Dire State of Affairs in Illinois

Townhall.com ^ | October 27, 2012 | Mike Shedlock

[Kaslin]

I just finished slogging through a 69 page PDF by the State Budget Crisis Task Force outlining the dire state of affairs in Illinois.

I knew in advance that pension funding is the biggest issue facing Illinois. The task force shows exactly that. Here is a summary.

Pension Funding Levels

• Teachers Retirement System (TRS) - 46.1%
• State University Employees Retirement System (SURS) - 45.3%
• State Employees Retirement System (SERS) - 34.9%
• General Assembly Retirement System (GARS) - 20.2%
• Judicial Retirement System (JRS) - 31.0%

Those funding levels assume 8% returns going forward, something that is not going to happen. So as bad as the above looks, the true pension underfunding is even worse.

Illinois' infrastructure is in bad shape, and the report has the details.

There were many things in the report that I did not know about including the loopholes that let legislators pretend Illinois' budget is balanced when it's not.

Here is a surprising fact: Illinois has more governmental taxing agencies than any other state including California, a grand total of nearly 7,000 taxing bodies!

Here's a juicy tidbit on infrastructure "Nearly two-thirds of Metra and CTA passenger rail cars were in a marginal state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life."

The report finished with "recommendations" but they were broad stroke, budgetary meaningless things like timely reporting, long-term planning, accrual planning, etc.

I am in favor of most of the report recommendations, but they will not solve a single problem.

Here is the scariest single sentence in the report "If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years."

Illinois is insolvent, but what can be done about it?

Mish Six-Point Proposal

1. Immediately end all defined-benefit pension plans
2. Default on pension obligations in the fairest possible manner (cap benefits)
3. End collective bargaining of public unions  
4. Eliminate prevailing wage laws that are murder on local budgets
5. Lower corporate income taxes to attract business
6. Eliminate property taxes as the primary method of funding schools

Point number two is against the constitution but I believe it could be accomplished by taxing all benefits above a certain amount at 100%. The alternative is also simple. If the money is not there (the pension plan is bankrupt) all payouts will cease.

The way to win approval from the unions is to set the cap high enough so that the majority of union members get 100% of their benefits.

State Task Force Report

Everything that follows is from the report. It is lengthy and will be easier to read if it is not in blockquotes as per my usual format. Emphasis is generally, but not necessarily mine.

“What Would It Take” Calculations

• If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years.
• To close the gap with an income tax increase would require the individual tax rate to rise to 7.1 percent from the then-existing 3.0 percent and a proportional rise in the corporate rate.
• To close the gap with a sales tax increase would require the rate to jump from 6.25 percent to 13.5 percent.
• To close the gap with spending cuts alone would require over 25 percent across the board reductions in all spending (other than for pensions, debt service, and transportation).

Of Illinois’ three biggest fiscal problems — pension costs that are crowding out the rest of the budget, Medicaid cost increases that have grown faster than the state’s resources and will be unsustainable as the federal ARRA funds expire.

Despite greater recognition that the growth in pension costs cannot be sustained, different views of how to cut or shift the costs have led to a stalemate. No action on pension reform is expected until after the November 2012 elections at the earliest.

Illinois’ demographics show an aging population with a trend toward fewer workers and more retirees, which will pose daunting fiscal challenges in the years ahead. Illinois is also a diverse state with a variety of competing interests, which makes it difficult for political leaders to reach consensus on key issues.

The Politics of Spend, but Don’t Tax

While in Illinois, as elsewhere, the desire to please constituents by expanding government services without increasing taxes is a given, the origins of the structural gap between spending growth and sustainable revenues can be traced to the 1990s. Governor Rod Blagojevich (Illinois’ first Democratic governor since 1976) was elected in 2002 with an agenda to expand programs for children, seniors, and the poor.

However, conflict between Blagojevich and Speaker of the House Michael Madigan (both Democrats) meant that tax increases became virtually impossible as the two “checkmated one another.… The governor declared he would veto any general tax increase…. Madigan blocked all the revenue initiatives proposed by the governor.”

