
Illinois pension benefits have grown six times faster than state revenues - Four_Star
http://thesoundingline.com/the-illinois-pension-nightmare/
======
ComputerGuru
Yeah it’s a horrible mess. One generation promised itself the next generation
will pay them massive, undeserved pensions. That first generation is still
calling the shots (and voting avidly) and the coming generation is going to be
stuck with an impossible tab, continuously rising taxes, lowered pensions and
benefits, and a miserable situation all around.

Or Illinois could find a way to renege without filing for bankruptcy to avoid
throwing out the baby with the bathwater.

Perhaps someday Madigan and his political machine will pay for what they’ve
done. But likely not.

~~~
pulisse
_One generation promised itself the next generation will pay them massive,
undeserved pensions_

Defined-benefit pensions are a form of deferred compensation. State employees
in the past accepted lower salaries in exchange for this future benefit.
Taking away that pension now would be theft from these people.

~~~
ashooner
"State employees in the past accepted lower salaries in exchange for this
future benefit."

Isn't this the public sector equivalent of letting a startup pay you in
equity? While it may have been characterized as more secure than personal
investment, agreeing to this compensation scheme doesn't remove the burden of
risk, particularly when the 'startup' offering to pay you later is state
government.

~~~
pulisse
_While it may have been characterized as more secure than personal investment,
agreeing to this compensation scheme doesn 't remove the burden of risk_

Owing a defined-benefit pension is a legal obligation to provide a future
revenue stream. It's more like a bond than a stock, and debt generally has
priority over equity.

~~~
sol_remmy
Doesn't matter if there is a "legal obligation" or not, if the state does not
have money to pay then the money will not be paid.

~~~
closeparen
If I take on a $1m debt through an LLC, pocket the $1m, and have the LLC
default, courts will see through that.

The state has money. The government doesn’t.

------
stupidcar
This ties into the larger problem of Western democracies generally
degenerating into gerontocracies. Older voters can form a bloc protecting
pensions and pensioner-directed state-benefits that no politician dare take
on.

The results of this is a political trap without an easy exit: Impose punitive
taxes on the working population and you'll strangle the economy and incite
capital flight and outright rebellion. Form a consensus with other mainstream
politicians to slash pensions and benefits, and you'll push the pensioner
voting bloc into the arms of whatever extremists promise to protect their
interests. And you can't allow large-scale immigration to correct the
demographic imbalance and raise tax revenues, because the same pensioner
voting bloc is also rabidly anti-immigration.

Brexit was a first taste of this: The 1997 Labour government saw the
demographic and revenue crisis coming and thought EU migration was a solution.
But the long-term result was to inspire an anti-immigration and anti-EU
movement amongst older voters that has forced the country out of the EU. In
Germany you see the same forces at work with the rise of AFD, and in France
with the FN. This is going to get a lot worse before it gets any better.

~~~
dmm
> generally degenerating into gerontocracies.

Solution: You can't vote your first 17 years and you can't vote your last 17
years. The average life expectancy in the US is ~78 years so you can't vote
after 61, periodically adjusted for changes in avg. life expectancy.

~~~
DINKDINK
Are you proposing taxation without representation or that people after 61
wouldn't be taxed?

~~~
PurpleBoxDragon
Only to the same extent those under 18 are taxed.

------
lotsofpulp
There is a very simple solution to this problem of politicians and unions
leaving future taxpayers on the hook. The state simply pays an insurance
company for an equivalent annuity. Or the state pays the union the normal cost
(the cost of whatever defined benefit pension is earned in a year of work),
and then it's the union's problem to fix its deficits.

Either way, remove the government from these long term obligations with easily
corruptible pots of money, and the problem fixes itself. And you get
transparent, accurate accounting of government costs instead of the
manipulable numbers we get now, which of course politicians and unions fill
fight against.

~~~
robert_foss
Government granted pensions work well in other places, like Sweden for
example.

I'm sincerely wondering why they aren't working in the US?

~~~
Larrikin
The specific problem in this case is the massive corruption through all levels
of government and politics in Illinois.

[http://abc7chicago.com/archive/8973798/](http://abc7chicago.com/archive/8973798/)

~~~
dmm
How did corruption harm the Illinois pensions? Were governors using pension
contributions to buy yachts?

People keep using the word "corruption" but I think this situation arose
simply because pension funding was continuously deferred. Is the deceptive?
Yes, because the state is making promises it can't keep but it's not an
example of corruption.

