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The Next Detroit

Friday January 2nd, 2015   •   Posted by Craig Eyermann at 12:10pm PST   •  

26613918_SWhat’s wrong with giving government employees every single dollar they ask for in pensions and benefits?

After having seen the role of out-of-control public employee pensions in helping drive the city of Detroit into bankruptcy, which the city was only just able to exit in November 2014 after the city’s public pensioners finally agreed to cut their overly generous pensions and benefits to levels that are more affordable for the city’s taxpayers, we wondered which local government in the U.S. is most like Detroit in the disconnect it has between the size of its debts and its ability to make good on those liabilities.

We didn’t have to spend much time researching the topic. America’s next Detroit is Illinois. At least, according to The Economist, which being international in scope, directly compares the fiscal state of Illinois with its most similarly dysfunctional European equivalent: Greece….

Illinois is like Greece in one obvious way: it overpromised and underdelivered on pensions and has little appetite for dealing with the problem, says Hal Weitzman of the University of Chicago Booth School of Business. This large Midwestern state, with a population of 13m (Greece has 11m, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen. According to the Civic Federation, a budget watchdog, Illinois has piled up a whopping $111 billion in unfunded pension liabilities (see chart), in addition to $56 billion in debt for health benefits for pensioners. The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’s bond rating is the lowest of all the states, which means dramatically higher borrowing costs. When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana. (An incensed editorial in the Chicago Tribune asked what Botswana had done to be so insulted.)

The main reason for the pension debacle is decades of underfunding. “Everything was always done with a short-term view,” says Laurence Msall, head of the Civic Federation. “Unique to Illinois is the idea that you don’t have to pay for pensions and you don’t have to follow actuarial recommendations.”

Unlike Detroit, however, Illinois has an extra barrier that is preventing desperately needed reforms for making its public employee pensions sustainable by reducing promised pension payments and benefits to affordable levels: the State of Illinois’ Constitution.

Here, the state’s top law prevents lawmakers from even being able to address its worsening public employee pension crisis by diminishing or impairing pension benefits to retired government employees at all. The state’s only way out is a “long shot” attempt to amend its Constitution, but that would require that the people responsible for creating the crisis in the first place, public employee unions and the large number of officials they helped put into power, go against their own greedy interests in favor of the public’s best interest.

Unfortunately, with such a stacked deck, it’s in their greedy interest to push Illinois to the very edge of insolvency. And all indications are that they will fight reform rather than give up their guaranteed gravy train.

That’s the sort of thing that doesn’t even fly in communist China, which has implemented real public employee pension reforms to meet the public’s interest! If only Illinois’ elected officials would show similar public spirit.

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January 2015