Illinois’ Squishy Balanced Budget Requirement

It would appear that Illinois’ budget is required to be balanced. The Illinois Constitution states that “Proposed expenditures shall not exceed funds estimated to be available for the fiscal year shown in the budget”

However, Illinois’ balanced budget requirement has some serious limitations.

First, it refers to anticipated revenues, and there is no requirement that the state adjust its spending if the anticipated revenues are not realized. There is nothing to stop a governor or General Assembly from using an unrealistically high estimate when crafting the budget.

Illinois’ balanced budget requirement is also a cash concept, referring only to the current fiscal year. This means that the balanced budget requirement does not refer to future pension liabilities or unpaid bills from the previous year. Each fiscal year from 2009 to 2012 ended with a larger stack of unpaid bills — $8 billion at the end of fiscal year 2012 — and each year these bills were ignored when projecting balance for the next year’s budget.

Underfunded Retirement Promises Are Crowding Out Other Needs

It is widely recognized that Illinois  has the worst unfunded pension liability of any state. Its five retirement systems had a total of $85 billion in unfunded liability in 2011 (Table 2), and the figure has increased since then. Dealing with some of the lowest funded ratios of public pensions in the nation has contributed to the state’s ongoing fiscal crisis. Illinois’ pension problems were cited by Moody’s Investors Service when it downgraded the state’s bond ratings in January 2012, making Illinois’ credit rating the lowest of all fifty states. However, Illinois has done nothing to reform state employee pensions since that time and it is doubtful that anything will happen before 2013.

Table 2 describes the five retirement systems the State of Illinois is responsible for funding: Teachers Retirement System (TRS), State University Employees Retirement System (SURS), State Employees Retirement System (SERS), General Assembly Retirement System (GARS), and Judicial Retirement System (JRS). It also shows the Illinois Municipal Retirement Fund (IMRF), which the state administers but the local government entities are responsible for funding. Most of the state’s
$85 billion in unfunded liabilities are in the three largest funds, TRS, SURS, and SERS. All five state funds have funding ratios below 41 percent. The IMRF has a much higher funding ratio because of a state law that obliges local governments to make “annual required contributions” (ARC).



click on chart for sharper image

The Way Pension Costs Are Reported Can Obscure the Problem

Illinois’ pension systems are likely in a more dire fiscal condition than they seem. Illinois’ three largest pension systems discount future pension liabilities using an assumed rate of return on investments of around 8 percent. Since the financial crisis, ongoing economic instability in Europe, and worries of a double-dip recession, many believe that this assumed rate of return is overly optimistic. Most state pension systems have exceeded an 8 percent rate of return over the past several decades, but the rates have been much lower in recent years. Lower discount rates will soon be required in Illinois and other states.

Under new rules approved by the Governmental Accounting Standards Board (GASB) in June 2012, Illinois will be required to report liabilities using “market rates,” which are typically closer to 5 percent. Although this change will no doubt have a positive impact by more accurately estimating the level of state liabilities, it reveals an even more precarious financial position. For example, “under the new rules, the Illinois Teachers’ Pension System [TRS], one of the country’s worst funded, would have shown just an 18 percent funding ratio as of July 2010.”

Schools

In Illinois, total preK-12 education spending per pupil slightly exceeds the national average, but the proportion that comes from the state’s own resources is low in comparison to other states. In the 2008-2009 academic year Illinois was ranked forty-eighth in per-pupil education revenues from state sources, but tenth in per pupil revenues from local sources. Illinois’ heavy reliance on local property taxes to fund education means that disparities between wealthy and poor communities are reflected in the quality of the schools.

During the 2009-2010 academic year, Illinois’ wealthiest elementary districts spent about $24,000 per pupil while the poorest districts spent about $6,000. A 2010 national study found that Illinois has the second-highest disparity between high-poverty and low-poverty schools.