~~~
lotsofpulp
Governments use GASB accounting standards, and non-government entities have to
use IFRS accounting standards. There are completely different and far more
stringent requirements for non-government defined benefit pensions (PPA 2006),
and far more lenient standards, if you can even call them that, for taxpayer
funded pensions.

If that doesn't scream corruption, I don't know what does.

------
gregorymichael
We recently left Chicago after living there for 11 years, and this was one of
the ~dozen reasons why. We had a kid, started looking at buying a place, and
couldn't justify making a long bet on the city given its financial situation.

Chicago has lost population for three years in a row.

[http://www.chicagotribune.com/news/local/breaking/ct-met-
chi...](http://www.chicagotribune.com/news/local/breaking/ct-met-chicago-cook-
county-population-20180320-story.html)

~~~
tptacek
Chicago is losing population from the south and west sides --- for good reason
--- but has hit historic low unemployment rates. If you're in the middle
class, you can safely pretend none of what's happening to low-income residents
has anything to do with you.

~~~
rrdharan
Not arguing that any individual should stay or go since that's obviously a
complex decision, but at some level if you believe the municipal and/or state
government are broken, yet you are in the middle class and you decide to stay,
are you not implicitly funding the brokenness with your continued tax dollars?

A huge part of why I decided to leave California was because I lost faith in
the municipal and state government and didn't feel like funding them anymore.
As a high-earning non-citizen, I "vote" with my feet and my taxes.

I guess the point is that you can still pretend it doesn't have to do with you
until it's really staring you in the face... and also by my same argument all
Americans are also funding US neocolonialism and war etc. by contributing our
productivity to the nation. At any rate, I want to emphasize again I'm not
saying anyone choosing to stay in Chicago is somehow making an ethically
questionable decision, just wanted to bring up this line of thinking for
consideration.

~~~
nwsm
>if you believe the municipal and/or state government are broken, yet you are
in the middle class and you decide to stay

If everyone that disagrees with a government leaves, it almost ensures that
government will stay the same. The only voters left are the ones who don't
have a problem with the current administration.

~~~
kolbe
That sounds pretty nice, actually. Everyone gets what they want.

~~~
nkrisc
Not those who can't afford to leave.

~~~
sol_remmy
If poor South American families can afford to sneak into the U.S., than 99.9%
of Americans can afford to move to a neighboring state.

Or, why don't you give me a counterexample of someone who "can't afford to
leave". A news story would be acceptable.

~~~
nkrisc
Are you suggesting the poor citizens of our country ought to be refugees
within their own country in order to escape violence? That's a very bleak view
of our country, but one that might actually be accurate.

[http://www.chicagotribune.com/news/local/breaking/ct-
african...](http://www.chicagotribune.com/news/local/breaking/ct-african-
americans-population-cook-county-met-20160623-story.html)

Moving costs money. Are you suggesting they simply leave everything behind and
walk to a new city?

While we're talking about sources, how about a source for your claim that
99.9% of Americans can afford to move to a neighboring state.

~~~
sol_remmy
Why do you consider people from Chicago moving to the South "refugees"? They
are moving for better weather, lower taxes, and more jobs. Those are very
normal reasons, not "refugee" reasons.

Moving to the South is not a lower-class Chicago specific thing, in fact
wealthy Jews are moving from New York to Florida. Are they refugees too?

~~~
nkrisc
I don't consider them refugees. You were the one setting the bar at what South
American refugees can achieve. Which taken at face value would imply you
considered anyone who could not afford to move worse off than a South American
refugee.

However I consider your claim that 99.9% of Americans can afford to move to a
neighboring state highly suspect. I am awaiting a source for that, even a news
article.

------
surfearth
Pensions in principle are great. The problem in the US is a combination of (i)
unrealistic return expectations, (ii) laws that allow pensions to be
underfunded, (iii) poor governance that reduces investment returns, and (iv)
overly generous benefits.

Other countries (e.g. Canada) address all four of these problems and have
pension systems that are widely admired as well funded, well governed,
sustainable and savvy investors. The US needs comprehensive reforms to address
all four of these points. Without that, any partial solutions such as
increased funding or reduced benefits, only serve to delay fixing the system.

For (i), returns should be conservatively based on a bond index rather than an
unrealistic 7-7.5% return.

For (ii), pensions provides should be legally required to maintain a small
funding surplus (e.g. 105%).

For (iii), pensions should have independent boards comprised of investment
professionals that are free of political meddling and actually pay their staff
Wall Street level salaries so they can attract top talent to compete, rather
than constantly being fleeced by Wall Street.

For (iv) I don't have any specific recommendations, but it would be
interesting to see the distribution of benefits for the Illinois pensioners.

