Wednesday, December 11, 2013

US pension woes - December 11 , 2013 ... Illinois and Chicago in focus - pension "fix " or accounting games sham ? Will Illinois follow Detroit into bankruptcy at some point if he really decides to attack pensions and retiree benefits over Union objections ?

Tuesday, December 10, 2013 11:30 PM 

About That Illinois Pension "Fix"

The highly touted Illinois plan to fix its pension system is largely hot air. I was waiting for details to prove just that and they came out today. Let's flashback to the initial claim.

A headline from six days ago reads Illinois lawmakers approve fix for $100b pension crisis 
 The Illinois Legislature approved a historic plan Tuesday to eliminate the state’s $100 billion pension shortfall, a vote that proponents described as critical to repairing the state’s deeply troubled finances but that faces the immediate threat of a legal challenge from labor unions.

The measure approved Tuesday emerged last week following negotiations by a bipartisan pension conference committee and then meetings of Illinois’ legislative leaders. They say it will save the state $160 billion over 30 years and fully fund the systems by 2044.

It would push back the retirement age for workers ages 45 and younger, on a sliding scale. The annual 3 percent cost-of-living increases for retirees would be replaced with a system that only provides the increases on a portion of benefits, based on how many years a beneficiary was in their job. Some workers would have the option of freezing their pension and starting a 401(k)-style defined contribution plan.

Workers will contribute 1 percent less to their own retirement under the plan. Legislative leaders say they included that provision, as well as language that says the retirement systems may sue the state if it does not make its annual payments, in hopes of boosting the measure’s odds of surviving the unions’ anticipated court challenge.
Actuarially Unsound 

Unions are opposed to the plan, as always, and will file lawsuits, as always. But the plan does not even work.

Via email, Jonathan Ingram, at the Illinois Policy Institute explains...
 House Speaker Mike Madigan and proponents of the temporary pension “fix” enacted last week promised taxpayers that it would immediately reduce the state’s unfunded pension liability by about $20 billion. But despite these promises, the credit rating agencies have indicated that they would be waiting for actuarial analyses before making any decisions on how the new law will affect Illinois’ worst-in-the-nation credit rating.

They’re wise to wait. It turns out that somewhere between $6 billion and $8 billion of Madigan’s promised reduction is solely the result of accounting gimmicks.

Part of the “fix” Madigan’s bill offers is to eventually move to what’s called the “Entry Age Normal” cost method for calculating how much the state should be contributing to pensions each year. That’s actually a good idea. This new accounting method helps make the pension ramp a little less steep. It’s also required by the new pension accounting rules promulgated by the Governmental Accounting Standards Board.

But here’s the problem: switching to this new accounting method actually increases the state’s unfunded liability by approximately $6 billion to $8 billion in the short term, because it attempts to spread the costs over the course of employees’ careers, rather than having them backloaded like we do now.

So how do you make up for that increase when you’re trying to reduce the state’s unfunded liability? Do you incorporate more comprehensive reforms to get that debt under control? Not if you’re Madigan.

Instead of addressing that increase, the pension bill simply delays implementing the accounting change until fiscal year 2016. This means that the state gets to pretend that at least $6 billion to $8 billion of the pension debt simply doesn’t exist for now. But when the new rules take effect in 2016, that pension debt is added back to the books. Instead of cutting $20 billion off the unfunded liability as promised, it looks like Madigan’s bill only really cuts $12 billion to $14 billion.

Actuaries for the state’s largest pension system recommended against delaying the new accounting rules. As they noted, the gimmick is being used to “maximize the amount of liability reduction,” even though 25% to 35% of that liability reduction will be added back to the pension debt in just a few years.

The rating agencies have already begun cracking down on state and local governments for using gimmicks to paper over their true pension debt.

Are lawmakers seriously hoping they’ll overlook this one, especially when our own actuaries are highlighting it?
Pension Fight Could Create Deeper Hole

The Washington Post reports Ill. pension fight could create deeper fiscal hole
 With the fight over solving Illinois’ worst-in-the-nation pension shortfall now headed to the courts, the financially troubled state faces a grim possibility: The plan could be tossed, and Illinois could wind up in an even deeper fiscal hole than the one it’s in now.

Legislative leaders, anticipating a legal challenge from public-employee unions once the landmark bill approved Tuesday is signed, went extra lengths to bolster the law’s odds in the courtroom — including an unusual three-page preamble to the legislation in which they lay out their case for cutting worker and retiree benefits.

But legal experts say those efforts could mean little in a state that provides some of the country’s stronger constitutional protections of pension benefits.

They point to Arizona as a possible warning sign. In 2012, a judge there said a law raising the employee contribution to pension benefits was illegal, and ordered the state to repay the money to workers — with interest.

Illinois, Michigan and Arizona are among the seven states that have clauses in their state constitutions that protect pension benefits, according to the Center for Retirement Research at Boston College. The others are Alaska, Hawaii, Louisiana and New York.

Illinois and New York’s protections are considered to the strongest, however, because the language expressly states that it applies to current and future benefits.

A coalition of labor unions known as We Are One Illinois stated immediately after the bill passed that it will sue if Gov. Pat Quinn signs it, which the Chicago Democrat is expected to do as early as this week.

Quinn said he believes the legislation is constitutional and will ultimately be upheld by the Illinois Supreme Court.

“It is necessary for the economic good for the people of our state, and I think the court will see it that way,” he said.
Economic Good of the State

If Governor Quinn really wants to do something for the "economic good of the state" he can start by signing legislation that would ...

