By: Mark Glennon*
Let’s suppose you’re smart enough not to trust what the government says about how far underwater public pensions are — even using the new accounting standards that are more conservative. Suppose, instead, you change one key assumption — the “discount rate” — to use what all reputable financial economists say you should use.
Do that and our pension liabilities become utterly absurd. Illinois, Chicago and Cook County pensions stand out.
That’s basically what Prof. Joshua Rauh of Stanford University’s Hoover Institution did in a major study of state and local pensions across the country released yesterday. His study calls it Market Value of the Liability, or “MLV.” The full study is linked here.
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.
Among the study’s conclusions:
• Illinois pensions have just 29% 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% of what they need, the worst of any major city. It’s pension debt is over $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, Michigan), being about $30% funded. It owes about $18 billion.
Truly staggering is what the study says about how badly those pensions continue to be underfunded. In other words, how much more would it take from taxpayers just the keep these pensions from sinking further into debt?
• For 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.”
Keep in mind this is about unfunded liabilities, which are for obligations on work already performed.
Oh, and the study doesn’t cover healthcare liabilities. For Illinois, that’s roughly another $50 billion, entirely unfunded. Those liabilities are discounted at 4.5% per year even though no investment assets back them up. And we really don’t have any current numbers on how big that liability is because the state hasn’t published an actuarial report on them since September 2015. Meh, why bother?
The study also does a nice job explaining why the new government accounting standards failed. Official actuarial reports remain terribly misleading.
You should already know that our pension obligations are insurmountable even using the government’s numbers. The only two ways to reduce those obligations are a state constitutional amendment deleting the pension protection clause or federal bankruptcy.
With these new numbers you can, well, I don’t know, have a good laugh.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.