~~~
lotsofpulp
These could happen, except politicians excluded taxpayer funded pensions from
any type of oversight, starting with its exclusion from ERISA. Even now,
taxpayer funded pensions don't have to follow rigorous accounting standards
such as IFRS, and instead choose to use GASB, which are intentionally lenient
so it hides the underfunding.

It's telling that once non-taxpayer funded pensions were brought to fully
account for their promises, they started disappearing. It's just too costly
and too unpredictable to promise something 30+ years into the future. It's
ridiculous as a concept, I've never heard of anyone else saying with
confidence that they can predict that far into the future, yet we have
billions and trillions of dollars of liabilities based on these projections.

~~~
surfearth
You're correct that poor governance is a big part of the problem.
Nevertheless, it is certainly possible for well governed pensions to remain
solvent and even run at a surplus. Insurance and annuities are two other
industries with the same basic concept. Pool risks together and guarantee a
certain level of future benefits based on conservative assumptions (it is not
unreasonable to guarantee an inflation adjusted payout if you assume you will
generate a market-based return over the long run). One of the problems today
is that assumptions have not been conservative.

------
anilshanbhag
The public pension system is flawed. Unions hold significant political sway
and no politican will want to go against them. There was a multi-year standoff
between the governor of Illinois and the house on this. The governor of
Illinois tried to balance the budget and adjust compensation to market rates;
he failed. Here is an article on it:
[https://www.nytimes.com/2015/10/27/us/illinois-budget-
stalem...](https://www.nytimes.com/2015/10/27/us/illinois-budget-stalemate-
rauner-and-democrats-divided.html).

------
ckinnan
Blog spam, here's the original report:

[http://www.wirepoints.com/illinois-state-pensions-
overpromis...](http://www.wirepoints.com/illinois-state-pensions-overpromised-
not-underfunded-wirepoints-special-report/)

------
Harkins
This is blogspam ripping off this site and the link should be changed:
[http://www.wirepoints.com/illinois-state-pensions-
overpromis...](http://www.wirepoints.com/illinois-state-pensions-overpromised-
not-underfunded-wirepoints-special-report/)

The authors of this report are former employees of the Illinois Policy
Institute: [http://www.wirepoints.com/mark-
glennon/](http://www.wirepoints.com/mark-glennon/)
[https://www.illinoispolicy.org/author/ilpoliski/](https://www.illinoispolicy.org/author/ilpoliski/)

The Illinois Policy Institute is, politely, a conservative think tank:
[https://en.wikipedia.org/wiki/Illinois_Policy_Institute](https://en.wikipedia.org/wiki/Illinois_Policy_Institute)

The full report plays a lot of games to produce these striking, misleading
graphs, like comparing yearly numbers with total values of all future pension
liabilities at face value instead of any attempt at NPV. If you're curious to
spot more, the 1993 edition of How to Lie With Statistics chapter 7 ("The
Semi-Attached Figure") and 9 ("How to Statisticulate") are a lighthearted
read.

------
sct202
In Illinois, there have been austerity measures taken that have put more
burden on younger residents:

* Pensions for new employees fall under a tiered system where the benefits are far far lower than the old plans.

* Funding to services (eg higher education) have been cut to divert money to pay for the short falls.

* Almost every new tax is earmarked to pay for old pensions.

So not only do we have to pay more for today's services (tollways, rising
transit fees, property taxes, sales tax, college), we have to pay for
yesterday's underfunded promises.

