Report shows 'true' accounting of pension liabilities more than double what governments say; Expert: debt is 'utterly absurd'
Financial expert Mark Glennon of Wilmette says in his analysis of a new study on state and local pensions that the options available to reduce the substantial obligations facing Illinois funds include amending the state constitution or going through federal bankruptcy.
A report produced by the Hoover Institution at Stanford University, "Hidden Debt, Hidden Deficits: 2017 Edition," studies in detail 649 pension systems across the U.S. It analyzes the way the funds measure their costs and obligations and how those differ from market valuations "that are consistent with the principles of financial economics."
The report indicates that Illinois systems, by a number of measures, are in the worst shape in the nation with actual liabilities being nearly double what the state reports.
Glennon wrote that if the liabilities of the state's public pensions are measured the way "reputable" financial economists say you should - rather than the way governments under-estimate - "our pension liabilities become utterly absurd."
The study looks at the market value of liability (MLV), which Glennon describes as:
"The basic idea is that, since pension liabilities are guaranteed hell-or-high-water, which the Illinois Supreme Court says is the case for all state and local liabilities, then the investments backing up that guaranty should likewise be guaranteed — safe, secure and low yield. So, the study looks at unfunded pension liabilities from the same perspective: The proper discount rate is what you could earn on Treasury bonds with a duration comparable to what’s owed on the pensions."
According to the report written by Stanford Graduate School of Business finance professor Joshua D. Rauh, while governments reported unfunded pension fund liabilities at $1.378 trillion in fiscal year 2015, when using market valuation techniques the "true" unfunded liability owed to public workers is $3.846 trillion.
"These calculations reflect the fact that accrued pension promises are a form of government debt with strong rights," Rauh wrote. "These unfunded liabilities represent an increase of $434 billion over 2014, as realized asset returns fell far short of their targets."
In Glennon's article posted Tuesday in Wirepoints Illinois News, he notes some of the study's conclusions about Illinois:
• Illinois pensions have just 29 percent of what they need to meet promises made, which is the worst in the nation, having a total MLV unfunded liability over $360 billion instead of the reported liability of $188 billion.
• Chicago pensions have 19.9 percent of what they need, the worst of any major city. Its pension debt is more than $90 billion as opposed to the $45 billion officially reported.
• Cook County’s pension debt is only the second worst among counties in the nation (behind Wayne County, Mich.), being about 30 percent funded. It owes about $18 billion.
He also pointed to what the study indicates about how profound problems are when looking at what it would take to stop deficits from expanding.
"In other words, how much more would it take from taxpayers just to keep these pensions from sinking further into debt?" he wrote.
For instance, Glennon wrote:
• In Illinois, the state would have to contribute “well over twice of what it actually contributed.”
• Chicago “would have had to contribute a full 44.5 percent of its own revenue.”
• Cook County “would have had to contribute more than 40 percent of its own revenue budgets just to prevent unfunded liabilities from rising.”
"You should already know that our pension obligations are insurmountable even using the government’s numbers," Glennon wrote. "The only two ways to reduce those obligations are a state constitutional amendment deleting the pension protection clause or federal bankruptcy."
Factors contributing to the state's pension crisis include guaranteeing workers much more in retirement than they contributed into the systems in which they are vested, and annual cost of living increases.
State lawmakers attempted to fix the pension funding problem in 2013 by passing a bill that cut automatic cost of living increases for retired workers, extended retirement ages and put limits on salaries used to calculate benefits. But in 2015, the Illinois Supreme Court found the law unconstitutional as it sided with public unions, saying the state was obligated to protect public worker pensions.