Illinois has the third highest number of school districts of all U.S. states. More than 200 of Illinois’ 868 school districts have only one school.

Underinvestment in Infrastructure

Crowding out has also become increasingly evident in the case of Illinois’ aging infrastructure. In 2010, the American Society of Civil Engineers (ASCE) Infrastructure Report Card gave Illinois an overall grade of D+.140 The state’s infrastructure is in urgent need of immediate repairs to meet basic standards of public safety, and in need of expansion and modernization to accommodate future growth. However, as Illinois continues to struggle to pay its pension, Medicaid, and debt obligations, the state’s infrastructure condition will only worsen. Illinois state agencies estimate that infrastructure needs over the next twenty to thirty years will exceed $300 billion. But the state does not have a comprehensive capital improvement plan, and the information needed to make an accurate assessment of the condition of Illinois’ infrastructure is incomplete.

Condition of Illinois’ Infrastructure

The poor condition of Illinois’ infrastructure — including highways, roads, bridges, trains, buses, dams, locks, and buildings — has become critical.

A FY 2011 survey of Illinois’ highways and roads by the Illinois Department of Transportation indicated that approximately half of Illinois’ highways and roads were in Fair or Poor condition. According to the Federal Highway Administration, in 2010 over 15 percent of Illinois’ 26,000 bridges were structurally deficient or functionally obsolete.

Illinois’ mass transit infrastructure is also lacking: in 2010 approximately one-third of mass transit bridges and structures; maintenance facilities; and buses were not in a state of good repair. Nearly two-thirds of Metra and CTA passenger rail cars were in a “marginal” state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life. Little state funding is available to address these needs.

Local Government Fiscal Stress

Local government taxing jurisdictions weave a complex web in Illinois. According to the 2007 Census of Governments, Illinois has more units of government than any other state — nearly 7,000. This includes 102 counties, 1,400 townships, 1,300 municipalities, 868 school districts, and about 4,000 special taxing districts such as library, fire protection, forest preserve, and park districts.

In Illinois, the fiscal condition of thousands of local governments is intertwined with that of the state. At present, neither is in a position to help the other. The state’s fiscal stresses have led to cutbacks in transfers of state revenues to local governments, exactly at the time that local governments are most in need of assistance.

Everything above, starting with "What Would It Take Calculations" were pieces snipped from the 69-page PDF.

Illinois is in deep "sheet" and the primary proposals under discussion all involve tax hikes and more pandering to public unions which will do nothing but drive businesses away.

My six-point alternate proposal would put Illinois back on a track towards fiscal sanity and also encourage businesses to relocate to Illinois.

[muawiyah]

Different mix, plus they don't pour as much salt on it.

Still, i can show you an interstate interchange that connects a major NS national thoroughfare with Veterans Parkway in Bloomington IL that looks as bad as anything in Chicago.

The Democrats left it unimproved for decades, and every campaign where a Democrat ran for the legislature or Congress he'd say 'I can fix this if you vote for me', and they'd vote for him, and it wouldn't get fixed.

Sometimes the color depends on the aggregate mixed into the mortar ~ PA has what I've always taken to be dark violet sidewalks ~ and, of course, PA has a primary layer of accessible shale and limestone that is violet ~

[StandAndDeliver1]

Here is that urban planning article that details Chicago’s precipitous decline. It’s called, “Second-Rate City”:

http://www.city-journal.org/2012/22_2_chicago.html

[stars & stripes forever]

Illinois is insolvent, but what can be done about it?

Illinois has civil unions and is working hard to legislate homosexual marriage. Illinois has one of the largest abortion mill in the United States. Illinois leads in STDs, unwed mothers, violence, corruption.

SIN is the underlying problem in Illinois.

If my people, who are called by my name, will humble themselves and pray and seek my face and turn from their wicked ways, then I will hear from heaven, and I will forgive their sin and will heal their land. 2 Chronicles 7:14

[SgtHooper]

I love it! When Romney comes into power, there will be NOTHING too big to fail. Even rat states.