~~~
jdhn
The tolls in Illinois are ridiculous. I was heading up to Madison, WI and
decided to take I-90 despite the fact that it had tolls. I figured that the
gas saved would make up for the tolls. That turned out to be an expensive
mistake. What an absolute racket.

~~~
gok
Of all of Illinois’ goofy taxes I find the tolls pretty reasonable actually.
Especially since electronic tolling gets a 50% discount and often allows you
to avoid stopping or even slowing down to pay. Compared to SFBA bridge tolls
it’s downright pleasant.

------
pessimizer
This (or the original, rather: [http://www.wirepoints.com/illinois-state-
pensions-overpromis...](http://www.wirepoints.com/illinois-state-pensions-
overpromised-not-underfunded-wirepoints-special-report/)) is a lot of graphs
and percentages with very few absolute numbers, and all of them deceptive,
with endless spurious comparisons such as comparing the percentage rise in
"promised pensions" to the rise in average income.

Literally inviting you to think that retired state workers make 11x the
average salary of working people in Illinois. They do this by comparing the
total pensions committed to be paid over a lifetime to people to a bunch of
yearly metrics, and most deceptively of all, comparing the rise in total
promised pension payments to _the rise in inflation during the time that the
promises were made._

The people who wrote this report are terrible people who were paid to sell a
conclusion, not to study anything. The reason that everything was pushed to
pensions was simply a way to pay employees less. If they simply paid their
workers, they wouldn't have to promise such a luxurious retirement.

------
oflannabhra
In Kentucky, the governor is essentially committing political suicide by
deciding to tackle the issue. Kentucky's pension is rated as the worst state
in the union by S&P.

The press has excoriated him (as have much of the public). The fact that he is
actually addressing the crisis is commendable, though.

------
selleck
Honestly, this is one of the reasons I am looking to move out of state.
Eventually somethings gotta give and I am assuming it will be much higher
state and property taxes.

~~~
concrete-faucet
> Eventually somethings gotta give and I am assuming it will be much higher
> state and property taxes

Well since y'all refuse to consolidate governmental units, it will be higher
property taxes. A typical suburb with 50,000 people has its own police
department, its own fire department, its own library system, its own parks
department, road department, etc. Two school systems (K-8 and high school),
each with a full administration! Drive your car, cross an intersection, and
now you are in some other identical suburb of 50,000 people with all those
same governmental units.

I know you want your community to feel like a little village, and your
community is better than the one next door, so you'll never vote to combine
into one. This is how much it costs.

Someone pays $15000 per year tax on a $280000 house. I pay $9000 per year on a
$650000 condo. I share the cost of a police chief with 2.7 million people and
you share it with 50,000.

~~~
sol_remmy
> I share the cost of a police chief with 2.7 million people and you share it
> with 50,000.

And you wonder why people feel helpless to control the endemic corruption
within the Chicago urban limits..

------
TuringNYC
Here is my worry: IL, CA, and hundreds of states and municipalities will come
hat-in-hand to the US government for bailouts in 10 or 15 years. If that
happens, everyone in the country is on the hook.

------
danvoell
"Total pension benefits have grown at an annually compounded rate of 8.8
percent over the past three decades. Compared to 1987, benefits have grown
1,061 percent." How could they let this cost grow at 8.8% for 30 years! Yikes.
How immoral.

------
LorenPechtel
When you "pay" workers with delayed benefits like pensions it doesn't break
__your __budget, it becomes someone else 's problem. Hence high, unfunded
pensions with government jobs.

------
Leader2light
IL is screwed. Thank god I got out 2 years ago.

Insider info, State Farm is next. Major cuts. Again IL is dead.

Thanks Chicago.

~~~
nwsm
Can you give me some even better insider info: what city / state (US) is
already decent and getting better?

~~~
lotsofpulp
I would avoid NJ/CT/IL for sure. Also seems like more work and highly
qualified people are concentrating in urban/metro areas. I would look for
somewhere that's up and coming, has decent weather, and secure water supplies.
West coast cities, Denver, Austin, Dallas, DC, Boston, NYC seem to be the big
ones, although I'm sure there are other urban areas exhibiting growth.

------
ryandrake
There’s got to be some happy medium between this insanity and the insanity of
“you’re on your own—here’s a crappy 401(k), figure it out!”

