


Reprint from November 13, 2009

Budget catastrophe escalates while law makers watch

While the Tribune was right to emphasize the Minority Report of the Pension Modernization Task Force (“Just send your $7,000,” Nov. 8), even that report understates the full extent of the calamity now at hand. That report showed that unfunded liabilities of the five pensions that the state guaranties total $95 billion – roughly $7,000 for every person in Illinois. In fact, the broader problem is over twice that size:

Illinois has over 600 other municipal pensions with at least $62 billion in unfunded liabilities, aside from the five pensions guaranteed by the state,. Those pensions are generally ignored and were not part of the task force report. Their deficits are reported biannually by the Illinois Department of Insurance and the reports are on their website. That $62 billion deficit figure is from the 2007 report – before the markets tanked – so the 2009 report will likely be much worse.

Retired state workers also get state-paid health care, which has also been mostly ignored. That’s another $40 billion unfunded liability, based on an earlier study by the Civic Committee of the Commercial Club of Chicago, and $2 billion more per year is required just to cover the growth in this liability.

Add these two items to the $95 billion state-guarantied pension debt and you get $197 billion, which is roughly $15,000 for every person, or $60,000 for every family of four in Illinois. Most families don’t have resources to pay off a debt that size and shifting an even higher burden to everybody else would spark a genuine tax revolt.

Keep in mind that the unfunded pension liabilities are worsening at the rate of $8 billion per year just on the five state-guarantied funds, according to the Civic Committee. That’s in addition to annual budget deficits being incurred in brazen violation of the Illinois Constitution’s balanced budget requirement, which are now projected at roughly $14 billion. Add on that $2 billion per year needed to stay even on retiree healthcare, and the real annual shortfall is roughly $24 billion.

Governor Quinn’s proposed tax increase would raise $3 billion per year; Dan Hyne’s proposal, $5.5 billion, so neither plan gets remotely close to funding the budget deficits or stopping further bleeding on pensions and health care. The already-accumulated deficits of $60,000 per family are on top of all that and have no chance of being whittled down. Nobody has proposed any solution or scenario that begins to address all this. Illinois is hopelessly insolvent.