  1. End collective bargaining rights for Illinois public unions.
  2. Make Illinois a right-to-work state.
  3. Scrap prevailing wage laws.
  4. End defined benefit pension plans going forward.
  5. Lower taxes for the average citizen.
  6. Hike taxes on public union pension payments enough to make the system sound.

Plan Worth Fighting For

As long as there is going to be a court battle with the unions, you may as well go to court over a plan that will actually fix the system.

Illinois should figure pension liabilities at a reasonable rate of return, say the 30-year treasury rate. That would make the plan underfunding look far worse today, but so be it. The idea is sound.

Then after barring new entrants into the scheme, the state should hike taxes on pension recipients enough to make the system fully funded with no additional taxes on regular taxpayers.

I propose something along the lines of "taxing pension benefits above a specified amount at 80%, taken straight out of the check". The "specified amount" would be determined based on what it takes to make the system actuarially sound in a reasonable timeframe (say 15 years).

If you going to have a fight, make it a fight worthwhile.

As always, it's best to have a plan B. I propose a simple one: default on pension obligations above a certain level, but pay all other state obligations early to avoid bond market disruptions.

Public Unions Should Bear the Brunt of the Pain

Public unions (in conjunctions with pandering politicians) wrecked Detroit, and numerous cities in California and other states. Together they wrecked Illinois.

It's perfectly fair for unions to bear the brunt of the pain in working out a solution.

Mike "Mish" Shedlock

Pension crisis endangers Chicago's future
 Email this Story

Dec 10, 1:18 AM (ET)

(AP) This July 19, 2013 file photo shows, Jesse Sharkey, Vice president of the Chicago Teachers...
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CHICAGO (AP) - It's not the vision of a world-class city that Chicago Mayor Rahm Emanuel typically likes to portray.
More teachers losing their jobs, thousands fewer police and firefighters on duty, less frequent trash collection and miles of potholed roads going unrepaired - all as property taxes soar.
But that's the scenario Emanuel and others have said could befall the nation's third-largest city if the state Legislature - which passed a landmark measure last week to address Illinois' severe public pension shortfall - doesn't deal with Chicago's own multibillion-dollar pension problem.
The economic capital of Illinois and the Midwest, Chicago holds the dubious distinction of having the worst-funded public pension system of any major U.S. city. It's a crisis that's putting in peril Chicago's reputation as "the city that works," and its vision of being a modern transportation hub in the midst of a high-tech boom.
(AP) This Sept. 10, 2012 file photo shows Striking Chicago Public School teachers picketing as...
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"Chicago sticks out for all the wrong reasons," said Rachel Barkley, a municipal credit analyst at Morningstar Inc. (MORN), referring to a public pension system that is only 35 percent funded, compared to New York's 60 percent and San Francisco's 88 percent.
It's raising the question: Which version of itself will Chicago become?
Just raising taxes, which could cause businesses to leave, or cutting services, which would penalize residents, won't be enough, said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago.
"I don't think either one is even a possibility," he said. "Everybody's going to have to give something."
Chicago's pension funds for city workers, police officers and firefighters are about $19.5 billion short of what's needed to meet its current obligations.
(AP) This Sept. 10, 2012 file photo shows Chicago teachers walk walking a picket line outside a...
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The shortfall amounts to about $7,100 per Chicago resident. That's nearly eight times the per person cost of the unfunded pension liability in Detroit, a city that saw its population plummet in the years before it went into bankruptcy earlier this year. Add in the unfunded liability for Chicago teacher pensions, and the total shortfall jumps to about $27 billion.
City officials say the shortfall is due largely to investment losses during recent economic downturns, to workers and retirees living longer and to increases in benefits. The city's annual contributions to the funds, set by state statute, also were well below what was necessary for meeting its obligations, according to a Morningstar analysis.
Under state statute, those contributions are now scheduled to more than double next year, to about $1.07 billion. Emanuel, a former White House chief of staff who is up for re-election in 2015, says the increase is about equal to the annual cost of having 4,300 police officers on the beat or resurfacing 16,000 city blocks.
If the city doesn't cut services and pension benefits aren't changed, he says, the annual payment would require a 150 percent hike in property taxes - an increase he calls "unacceptable." Chicago Public Schools' payment to the pension fund for Chicago teachers also is slated to increase next year, from $196 million last year to $600 million.
Emanuel wants the Legislature, which must approve any changes to pension benefits, to raise the retirement age and cut cost-of-living increases, as it did for the state pension system.
(AP) This Sept. 10, 2012 file photo shows Chicago Mayor Rahm Emanuel visiting with students at...
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"The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities," he said after lawmakers approved the state changes last week.
Senate President John Cullerton, a Chicago Democrat, said he wants to take up the issue "as soon as we can when we come back next year." Lawmakers are next scheduled to meet at the Capitol in Springfield in late January.
Jesse Sharkey, vice president of the Chicago Teachers Union, said the union fully expects a bill that will solve the problem "on the backs of working people."
He warned the Legislature should prepare for protests on the scale of those in Wisconsin in 2011, when thousands of union members camped out in the state Capitol to protest Republican Gov. Scott Walker's attempts to effectively end collective bargaining for most state workers.
"There's no way this attack isn't coming, and we're gearing up for it," Sharkey said.
Emanuel isn't backing down either.
He says reducing the city's and the Chicago Public Schools' payments to the pension funds is particularly critical for the school system, which closed dozens of schools this fall, in part because of budget problems.
"I don't want the cost as it relates to pensions to crowd out the future of the city of Chicago, which is our children," he told a group of executives during a recent Bloomberg Business Summit.