By: Mark Glennon*
I’m fed up with the entirely fictional debate about the Illinois budget being played out in the press. One cause is the the state’s failure — at all levels — to give us meaningful, current numbers. Let’s start with two:
First, Governor Rauner’s office, Senate Republicans and Senate Democrats alike are consistently claiming that the pending pension bill, Senate Bill 11, would save about $1 billion per year. The press repeats that claim without challenge. But the bill is built primarily on the goofy “consideration” theory about pension reform. Yes, it’s “goofy,” because it can’t work “by definition” for the reasons explained in sworn filings by the City of Chicago before the Illinois Supreme Court. For details, see our earlier articles on this going back almost two years, linked here and here. Worse, we now have somebody in the Governor’s office referring to the bill as “comprehensive pension reform.”
Hogwash — it’s not comprehensive pension reform and I’m beyond skeptical that it will save much if anything. Put up the actuarial report or other analysis that indicates how much would be saved.
Second, we’re tired of waiting for reasonable reporting on a staggering liability going entirely ignored by the state and the press — the unfunded liability for pensioner healthcare. I have FOIAd for the latest, but the most recent report available is almost three years old — the FY2014 actuarial report linked here. I’m talking about an entirely unfunded debt that increases the commonly reported pension liability by something like 50%, though we really don’t know because the state doesn’t report the numbers on any timely, usable basis. That liability is constitutionally guarantied, just like pensions themselves.
We finally got the financial statements for the state yesterday for the fiscal year that ended last June 30. But they are of little value for the reasons described today by Truth in Accounting:
The Illinois balance sheet is based upon amounts at three different times. Most of the amounts are as of June 30, 2016, but the state’s largest liabilities, the unfunded pensions, are based upon June 30, 2015 valuations. The 2016 unfunded liabilities are at least $20 billion more than what was reported on the balance sheet. The unfunded retiree health care liability is based upon a June 30, 2014 valuation. [Emphasis added.]
Get the actuarial report for pensioner healthcare liabilities done and publish it. We know it’s massive. Stop hiding it.
That would be just a start towards some honest financial reporting.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
As confusing as these reports are, it seems odd that the insurance programs use a discount rate of 4.5% whereas the pension systems assume a 7.5% discount rate. Any idea why?
Yes. It’s absurd. Made up out of thin air. The concept behind the discount rate is to match the rate of return on assets set aside to cover the liability. But there is nothing whatsoever set aside to cover healthcare liabilities, which are totally unfunded. It’s fraudulent. We’ve been waiting to write about this pending getting a more current report on those liabilities.
Let’s see if we can cobble together the narrative as described by the actuary in the teachers retiree healthcare actuarial report. “The discount rate assumption is used to discount projected net OPEB benefits to a present value.” “Because plan benefits are funded based on a pay-as-you-go policy, a discount rate of 4.5 percent was used to develop the Actuarial Accrued Liabilities, and Normal Costs.” Market Value of Assets as of June 30, 2015: ($66,272,000)….that is negative $66,272,000. Next comes the analysis of those facts. There are no assets. So there can be no investment return. Yet credentialed actuaries project the… Read more »
You got it, Mike. One actuary I talked to said healthcare may turn out to be a bigger problem than pensions themselves. I just haven’t had the time to tackle this and I have been waiting for a new actuary report on the state liabilities, which should be out soon. Also, as I understand it, many plans game the rules by funding some token portion of the liabilities, which allows them to use a “blended,” higher rate.
“Historically, these assets have been invested in cash and other short term investments according to the current investment policy, and benefit obligations are effectively funded on a pay-as-you-go basis. Consequently, according to GASB Statement No. 43, the interest discount rate used to calculate the present values and costs of the OPEB must be consistent with the assets supporting liabilities, which for this case is expected to be the long-range expected return on short-term fixed income instruments. The plan sponsor has selected an interest discount rate of 4.5 percent for this purpose.” – TEACHERS’ RETIREMENT INSURANCE PROGRAM OF THE STATE OF… Read more »
Yes, using 4.5% conforms is commonplace and conforms to GASB, I’m told. But it makes no economic sense. There are no assets and no returns. I think there should be no discounting, which is debatable, but it certainly shouldn’t be so high.
TRIP / THIS should have records of historical returns (when their were assets) which is subject to FOIA request.
Couldn’t locate such a history or a justification for the 4.5% in the actuarial report.
The following is in the report.
“Because plan benefits are funded based on a pay-as-you-go policy, a discount rate of 4.5 percent was used to develop the Actuarial Accrued Liabilities, and Normal Costs.”
All not surprising in the land of Illinois Math & Illinois Math 2.0.
Seems a bit absurd that the insurance plan has no assets yet uses a reasonable, market-based discount rate. Then you have the pension plans that use aggressive, above-market discount rates that distort the liability. Something tells me that if the insurance plans had measurable assets, they’d probably assume 7.5% as well.