Outside experts size up Illinois pension mess: twice as big as the state admits — WirePoints Original

“A nation of sheep will beget a government of wolves.”

Edward. R. Murrow

December 9, 2012, Updated January 9, 2012

A primary reason for the fiscal calamity in Illinois is sheepish acceptance of the state’s narrative about pensions. The official unfunded liability of the five state guarantied pension funds — the key number in the narrative — is $96 billion, a number repeated endlessly and mindlessly by most of the media and some “pension reform” groups. It’s nonsense.  [Update:  The first two of the sources below lump in local unfunded pension liabilities with the state’s.  However, the Illinois Policy Institute has calculated the real numbers for just the state as $200 billion. Remember that these reported liabilities are lagged and have been growing most recently by $14 billion per year and that none of these include related healthcare coverage for pensioners which is an entirely unfunded state liability of $35 to $50 billion.  Accordingly, the weight of expert opinion affirms that the real number for the state is indeed roughly twice what the state says.]

Here are some of the outside experts, ever growing in number, who tell us the real problem is roughly twice what the state says:

– The annual State of the States study released last week shows the state’s unfunded pension liability is $236 billion — well over twice the official number. That study is a project of the American Education Foundation, Harvard Kennedy School Institute of Politics, University of Pennsylvania Fels Institute of Government, and the the W.P. Carey Foundation.

– State Budget Solutions, a project of Sunshine Review, calculated the unfunded liability at $225 billion.

– The State Budget Crisis Task Force, a bipartisan group headed by Richard Ravitch and former Federal Reserve Chair Paul Volcker, released a report last month that detailed the errors in how Illinois reports its pension deficits.  It singled out Illinois’ largest pension, the teacher’s pension, as having only 18% of the assets it needs to meet its current liabilities, which is less than half the official number.

– Professors Joshua Rauh of Stanford and Robert Novy-Marx of the University of Rochester, long time critics of the official numbers, totaled the true unfunded liabilities of the state’s funds with other Illinois municipal funds at about $200 billion.

Much of the problem stems from phony assumptions about how much the pensions will make each year on the assets they hold.  But new rules from the Governmental Accounting Standards Board will, by 2014, force Springfield to acknowledge the higher numbers.  Rating agencies also are acting to force the state to use more realistic assumptions.  Moody’s plans a recalculation using lower assumed rates of return which, alone, will increase the official shortfall numbers by over 50%.  The state will no longer be able to claim that the experts are wrong about its return assumptions.

Remember that state pensioners also are entitled to healthcare benefits which are not in these numbers, and that obligation is totally unfunded.  Add in another $30 to $ 50 billion.

We will get no real pension reform because the state is working off phony numbers.  If the entire official pension problem is somehow erased, the real numbers will soon be apparent leaving the state with a pension deficit just as large as the current official one.

Illinois, do you believe the numbers from the folks who created this problem — the state — or the conclusions of outside experts like those above?

Alicia Munnell is the director of the Center for Retirement Research at Boston College, who’s specialty is properly sizing state pension problems.  Most other states have a manageable problem, she says, but we in Illinois “should be hysterical.”

Mark Glennon