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April 17, 2020 | Illinois is Insolvent: State Requests a Pension Bailout From Congress

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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

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April 17th, 2020

Posted In: Mish Talk

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