[Ann Archy]

we lived in the best part of downtown Chicago on the Gold Coast and the roads and streets had HUGE POTHOLES even though all the streets have beautiful trees and flowers that are changed out 3-4 times a year (paid for by the businesses and condos they are in front of) but the actual rods were HORRIBLE!!! WHERE”S ALLL THE MONEY GOING???

[zeestephen]

Re: “Illinois is insolvent, but what can be done about it?”

Plan “A” - Reelect Obama.

Plan “B” - Scream racism.

[Uncle Chip]

Put on the popcorn —

[Professional]

I’m in the Finance biz. I seem to recall that back in about 2002, the State of Illinois floated bonds of 10 b to borrow money, invest, to make up for the shortfall in pensions. So, it might just be worse than you think, if you aren’t including debt that is associated with the assets.

Imaging that, Illinois borrowing money, to invest in the stock market, because they are SOOOO far behind in pension funding. So, not only do the tax payers pay taxes do fund the pensions, but they are on the hook for borrowed money, and need to pay interest on that money...

Sadly, I doubt that Illinois is the only state to have done this desperate move.

[uncommonsense]

"Same in Buffalo, and Detroit. One of the things that has always bugged me about “investing in infrastructure” was that gosvernments should be maintainng roads and bridges on a contiuous basis. There are ostensibly plenty of dedicated revenue sources to keep these thing in good repair (fuel taxes, registration fees, tolls, milage fees, etc). Yet the liberals have to raid these revenue streams to fund their welfare state."

That's what sunk New Orleans. There was plenty of money to maintain the levees, but the separate levy boards used the funds as their piggy bank for family and friends (common in all liberal-controlled communities).

[AD from SpringBay]

Thing is - the toll roads were going to take care of the roads & bridges and the gambling boats and lotto were going to save the schools. Hmmmm...

[bert]

The mathamatically simple plan is to halve pension payments forever. Problem solved

[Lee N. Field]

Teachers Retirement System (TRS) - 46.1%
State University Employees Retirement System (SURS) - 45.3%
State Employees Retirement System (SERS) - 34.9%
General Assembly Retirement System (GARS) - 20.2%
Judicial Retirement System (JRS) - 31.0%

When I left UofIll in '91, I rolled retirement from the State Screwniversity Retirement System into an IRA. My grandmother upbraided me for that. "Oh, they'll never let that go bust."

They just might. I think I was right.

[is_is]

////////To close the gap with spending cuts alone would require over 25 percent across the board reductions in all spending (other than for pensions, debt service, and transportation)./////////

i like that idea best.........

[genghis]

could someone explain why the bond prices have not crashed?

[EVO X]

They just might. I think I was right.

If you were vested, it was probably not the best of ideas. You would have forfeited the states matching share and compounding until you were 55. If you weren't vested, rolling it over to an IRA was a wise decision.

[RKBA Democrat]

“A major trend in the next five-ten years will be baby boomers deciding where to live when it is time to retire (and they don’t need to commute any more). One factor they will look at is _future_ local and state tax rates.”

That’s the tip of the iceberg. Add “national” taxes to the mix of things looked at, and you see the problem that’s brewing. U.S. dual nationals living abroad are already renouncing their citizenship to avoid the taxes and banking problems they’re encountering. As those tax issues become more relevant to those at lower and lower income levels, as they will, you see the potential problem.

One smart thing that Gov. Romney is pushing is to stop taxing Americans on a citizenship basis rather than a residency basis as most countries already do. It’s not to be nice to expats, simply an acknowledgement of reality.

[donmeaker]

If a state can not pay its debts, its government fails. The state loses status as a state: Reverts to being a non state territory, just as the pretended secession of South Carolina et al. caused the states to revert to territories. The promises of the state are then meaningless. The Federal government would then be able to appoint a territorial governor, and arrange a new state government, with a new constitution giving proper constitutional protections.