~~~
DubiousPusher
"Try not to get screwed buying funds you have no hope of understanding
everyone who didn't study finance in college."

~~~
ryandrake
I studied finance and still am the world’s worst stock picker. Every time I’ve
experiment with investing in individual stocks I’ve lost money. Yet we ask
every Tom, Dick, and Harry out there to manage their own asset allocation.
It’s madness. I dump my meager savings 1/2 into a savings account and 1/2 into
a low fee diversified mutual fund, since that option “sucks less” than all the
other shitty options available to us normal people.

My parents (and their generation) who enjoy robust defined-benefit pensions
are laughing at me and my generation for sure.

------
vidanay
This is one of the many reasons NY wife and our son spent the last week
looking at properties in Raleigh NC and Tampa FL this week. We feel that the
clock is ticking for Illinois and the judgement day is going to be
spectacular. It's time to vote with our feet.

------
wyldfire
Holy cow, what is up with the slope of that line? I'd have expect it to level
off but it looks like it's headed straight for inf.

------
mylons
the state is becoming increasingly unlivable. my parents have a house worth
about $750k in teh suburbs and are paying ~$15k/year in property taxes. they
get almost _nothing_ in terms of services for this money, and taxes are likely
going to go up.

------
pure_ambition
There are several problems with this analysis.

The first major problem is that the article presents "promised benefits" \-
equal to the sum of all future pension payouts, which can span as many as
50-60 years into the future - and compares them to ANNUAL state revenue; a
comparison which will obviously seem ridiculous. A more accurate comparison
would be expected annual payouts vs expected revenue allocated to pensions. An
even more accurate comparison would be expected payouts at year X vs
(contributions + (expected returns at year X * balance of pension fund at year
X) + expected revenue allocated to pensions). After all, pension payouts are
funded by a mix of contributions, investment returns, and any state revenues
allocated for pension payouts.

Another error is that in the linked analysis where they say they looked at
every state's level of underfunding, they state: "According to a recent report
from the Hoover Institution, on average, public pensions (state, local and
federal employee pension plans) assume that they will achieve a risk free 7.6%
return on investment per year, every single year."

This seems very stupid if it were true, but it's not. The Hoover Institution
paper actually states that the 7.6% figure is the return these pension funds
are expecting, which is reasonable given the historical S&P 500 annual return
of 11.83% (since 1928). The Hoover paper makes no mention anywhere that
pensions are expecting the return to be "risk free." Furthermore, the paper
makes no mention of inflation or "real" returns, and pensions are tied to
nominal wages rather than real wages, so it's reasonable to assume that the
7.6% figure is NOT adjusted for inflation - but even if it were, it would be
reasonable, given the historical average inflation rate since 1928 of 3%.

Moreover, the Hoover paper rests on the rather dubious assumption that "The
appropriate discount rate for a guaranteed nominal pension is the rate on a
government bond with a guaranteed nominal return of that same maturity, so for
the average plan it would be a Treasury bond with a roughly ten-year
maturity." They are saying that pensions should always value their expected
returns at the 10-year treasury rate, which is absurd. The only use for using
the 10-year T rate is to estimate taxpayer liabilities if everything fell
apart.

The real question should be, is it reasonable to expect these returns and
inflation rates going forward? I would argue that 11.83% is too high to
expect, although if it encourages you to save as much as possible to maximize
possible gains, so be it; but that 7.6% is much more reasonable. If I were a
pension fund manager, I would expect a more conservative target like 5 or 6%,
and allocate anything extra either to an "emergency pension fund" in case of
years with a revenue shortfall or allocate the extra to be refunded to the
taxpayers.

Sources:
[https://ycharts.com/indicators/sandp_500_total_return_annual](https://ycharts.com/indicators/sandp_500_total_return_annual)

[http://www.calculator.net/inflation-
calculator.html?cstartin...](http://www.calculator.net/inflation-
calculator.html?cstartingamount1=1&cinyear1=1928&coutyear1=2018&calctype=1&x=100&y=9)

~~~
lotsofpulp
Being off by 1% or 2% is huge. For example, look at page 24 and see what the
differences could be. Every 1% change in discount rate can lead to changes of
~15% in liability.

[https://www.varetire.org/Pdf/Publications/VRS-Stress-Test-
an...](https://www.varetire.org/Pdf/Publications/VRS-Stress-Test-and-
Sensitivity-Analysis-6-6-2017.pdf)

There's a reason that non-taxpayer funded entities have to use much more
conservative discount rates, based on high grade bonds. Might be a around 4%
or 5%. No reason for taxpayer funded pension plans to be using anything
riskier.

