Illinois is Insolvent: State Requests a Pension Bailout From Congress

Mish

Illinois pension plans are in serious trouble. So serious, the states seeks a federal bailout. Cities are in trouble too!

The president of the Illinois State Senate seeks $40 billion to help the pension system, fund unemployment insurance and aid hospitals and cities according to the New York Times. 

The letter, sent this week by State Senator Don Harmon, also seeks a $15 billion grant to “stabilize the state’s budget,” $9.6 billion in direct aid to Illinois’s cities, $6 billion for the state’s unemployment insurance fund, and hardship money for hospitals and nursing homes, among other things.

Messages left for State Senator Bill Brady, the minority leader, were not immediately returned on Friday evening. Democrats hold 40 of the State Senate's 59 seats.

Illinois is Insolvent

I was certain this would happen, but the way this happened is a bit unexpected. Some of the state pension plans will run out of money in as little as 2-7 years. 

Wirepoints reports Illinois pension plans were running out of cash long before the Coronavirus hit.

Many pension funds across Illinois were running out of cash even before the Coronavirus reared its ugly head. Some funds were even on the brink of becoming pay-as-you-go plans, where pensioners are forced to rely directly on employer operating budgets, and not pension fund assets, to get their retirement checks.

The proof is in the collapsing asset-to-payout ratios of most Illinois pensions. That ratio – which is one of the statistics Moody’s Investors Service uses to measure pension health – compares a fund’s total assets to how much it pays out in benefits each year. In other words, it measures how many years a pension plan can make benefit payouts before it runs out of money, assuming no new contributions or investment income. 

Illinois’ worst-off funds only had two to five year’s worth of payouts left in 2018. They were among the most insolvent in the country. The COVID-19 market meltdown will have only shrunk their assets further.

Illinois and Chicago Pension Plan Funding

Illinois and Chicago Pension Funds Wirepoints 2020-04

Take, for example, the Chicago firefighter fund. In 2018, its total assets were $1.1 billion and its pension payout for that year was $330 million. That means it had about 3 years’ worth of payouts on hand – an asset-to-payout ratio of 3.4. There are just a handful of funds in the nation with lower ratios than that.

By comparison, the plan’s assets amounted to nearly 10 years’ worth of payouts in 2000.  

Chicago’s firefighter plan is now dangerously close to becoming a pay-as-you-go pension plan. That would make firefighters dependent on the city – which is already junk rated and effectively bankrupt – for their retirement checks.

It’s not just the firefighters’ fund that’s in trouble. It’s the same thing for Chicago police. Their funds’ ratio was just 4.1 in 2018. Chicago municipal had a ratio of 4.7 years. With the markets and bond yields down significantly, Chicago’s funds are now in a precarious position.

The state’s funds are only slightly better off. Illinois’ biggest fund, the state Teachers’ Retirement Fund, had a ratio of just 8.2 in 2018. At the turn of the century, it had 17 years’ worth of payouts.  

The State Employees Retirement System had a ratio of only 7 years.  

Worst of all is the Illinois lawmakers’ fund, which had just 2.5 years worth of payouts.

There is much more bad news in the article. Including a look at various cities.

Wirepoint Concludes

If the market meltdown persists for much longer, expect the city of Chicago’s rating to fall further and for the state’s to end up in junk. The consequences of both would be huge. But so far, Gov. J.B. Pritzker and Mayor Lori Lightfoot continue to reject an amendment to Illinois’ pension protection clause.

But soon, they may be forced to choose between either chaos or reforms. Barring state bankruptcy, pension reform is the only way to cut Illinois’ strangling debts and to keep pension fund asset-to-payout ratios from plunging straight to zero.

No Bailout

Illinois does not deserve a bailout. Its pension woes are of it own making, and have nothing to do with the coronavirus.


The state and cities need serious reform starting with the state allowing cities to declare bankruptcy. 

Trump could easily have passed national bankruptcy reform in his first Congressional term but he failed to do so. Now Democrats would likely block it. 

Two Things

  1. Bankruptcy Reform
  2. Pension Reform 

Illinois needs both, and both are up to the state, not the federal government.

Mike "Mish" Shedlock

Comments (102)
No. 1-37
Greggg
Greggg

ohno
ohno

While we're at it let's redesign the entire system and get rid of personal real estate taxes entirely. This crap has to stop now!

Schaap60
Schaap60

I'm in California, and it does not deserve a bailout either. My guess is that states in better shape will block bailouts so those "two things" will be the order of the day.

