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Illinois Pension Debt Growing Worse, And So Are Taxes

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EDITOR'S NOTE: Mish Talk reports that the state of Illinois has an incredible $500 billion pension shortfall, which equates to around $110,000 of debt per household in the state. Even with the stock market’s powerful performance in the last few years and huge tax hikes in Illinois, the state somehow fell half-a-trillion-dollars short of its obligations to retired state workers. This number is more than double the amount of the state with the next-biggest shortfall (California, $240 billion). Wirepoints suggests a four-point plan to fix this problem that includes a constitutional amendment that overrides the pension protection clause, state retirees paying into some benefits, a freeze on benefits, and reviewing different localities requirements. Mish Talk adds that bankruptcy reform is also a crucial piece of solving this problem. 

Hello Illinois taxpayers, you have a massive bill that's overdue. I have the solution.

Illinois Taxpayers Are On the Hook

Photo: Mish Talk

Pension Debts Hit $530 Billion

Hello Illinois taxpayers, the Pension Shortfall Surpasses $500 Billion and your average debt burden is now $110,000 per household. 

Moody’s estimate of Illinois’ retirement debts, made up of pension and retiree health shortfalls at the state and local level, hits $530 billion in 2020.

This is despite a massive multi-year stock market rally and huge tax hikes that went to pension funds and little else.

Illinois just reached an alarming milestone: each Illinois household is now on the hook for, on average, $110,000 in government-worker retirement debts. That figure is the result of dividing Illinois’ $530 billion in state and local retirement shortfalls among the state’s 4.9 million households. In 2019, the burden was $90,000 per household.  

Shortfall Contribution

  • Illinois’ five state-run pension funds – $313 billion
  • State retiree health insurance – $55 billion
  • State pension obligation bonds – $9 billion
  • Chicago and Cook County pensions and retiree health – $122 billion
  • Other local government pensions and retiree health – $32 billion 

llinois’ debt swamps that of its neighbors and other big states. At $313 billion, Illinois’ state-level pension debt is the nation’s biggest, the 2nd-most on a per household basis, and the highest when measured as a share of state revenues and GDP. Illinois also has the nation’s highest pension costs as a share of revenues, according to Moody’s. 

Spotlight Chicago

Spotlight Chicago Pension

Photo: Mish Talk

The $110,000 per household is an average across the entire state, but the precise burden for Illinoisans differs depending on where they live. The debt burden on Chicago’s one million households is larger because of the city’s deeper debt crisis. There, each household is on the hook for $180,000 for their share of state and local retirement debts.

Illinois vs Other States

  • California, with more than triple the population of Illinois, has a state-level shortfall of $240 billion – $70 billion less than Illinois. 
  • Texas, with more than double the population of Illinois, has a shortfall of $173 billion – $140 billion less than Illinois.
  • Kentucky, suffering a pension crisis of its own, has a $56 billion state-level shortfall – just a fifth the size of Illinois’. 
  • When measured on a per household basis, Illinois’ state-level pension debt totals more than $64,200. That’s the nation’s 2nd-largest burden, behind only Connecticut’s $65,400 per household. 
  • Illinoisans’ state-level household burden is four times larger than the national average of $15,600
  • Compared to residents in neighboring Iowa and Wisconsin, Illinoisans’ burdens are 18 to 20 times larger. Iowa and Wisconsin’s per household burdens are $3,500 and $3,200, respectively.  

Pension Shortfall vs Revenue

Illinois State-Level Pension debt as % of Revenue

Photo: Mish Talk

Moody’s says Illinois’ “tread water” pension cost – the annual state contribution required to ensure the state’s pension shortfall doesn’t grow from one year to the next – equals 21 percent of Illinois’ own-source tax revenues.

No other state comes close to that amount. Connecticut’s tread water cost equals 15 percent of revenues, the national average is just 4 percent, and all of Illinois’ neighbors’ costs, except Kentucky, equal just 5 percent or less of revenues.  

Pension Funding Ratio

Illinois Has the Nation's Worst Funding Ratio

Photo: Mish Talk

Hard Truth 

The hard truth is that Illinois’ crisis will only worsen over time. As the state’s retirement debts continue to grow, more and more Illinoisans will be motivated to leave the state’s debts behind while fewer migrants will be willing to move in and assume the pension burden. A growing debt burden on an ever-shrinking population will only hasten Illinois’ downward spiral.

Pension reform is inevitable. The question is whether Illinois’ legislature will address the crisis now, while Illinois still has assets and dynamism left, or delay until this state is a shadow of its former self. It’s a question of whether those reforms will happen in a controlled, organized fashion, or under the duress of fiscal and political chaos. And it’s a question of whether lawmakers will enact true structural reforms or pass more can-kicks as they have in the past.  


Wirepoints offers a four-pronged solution to the Illinois Pension Crisis

  • A constitutional amendment that "conclusively overrides the pension protection clause and all other state law issues". 
  • State retirees would be required to pay for half of their health insurance costs – the national average for public workers – on a means-tested basis.
  • Freeze benefits.
  • Local funds’ circumstances vary substantially. The state has 665 locally sponsored pensions. They may require different reform options.

Bankruptcy Reform

I agree with all the points above, but Wirepoints missed a huge one: bankruptcy reform. 

Trump wasted his first two years attempting to kill Obamacare. Instead, we could have had national bankruptcy reform and who knows what else. 

As it stands now, states can either allow or disallow municipal bankruptcies. Illinois does not allow municipal bankruptcies. 

Municipal bankruptcies fall under Federal, not state rules. If Illinois allowed municipal bankruptcies, that alone would offer a way out. 

Federal laws would immediately supersede any state law that says pensions are sacrosanct.  

So rather than spelling it out in a constitutional amendment, the simpler approach is to just allow bankruptcies.

The mere threat of bankruptcy, would bring unions and pension plans to the table.

Originally posted on Mish Talk.

Bank Failure Scenario Kit - sm2



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