Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as pension-obligation bonds.
The borrowing scheme is a bit more complicated than the household example, but in essence, pension-obligation bonds are all about taking out a loan, then investing that money and hoping the returns beat out the costs of the loan.
It’s a lose-lose game for taxpayers. If politicians get it right, governments will have extra money to spend and grow even bigger. And if politicians get the bets wrong, they’ll come after taxpayers to pay off their gambling losses.
That’s one of the reasons why national organizations like the Government Finance Officers Association say “state and local governments should not issue POBs.”
Perhaps one of the best examples for successful reform is Arizona’s recent effort, where the state amended its constitution and passed pension reforms to, as Arizona Gov. Doug Ducey described it, set its public safety “pension system on a path to financial stability while improving the way it serves our brave cops and firefighters.”
No federal challenges to Arizona’s reforms have been made – which is part of a longstanding pattern nationally. Dozens of states over the past several decades have reformed their public pension systems as problems became apparent over the years. None has been sued successfully under the U.S. Constitution – whether under the contract clause or any other provision – in all that time.
The ratings firm Moody’s Investors Service this week upgraded Illinois’ credit rating one notch to Baa2, a level two notches above junk. It’s a major turnaround given that just one year ago Illinois faced the prospect of becoming the first state to ever be rated junk. In mid-2020, shutdowns ravaged the state’s tax base, Sen. Don Harmon asked for a $42 billion bailout from Congress and the state projected billions in multi-year budget shortfalls.
What changed so dramatically in such a short period of time? Ignore the claims by Illinois lawmakers of their heroic acts of “balanced budgets,” “fiscal discipline” and the like. Even if those claims were true – and they are not – they couldn’t by themselves create such a swing in Illinois’ short-term fortunes.
Credit, instead, the massive $138 billion in federal funds from the multiple COVID relief and stimulus packages – as compiled by the Committee for Responsible Federal Budget – that are now flooding Illinois’ public and private sectors. Those billions have significantly reduced the probability of a bond default – which is ultimately what Moody’s really cares about.
Wirepoints calculates that retirement costs will consume 26 percent of the 2022 budget. The state is set to contribute $9.4 billion in General Funds to pensions, pay $777 million in pension bond costs, and pay an estimated $1 billion in retiree health costs.
In total, that’s $11.2 billion of the $42.3 billion budget consumed by retirement expenditures.
On top of the payments from the General Fund, another $1.2 billion in pension payments will come from other budget funds, meaning the state’s total retirement costs will be an estimated $12.4 billion in 2022.
Wirepoints’ analysis uses national state-by-statemigration data compiled by the Internal Revenue Service. The IRS reviews tax returns annually to track when and where people move. It also aggregates the ages, income brackets and adjusted gross incomes of filers.
That data shows Illinois continued to be a national outlier in 2019 when it comes to losing people and the money they earn:
Illinois lost 81,770 net tax filers and their dependents in 2019. Illinois’ losses were the third worst in the country, with only California and New York losing more residents, 165,355 and 152,703, respectively.
On a per capita basis, Illinois also ranked 3rd-worst for out-migration, with net losses of 0.64 percent of its population. Only Alaska and New York fared worse, with losses of 1.02 percent and 0.78 percent of their populations, respectively.
There’s little doubt that Illinois politicians are salivating over the $13.7 billion windfall they’re about to spend. Those billions are Illinois’ share of the $350 billion in aid dedicated to state and local governments, a key part of President Biden’s $1.9 trillion stimulus package passed earlier this year. The state of Illinois itself will get $7.75 billion and the remaining $6 billion will go directly to counties and cities.
The numbers are big. Take the city of Berwyn, Illinois, which is set to receive $32 million in stimulus dollars, according to a data release from the Illinois Municipal League. The city’s take is equal to a whopping 81 percent of its 2019 general budget. Peoria expects $46 million, or nearly half of its $100 million budget. And the city of Chicago will get nearly $2 billion, worth 60 percent of its general budget, based on financial data from the Illinois Comptroller.
Even the state, which nearly broke even in revenues in 2020 compared to 2019, will get more than $7.75 billion, nearly a fifth of its budget.
Embedded below are a set of searchable databases that provide the estimated allocation of the $360 billion in direct government aid to states, counties and cities under the $1.9 trillion American Rescue Plan. The remaining stimulus includes funding for schools and other programs, for which detailed data is not yet available.
The $360 billion is split as follows: State governments are set to receive $230 billion in direct and capital project grants, county governments will receive $65 billion, and municipal governments will receive the other $65 billion.
Author(s): Ted Dabrowski, Mark Glennon, John Klingner
Chicago households are on the hook for a combined $63,000 in Chicago-only debt, based on Moody’s calculations. It’s why the city and the school district have been junk rated for years.
Pritzker’s COLA increase runs against what most of Illinois’ political elite already know – COLA cuts are necessary and inevitable at all levels of government. As Greg Hinz said in his review of Wirepoints’ Pension Solutions, “…that juicy perk over time has amounted to megabillions that state government just doesn’t have.”
The COLA hike will cause more financial headaches for Chicago. Mayor Lori Lightfoot says the COLA increase will cost the city an additional $18 to $30 million a year in pension costs. In all, the perk will force taxpayers to pay an additional $850 million over time.
Two separate 50-state comparisons of state and local tax burdens released this week confirm Illinoisans pay some of the nation’s highest taxes.
WalletHub, the personal finance company, calculated that Illinoisans pay the highest effective tax rates in the country. A more comprehensive study by the Tax Foundation, a non-partisan think-tank, says Illinoisans pay the nation’s 10th-highest tax burden.
Either way, their findings validate what Illinoisans instinctively know: they’re overtaxed.
The state assumes the pension funds will continue to earn an average of nearly 7 percent a year, while Moody’s lowered its assumptions for 2020 to just 2.7 percent: “the FTSE Pension Liability Index, a high-grade corporate bond index Moody’s uses to value state and local government pension liabilities, fell to 2.70% as of June 30, 2020, from 3.51% the prior year.”
Moody’s also reported that the asset-to-payout ratio for the state’s funds are now equal to about seven years’ worth of payouts.
Illinoisans who thought new House Speaker Chris Welch might change the direction Illinois is headed in just got a dose of reality. Welch recently said he wants Illinois to have a second go at a progressive tax scheme, this time committing the tax hike proceeds to pensions. Illinoisans rejected Gov. Pritzker’s first attempt, he said, because they didn’t know where the tax hike dollars would go. “…folks don’t trust us,” Welch said.
Welch is right about the trust factor, but he’s wrong to think Illinoisans will suddenly approve a tax hike just because the legislature promises to funnel the new revenues to pensions. They know it’s unlikely politicians will keep their promise. And Illinoisans know the state’s unreformed pensions are a corrupted mess – that they’d be throwing good money after bad.
The state’s current vaccination category, 1B, includes the 1.9 millions over the age of 65, as well as the 1.3 million younger people who are first-responders or “essential workers” such as teachers, grocery store workers and transit workers. To date, about 150,000 Illinoisans aged 65 and over have been fully vaccinated, while nearly 390,000 residents aged 16-64 are already inoculated.
But groups both inside and outside that list have been demanding they take top priority. Everyone from politicians to teachers to bartenders to transit workers to librarians and more. That is patently absurd. There are a limited number of vaccines and if everybody is at the front of the line, then no one is. That’s why getting the elderly vaccinated has been so problematic.
As long as we’re vaccinating the line jumpers who are younger than 60, we’re vaccinating the wrong people. Every needle in the arm of a younger Illinoisan – barring frontline health care workers – leaves an elderly Illinoisan at great risk.