Sequoia
Sequoia

The states should get some help for the difference from projected income to revised. They need to make cuts to the new reality though. Not a continuous rolling bailout. Since the shutdown was a national issue

They should not be bailed out of 50 years of stupid though.

My grandfather had an old saying from the Great Depression. Never mistake debt for wealth. They look the same in good times but not in bad.

Greggg
Greggg

Watch detroit closely. They have already gone through bankruptcy a few years ago and had to start making payments on 190 million dollars of debt the court deemed to be their responsibility in January 2018, cutting essential services such as police and fire department budgets to raise the necessary funds to make those payments. Now they are in trouble again... and so are the suburbs in the tri-county area. Detroit owns the water system to those areas.

Pat789
Pat789

Illinois needs to pull in the reins on their pensions and so does every other state that may hit the wall with their pensions.
Illinois should :
A.) They need to cut pension payments in half or more immediately to help balance their budget. Public employee pensions are unsustainable....cut...cut...cut now.
B.) These public employees have been living like Kings and Queens with the amount they receive in retirement compared to the private sector.

Illinois and other states are about to get a reality check like the rest of us all! Do not bail them out.

michiganmoon
michiganmoon

If Illinois gets bailed out many others will get in line. We can't borrow all of the money for these bailouts, we can't tax it - we will create the money and risk the purchasing power of the currency.

Jojo
Jojo

Why not bail out everyone and everything? We are seeing how easy it is to print trillions to bailout CV19!

Realist
Realist

The entire US pension system is a huge mess, from Social Security to state, local, and company pensions. Why they have been underfunded and managed so poorly is a mystery to me. As always, I suggest that Mish move to Canada where the pensions, while not perfect, are far better managed than in the US. He could live in Niagara Falls Ontario, and drive over a bridge to be back in the US in 10 minutes if he wanted. I visited Niagara Falls once and thought it was a lovely place.

Sadly, many Americans will never get the pension they were promised, though I’m sure they will get some portion.

I checked out the website usedebtclock.org yesterday. Trump has already got this year’s deficit over the 3 trillion mark and I wouldn’t be surprised to see him run it up towards 5 trillion. He is going to add more debt in 4 years than Obama did in 8. And that’s without a pension bailout.

tokidoki
tokidoki

Dow 100K will fix EVERYTHING.

Wait for it guys.

killben
killben

"Illinois does not deserve a bailout."

No one does. It is anathema to capitalism. But then, given that USA is a bailout nation and it has the printing press and it bails out scoundrels and corporate scavengers any which way why not Illinois?

GeorgeWP
GeorgeWP

With interest rates on any relatively safe investments near 0% how can any mutual or individual fund their retirement. Extreme low interest rates have killed saving in favour of debt and gambling in the markets. Umm, also why did these miniscule funds ever exist. The biggest of the examples has maybe 100 members, that is silly small.

bluestone
bluestone

I'm probably missing something here but aren't all annual pension fund payments funded by an equal annual contributions and the level of the fund irrelevant? I mean, there is no purpose to having a fund apart from as a buffer maybe.
If for example, annual contributions are less than annual payments out then the fund exhausts itself inevitably, and why would the other case, that of contributions exceeding payments, ever continuously exist?
So isn't the actual issue that payments out exceed contributions in?
In the case that this is because of demographics, workforce shifting out of state, then a federal bailout levied on the states with the extra transplanted workers seems reasonable enough because the contribution loss suffered by Illinois is their gain. Bankruptcy would allow any overly generous pensions to be reduced to reasonable levels.

THX1138
THX1138

New York, while not as bad as Illinois, is angling for a bailout as well. Gov. Cuomo has referenced federal bailouts for coronavirus stating a 10-15 billion shortfall. It's disingenuous because he had that 10-15b deficit heading into 2020 and is not corona related. I suspect many blue states will try passing the buck to the feds under the guise of dealing with the pandemic..

jcneall
jcneall

Illinois’s? Lol!

MiTurn
MiTurn

Mish, you still in Illinois? Moved yet? Hopefully you can sell the house!

numike
numike

It may be the most famous bit of economic policy advice ever given to a US president. “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Treasury Secretary Andrew Mellon told his boss President Hoover. “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

Tony Bennett
Tony Bennett

"The president of the Illinois State Senate seeks $40 billion to help the pension system"

...

If Illinois were a swing state, I'd wager DJT would come to its rescue.

Seriously, most have Americans have no pension and look with envy at those who do. And they are the ones who are supposed to bail out the fortunate?

Not to mention there is NEVER just one cockroach.

markonmish
markonmish

Illinois has been digging a hole for decades....just have the feds throw dirt on them!
They should have a state flag that has the word "CORRUPTION" on it!

