The poster child for liberal spending habits, Illinois, is beyond broke when it comes to its state pension. Back in 1994, they had a plan, which if they had stuck to it would have led to the paying off the then $17B gap in the pension system this year. So how did they do? Well not to good. Illinois' unfunded liabilities now total $78B (a 458% increase in just 16 years). In order just to keep making payments to retirees 30% of the $13B 2011 budget must be set aside to make those payments and that won't even begin to make a dent in the current shortfall, think paying the monthly minimum on a credit card. Unfortunately, Illinois is not the only state that underfunded their pension plan. According to Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University:
without reform, some state pensions might run out within the decade. By 2030, as many as 31 states may not have the money to pay pensions. And, if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1,000bn, he says.
What I find interesting is that States were allowed to legally underfund or defer payments into the pension system in the first place. If a private company were to do the same thing the DOJ and Labor Department would have the CEO's in front of the cameras tomorrow for their perp walk but that doesn't happen when its the politicians that cause this mess. So why did it happen. Well it all goes back to Wall Street, the States, just like stupid Americans, got caught up in the exuberance of the housing market and the bull market. They thought that the goods times would last forever so they projected what needed to be contributed based upon the best case scenario rather than the reality that whatever goes up must come down.
So why did the politicians let this happen? Because they are like the dysfunctional parents that gives the kid a candy bar in the supermarket because the kid is whining rather than simply saying no. State workers wanted great pensions so politicians gave it to them. In return the public employee unions used their money and power to both back the politicians that said yes and to defeat the ones that dared to say no, which didn't happened to often. Also let's not forget that most state legislators also get the same great pension as the union members even though they only work part-time.
When the good times stopped the states should have cut spending and started to contribute more to the funds but they didn't and the reason why is simple. There are only two ways for states to raise revenue. They either have to collect more in taxes (usually by raising them or some of the smarter states by encouraging businesses to come to their state) or cuts programs. Neither idea was appealing to the politicians so they did a song and dance and here we are today in some very deep sh*t.
The scary part is that Federal Government does the exact same thing as the states by underfunding programs (ie. Social Security and Medicare) and refusing to cut programs. There is one difference though, the Feds are able to monetize the debt because they can print money. But in the end it does matter because eventually a day will come when the piper must be paid and on that day the stories of Greece and Zimbabwe will not be something on CNN but rather something that every American both rich or poor will have to deal with and it won't be pretty.
From the Financial Times
By Nicole Bullock in New York and Hal Weitzman in Chicago
Illinois used to have a plan to pay off the gaping shortfall in the pension funds that pay retired teachers, university employees, state workers, judges and politicians, Dan Long recalls.
Mr Long, director of the Commission on Government Forecasting and Accountability, the non-partisan auditing arm of the Illinois state legislature, remembers that, back in 1994, the state laid out a proposal that would have paid off most of what was then a $17bn gap by 2011.
But Illinois could not stick to the plan.
With financial year 2011 less than six weeks away, the pension arrears of the 1990s look quaint. Instead of a balanced system, the state faces unfunded liabilities of about $78bn, the biggest pension hole in the US, and contributions of more than $4bn for 2011, the largest single element of its $13bn budget deficit.
Illinois is the poster child of unfunded pensions in the US. But state retirement systems could become a national concern, new research shows.
http://www.ft.com/cms/s/0/b9d90504-6379-11df-a844-00144feab49a.html
