Illinois' Blue State Blues on Unfunded Union Pension Liabilities

For decades, the mostly Democrat-controlled (blue) state governments have caved to their state union worker's demands for earlier retirement ages and increased pension amounts and benefits.  All to curry votes. Never once paying any real attention to the fact that Americans are living longer and that many rust-belt states are seeing declines in their taxable populations and increases in their poverty rates.  This is the problem facing the State of Illinois today.

Illinois has a massive unfunded pension liability problem that they may not get themselves out of until bankruptcy.  A problem so bad that the then-Governor Pat Quinn signed a 67% tax increase into law in 2011.  Then, in December 2013, that same governor signed some modest reforms that should have slowed the growth of the impending pension crisis.  But, the unions fought back; claiming that the State had a contractual obligation to pay pensions and that the amounts can never be changed. On May 8th, the Supreme Court of Illinois unanimously sided with that union argument. So, the pension crisis continues on unabated.

How big is the pension problem anyway?

The numbers are staggering, As of 2014, if you are a taxpayer and potentially on the hook to come up with the cash to pay all those retired state workers.  The unfunded pension amount, in all categories of programs, is $104 billion and growing by the day.  This is a state of nearly 13 million residents of which only half are actively working and able to pay income taxes that could help cover that huge debt.   But, if you do the math, that is a per-worker liability amount of nearly $16 thousand, and growing exponentially every year.  For, example, in 2000, the total pension liability was $15.6 billion or nearly one-seventh of what it is today.

What makes it even worse it that the Illinois' tax base is shrinking as taxpayers flee the state's already high taxes (income, real estate, sales, etc.).  I know I did. My wife and I escaped to Las Vegas for that very reason (along with the weather).  In Illinois, we were paying property taxes that were 2-1/2 times higher for a house that was 32% smaller and on a lot that was 1/3 the size of what we have now.  Also, thanks the Casinos, we pay no state  tax. The simple fact is that, based on a study of tax date in 2010, Illinois lost almost 50,000 taxpayers and their dependents in that year alone, along with almost $2 billion dollars in tax revenues.  This of course, was before the State raised its income tax by 67% in 2011; which probably only exacerbated the exodus.

There is one more problem that is putting Illinois on a path to bankruptcy.  Rising poverty.  Since the recession of 2007, the number of people in poverty has risen an average of 3.1% per year with "officially" only 2 million people or 14.1% in poverty.  But, that official rate assumes that even if you make a dollar more that the designated poverty income level per year, you're rolling in cash.  The Heartland Alliance says that 33% of Illinois residents are "at" or "near" poverty.  This is especially troubling for the pension crisis because people in poverty don't pay any taxes and people near poverty pay very little; and at the same time, sap the State treasury with welfare assistance.

Personally, I can't see how Illinois can avoid bankruptcy.  The unions won't concede on pension benefits.  The tax base is shrinking.  The workforce is shrinking while poverty is rising.  Essentially this is an all encompassing recipe for fiscal failure.  Of course, if the State is taken down by its pension shortfalls, those retired union personnel may just see much of their pension decimated.  They should have accepted the modest reforms and not taken the case to the State's Supreme Court.

References:

Definition: Blue States: https://www.google.com/search?q=blue+states+definition&ie=utf-8&oe=utf-8

Illinois Supreme Court rules landmark pension law unconstitutional: http://www.chicagotribune.com/news/local/politics/ct-illinois-pension-law-court-ruling-20150508-story.html#page=1

Census Bureau Quick Facts: Illinois: http://quickfacts.census.gov/qfd/states/17000.html

Illinois workforce smaller than at any time during the recession: http://www.rebootillinois.com/2014/08/06/editors-picks/kevin-hoffmanrebootillinois-com/illinois-workforce-numbers-since-recession/22205/

Outrageous Public Pensions Could Bankrupt These States: http://www.thefiscaltimes.com/2015/03/30/Outrageous-Public-Pensions-Could-Bankrupt-These-States

Report: Illinois poverty remains stubbornly high: http://www.washingtontimes.com/news/2014/jan/30/report-illinois-poverty-remains-stubbornly-high/?page=all

IRS data show more taxpayers fleeing Illinois: https://www.illinoispolicy.org/irs-data-show-more-taxpayers-fleeing-illinois/

Illinois' 33%: A Report on Poverty: http://www.ilpovertyreport.org/sites/default/files/uploads/Illinois_33percent_PovertyReport_FINAL.pdf


Illinois’ temporary tax hike: $18 billion later: https://www.illinoispolicy.org/policy-points/illinois-temporary-tax-hike-18-billion-later/

The victims of Illinois' failure on pensions - Chicago Tribune: http://www.chicagotribune.com/news/opinion/editorials/ct-pension-ruling-victims-edit-0510-20150508-story.html

The Last Thing Chicago Needs is an Activist Pro-Labor Mayor

Let me first say that I am no fan of Rahm Emanuel -- the current Mayor of the City of Chicago.  I consider him too abrasive and too much of a bully to be an effective negotiator in a city that currently needs a skilled one to save it from insolvency. Its this brashness that probably resulted in his being the first Mayor of that city to face a runoff in his bid for reelection; with his opponent being a pro-labor and labor activist by the name of Jesus "Chuy" Garcia.  Some are already saying that Rahm may lose the runoff, but, the last thing Chicago needs is a pro-labor Mayor because it is labor and its rich pensions that are killing the city financially.