SynergyOne
SynergyOne

What, you mean the Fed pumping out stonks does not help them enough?

shamrock
shamrock

The federal reserve can do anything, and they will probably bail out the states and cities.

lol
lol

Can't compare 2000 to today,20 years ago US still had manufacturing, to afford those lavish benefits.Offshoring destroyed that,factories that paid millions (billions)in taxes were replaced by pawn shops,Dollar stores,Title loans ,Convenience stores,lots of prisons,liquor stores etc,those together don't generate anywhere near the tax revenue of a single manufacturer!

numike
numike

Im gonna sign up for this deal hellya
Eligible Americans would receive $2,000 per month for at least six months. And it would continue until national employment levels return to pre-COVID-19 levels.
All single Americans older than 16 earning less than $130,000 a year get a monthly $2,000 check.
Married Americans who make less than $260,000 a year would receive a monthly $4,000 check, plus $500 per child, capped off at three children.
The money would not be considered income and would not be taxed.
U.S. Reps. Tim Ryan (Ohio-13) and Ro Khanna (Calif.-17)

Quark711
Quark711

If the Federal government borrows even more money to bail out insolvent states and/or industries, buyers of "safe" US Treasury debt will say, "If you're going to assume these risks, I want better compensation!" which means the Federal government will have to pay higher rates of interest that they would have otherwise.

Since it's a matter of self-preservation for the Federal government, there may be as high as a 50% chance the fools running the country will figure this out before opening the bail-out spigot.

anoop
anoop

There is an easy solution for all pension funds:

  1. Have them increase the allocation to stocks, preferably 100%. For the ones in really bad shape, allow use of leveraged ETFs.
  2. Have congress give the fed the power to buy stocks.
  3. Fed buys stocks and continues to ensure that we never see another dip regardless of what is happening with the underlying economy.

What do you guys think?

ClydeThe Raven
ClydeThe Raven

If the Feds cave to Illinois's request for a bailout, then pension plans across the country will want "equal" treatment because it's only "fair".
The question for me is will Congress have the guts to turn down Illinois?
I wouldn't want to bet my life on it judged on the recent behavior of the Congress and Federal Reserve Bank.

awc13
awc13

"Trump could easily have passed national bankruptcy reform in his first Congressional term but he failed to do so. "

easily? wrong. Democrats in the Senate would have filibustered any such legislation.

Alyoshak
Alyoshak

Property taxes are an abominable thing. You don’t end up actually owning the home you spent most of your laboring years to “buy”. State should be funded in some other way.

Alyoshak
Alyoshak

Why should those who do not get/have a pension have to pay for those who do? If all US citizens have to pay towards some state’s pension, then that state should also pay towards other states’ pensions and every working citizen should get a pension.

astroboy
astroboy

Wow, which pension in the graph is funded for 50 years out? Makes you think perhaps there's something as a pension being funded too well (or the payouts are too small).

Shig123
Shig123

Guess the Fed could give the state a trillion in the Central Bank. Or CLD make state employees do what everyone else does. I. E. use occasionally worthless 401k

RLJ
RLJ

Bailing out the consequences of bad politician's malfeasance only will encourage more of the malfeasance and sweetheart deals with unions and corrupt politicians at the taxpayers' expense. I was born and raised in Illinois when it was a conservation state. The taxes there are rediculous and people are leaving in droves. Just like businesses under capitalism, failure is a healthy concept. Let the failed business customers engage a business with a better product and better service and citizens find a state that does not abuse its citizens.

mpowerOR
mpowerOR

Bailout IL state pensions?

Why would any solvent state remain in the union if IL is bailed-out?

Bailout of insolvent states = the beginning of the end of the USA.

...and some will say, "...oh, that's extreme stuff... secession will never happen...".

...to which I reply " ...look out your window...".

this isn't 1950 america anymore... everything is 'extreme' now... the new normal.

Carl_R
Carl_R

What??? Hell no. Just hell no! There is NO way the Federal government should lift a finger to help Illinois. Their people voted for the people who created this mess, let their people live with their own mess. They created it, they need to deal with it.

SaratogaBob
SaratogaBob

“You never want a serious crisis to go to waste.” Thanks Rahm.

A requirement for any Federal support to state pensions should be a reduction in inflated benefits and a ban on public employee unions. CPD wants help? Fine, ban the police union. Chicago Teacher's pension wants help? Fine, ban teacher's unions.

benny10
benny10

Everybody knew that Illinois and Chicago are ticking time bombs, so this should surprise nobody.

TB13
TB13

Here's my solution:

Thoughts anyone?


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