By: Ted Dabrowski and John Klingner
Warren Buffett says he wouldn’t relocate a business to a state like Illinois. He doesn’t want to get stuck paying for its pension crisis. He recently told CNBC:
“In the public sector, you know, it’s a disaster…If I were relocating into some state that had a huge unfunded pension plan, I’m walking into liabilities…And those are big numbers, really big numbers…And when you see what they would have to do – I say to myself, “Why do I wanna build a plant there that has to sit there for 30 or 40 years?”
Already, more than a quarter of the state’s budget is consumed by retirement costs, largely the result of overpromised benefits. Illinois can’t handle it. The state has racked up billions in unpaid bills, multi-year operating deficits and credit downgrades. It’s now just one notch above junk, according to Moody’s.
But the problem is worse than it appears. The state’s ballooning retirement promises are actually far bigger than Illinois bureaucrats say they are. When the state’s debt costs are more properly and honestly accounted for, Illinois ends up beyond crisis levels. It would take nearly half of Illinois’ $38 billion budget to pay the true costs of the state’s retirements.
Simply put, Illinois is insolvent under most realistic financial measures.
Official reporting only tells half the story
The state’s official reports grossly understate Illinois’ fiscal crisis, but it’s a good place to start.
Illinois actual contributions to its state-worker retirement debts consume over 25 percent of the state budget. No other state in the country dedicates that much of its budget, making Illinois the national outlier when it comes to retirement debts.
And according to official state numbers, that burden won’t get better any time soon.
Pension costs alone will consume a full quarter of Illinoisans’ tax dollars for the next 25 years (See Appendix 1). That fact alone is enough to make Illinois increasingly unlivable for the majority of working and middle-income Illinoisans.
Not only does the state have an official $134 billion shortfall, but it also has a $73 billion debt for retiree health insurance benefits, none of which has been pre-funded. Add to that a $10 billion pension obligation bond that doesn’t mature until 2033 and the state’s official retirement debts end up totaling more than $210 billion.
The yearly statutory payments for those obligations are more than $10 billion annually, or about 26 percent of the 2019 budget.
Half the budget
Illinois’ true retirement costs, however, are far worse than what the official numbers say. When the state’s rosy assumptions are pushed aside and more rigorous, federal (GASB) guidelines are used, the state’s required contributions jump.
To start with, most market-based groups calculate a much higher pension debt for Illinois, using discount rates of 4 to 6 percent. Moody’s, for example, uses a rate much closer to that used by corporations. Their calculation puts Illinois’ pension debt at $234 billion – $100 billion more than the official debt.
Wirepoints calculated Illinois’ true yearly pension costs based on the following assumptions:
- 100 percent funded plans by 2045;
- Level, equal-dollar yearly contributions instead of the current ramp schedule; and,
- More realistic investment returns: 6 percent instead of the 7 percent the funds currently assume (See Appendix 2).
Paying for pensions properly adds another $5 billion to the state’s current general fund pension contribution – a $12.5 billion payment in all.
Wirepoints also analyzed what how much more it would cost the state annually if it contributed the actuarially required payments to its retiree health obligations – instead of the minimum pay-as-you-go contributions it makes today. That would require an additional $3 billion annually – creating a true annual payment of $4 billion. (See Appendix 3.)
Add up all the retirement costs and Illinois should be paying $18 billion dollars today – nearly 50 percent of Illinois’ $38 billion budget.
Paying almost 50 percent of the budget into public sector retirements is an impossibility. Diverting that much would slash the monies needed to fund Illinois’ core services and create chaos in an already dysfunctional state.
But that’s Illinois’ fiscal reality. It’s an insolvent state that can’t pay its bills.
Even if politicians were to hike taxes to raise $10 billion in new revenue, the state’s true retirement costs would still eat up over 37 percent of the budget ($18.1 billion in true retirement costs divided by a $48.4 billion budget).
JP Morgan: Illinois is the nation’s outlier
JP Morgan recently analyzed retirement costs in 2017 on a state-by-state basis, and anyway you look at it, Illinois was the outlier nationally. Morgan calculated what states currently pay toward their retirement debts, as well as what they should be paying to ensure their plans are actuarially sound. The bank added up contributions to pensions, retiree health insurance and interest on direct debt.
JP Morgan found that over 26 percent of Illinois’ budget currently goes toward public-sector retirements. That was far more than other states with major pension crises, including Connecticut and New Jersey.
By comparison, retirements only consumed 6 percent of Indiana’s budget and 4 percent of Iowa’s. That’s a big reason why those states have triple-A credit ratings while Illinois teeters just one notch above junk.
Illinois’ outlier status is even more stark when JP Morgan measured the true costs of state retirements. Over 50 percent of Illinoisans’ tax dollars would go to pay for pensions, retiree health and interest.
Iowa’s true retirement costs, in contrast, are just 5 percent of its budget. Wisconsin’s, 7 percent. Indiana and Missouri’s, 6 percent and 11 percent, respectively.
Even Kentucky, mired in its own pension debacle, is far better off than Illinois is.
More taxes can’t fix this
Illinois politicians are running out of options. Their usual tricks of more debt and reamortizations won’t work with Illinois teetering on junk status. That’s why they’re so desperate for what they call a tax hike on the rich. They’re selling Gov. J.B. Pritzker’s $3.2 billion progressive tax hike as the panacea for all of Illinois’ ills.
But the reality is the state has no way to pay for all the promises lawmakers have made. The state is currently shorting its retirement plans by at least $8 billion annually. It’s currently running a $3.2 billion operating deficit. And it has a stack of nearly $6 billion in unpaid bills.
No amount of tax hikes can fix the structural problems of runaway benefits.
Until Illinois’ retirement debts are brought under control through structural reforms, starting with a constitutional amendment for pensions, politicians will continue to throw even more tax dollars into the collapsing mess that is Illinois finances.
No wonder Warren Buffett stays away.
Read more about how pensions wreck Illinois’ budget:
- Moody’s vs. Illinois politicians: $100 billion difference in pension debts
- There’s No Legal Reason Not To Pursue An Illinois Constitutional Amendment
- Overpromising has crippled public pensions: A 50-state survey
- Illinois’ other debt disaster: $73 billion in unfunded state retiree health benefits
- Pritzker’s progressive tax push: A guide for the ordinary Illinoisan