To understand this, you need to look at this chart put together by Crain's Chicago Business:

So, essentially, the City of Chicago does not have enough money ($29 billion) to cover continued pension payouts for the top 5 groups of union workers that already have or will have retired in the future.  But also understand that there is an additional $3 billion in other unfunded pensions; bringing the total to $32 billion dollars in commitments that the City just doesn't have.  In fact, that $32 billion is nearly 4-1/2 times the $7.3 billion dollars the City plans to take in and spend in 2015.   And, that 2015 budget already fails to include $550 million in unfunded pension liabilities due by the end of the year.  So, somewhere, over the next few months, the City (Rahm; assuming he is still the mayor) must find an additional 7.5% increase in revenues (taxes) or, some combination of reduced pension commitments, tax increases, and reduced spending, in order to meet that year-end pension shortfall or default on it.

But, rather than solely raising taxes, which would have greatly ticked off the voters, Rahm has opted to do a "combination" of things to try and avoid the city defaulting on its commitments and, potentially, following Detroit into bankruptcy.  Besides raising property taxes, Emmanuel has greatly put himself at odds with the unions -- primarily the Teacher's Union -- by closing 50 non-performing city schools and by trying to negotiate concessions in wage increases and a reduction in pension commitments and increases in pension contributions. 

So, as a result of his effort to try and save the city, he now finds himself struggling for his political life because the voters seem to think there is some magic bullet out there that will solve the pension liability problem without raising taxes or by cutting services and pension benefits.  Thus, by letting the fox guard the hen house, the voters may just put "Chuy" in charge of the city's labor pension problems.  As such, I see no way that the City could survive.  While  "Chuy" says he will hold the line on taxes while maintaining city services and, at the same time, honor union pension commitments, you just can't have everything and still avoid future bankruptcy.  If he does get elected, it will be on the basis of promises he can't keep.  So, my guess is that -- being a labor guy who won't reduce pension commitments and city services -- he will just raise taxes to solve the City's problems.  That, in turn, will most likely force people and businesses to leave Chicago; resulting in even less tax revenues, and even bigger pension problems in the future.  That's exactly how Detroit got itself into bankruptcy.

References:

Rahm could actually lose: http://www.politico.com/story/2015/03/could-rahm-actually-lose-115739.html

Emanuel's pension fix costly, but pain is likely to double: https://www.google.com/search?q=Emanuel%27s+pension+fix+costly%2C+but+pain+is+likely+to+double&ie=utf-8&oe=utf-8

Chicago Teachers Union: Rahm Is Finished: http://www.breitbart.com/big-government/2015/02/26/chicago-teachers-union-rahm-is-finished/

Jesus "Chuy" Garcia - Chicago Tribune Election Center:   http://elections.chicagotribune.com/candidates/jesus-chuy-garcia/

How Detroit went bankrupt, how it got out and where the city goes from here: http://www.foxbusiness.com/markets/2014/11/07/qa-how-detroit-went-bankrupt-how-it-got-out-and-where-city-goes-from-here/

GM Still Has One Big Financial Problem

Based on the current stock price, anyone could buy GM for a mere $31 billion and change.  However, if you did buy the company, you would also take on $109 billion in "current" pension liabilities.  That's a burden that is 350% greater than the market value of the company. 

In June, GM announced that it was going to try and reduce those liabilities by $26 billion by offering 42,000 non-union employees a chance to opt out of their pensions by accepting a one-time, lump-sum payout at age 65.  The payout, itself, would be equal to whatever the annual pension would have been  over 12 years; starting at age 65.  Now, the cash for this is basically taxpayer money; part of the $33 billion that was left over from the $50 billion that the government gave GM to remain solvent.

But, even with this lump-sum program, GM is still left with $83 billion in liabilities; of which, $71 billion are theoretically non-negotiable union pensions.  That $83 billion is still 260% greater than the company's value, and, because union pension programs remained intact following last year's 4-year labor contract agreement, those pension liabilities will only continue to grow. 

Now, even if GM could fund the pension liabilities with every dollar it made in profits, it would still mean that it would take a decade or more to cover that liability in total; and, of course, realistically, that just won't happen.  Its pension liabilities could be a ticking time bomb that could sink the company once again.

The problem here was the way GM was bailed out.  Obama sided with labor, and all the labor commitments and contracts were left unchanged.  That would not have happened if they went through a normal bankruptcy process.  As a result, you have a company that, in the short term, looks to be successful,  but, in the long term, may be a disaster waiting to happen.  This is a major reason why GM's stock price is so low; below $20/share.  And, the taxpayers?   They're really screwed because its looking like it will never get back to the $53/share that is needed for us to breakeven on Obama's bailout of the company.  Basically, GM is another Obama Solyndra.   This time, a bankruptcy in slow motion.