Dire State of Affairs in Illinois

Townhall.com ^ | October 27, 2012 | Mike Shedlock

[Kaslin]

I just finished slogging through a 69 page PDF by the State Budget Crisis Task Force outlining the dire state of affairs in Illinois.

I knew in advance that pension funding is the biggest issue facing Illinois. The task force shows exactly that. Here is a summary.

Pension Funding Levels

• Teachers Retirement System (TRS) - 46.1%
• State University Employees Retirement System (SURS) - 45.3%
• State Employees Retirement System (SERS) - 34.9%
• General Assembly Retirement System (GARS) - 20.2%
• Judicial Retirement System (JRS) - 31.0%

Those funding levels assume 8% returns going forward, something that is not going to happen. So as bad as the above looks, the true pension underfunding is even worse.

Illinois' infrastructure is in bad shape, and the report has the details.

There were many things in the report that I did not know about including the loopholes that let legislators pretend Illinois' budget is balanced when it's not.

Here is a surprising fact: Illinois has more governmental taxing agencies than any other state including California, a grand total of nearly 7,000 taxing bodies!

Here's a juicy tidbit on infrastructure "Nearly two-thirds of Metra and CTA passenger rail cars were in a marginal state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life."

The report finished with "recommendations" but they were broad stroke, budgetary meaningless things like timely reporting, long-term planning, accrual planning, etc.

I am in favor of most of the report recommendations, but they will not solve a single problem.

Here is the scariest single sentence in the report "If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years."

Illinois is insolvent, but what can be done about it?

Mish Six-Point Proposal

1. Immediately end all defined-benefit pension plans
2. Default on pension obligations in the fairest possible manner (cap benefits)
3. End collective bargaining of public unions  
4. Eliminate prevailing wage laws that are murder on local budgets
5. Lower corporate income taxes to attract business
6. Eliminate property taxes as the primary method of funding schools

Point number two is against the constitution but I believe it could be accomplished by taxing all benefits above a certain amount at 100%. The alternative is also simple. If the money is not there (the pension plan is bankrupt) all payouts will cease.

The way to win approval from the unions is to set the cap high enough so that the majority of union members get 100% of their benefits.

State Task Force Report

Everything that follows is from the report. It is lengthy and will be easier to read if it is not in blockquotes as per my usual format. Emphasis is generally, but not necessarily mine.

“What Would It Take” Calculations

• If the projected deficits were paid for by borrowing, debt service costs would grow to consume all sales tax and income tax collections in just five years.
• To close the gap with an income tax increase would require the individual tax rate to rise to 7.1 percent from the then-existing 3.0 percent and a proportional rise in the corporate rate.
• To close the gap with a sales tax increase would require the rate to jump from 6.25 percent to 13.5 percent.
• To close the gap with spending cuts alone would require over 25 percent across the board reductions in all spending (other than for pensions, debt service, and transportation).

Of Illinois’ three biggest fiscal problems — pension costs that are crowding out the rest of the budget, Medicaid cost increases that have grown faster than the state’s resources and will be unsustainable as the federal ARRA funds expire.

Despite greater recognition that the growth in pension costs cannot be sustained, different views of how to cut or shift the costs have led to a stalemate. No action on pension reform is expected until after the November 2012 elections at the earliest.

Illinois’ demographics show an aging population with a trend toward fewer workers and more retirees, which will pose daunting fiscal challenges in the years ahead. Illinois is also a diverse state with a variety of competing interests, which makes it difficult for political leaders to reach consensus on key issues.

The Politics of Spend, but Don’t Tax

While in Illinois, as elsewhere, the desire to please constituents by expanding government services without increasing taxes is a given, the origins of the structural gap between spending growth and sustainable revenues can be traced to the 1990s. Governor Rod Blagojevich (Illinois’ first Democratic governor since 1976) was elected in 2002 with an agenda to expand programs for children, seniors, and the poor.

However, conflict between Blagojevich and Speaker of the House Michael Madigan (both Democrats) meant that tax increases became virtually impossible as the two “checkmated one another.… The governor declared he would veto any general tax increase…. Madigan blocked all the revenue initiatives proposed by the governor.”

Illinois’ Squishy Balanced Budget Requirement

It would appear that Illinois’ budget is required to be balanced. The Illinois Constitution states that “Proposed expenditures shall not exceed funds estimated to be available for the fiscal year shown in the budget”

However, Illinois’ balanced budget requirement has some serious limitations.

First, it refers to anticipated revenues, and there is no requirement that the state adjust its spending if the anticipated revenues are not realized. There is nothing to stop a governor or General Assembly from using an unrealistically high estimate when crafting the budget.

Illinois’ balanced budget requirement is also a cash concept, referring only to the current fiscal year. This means that the balanced budget requirement does not refer to future pension liabilities or unpaid bills from the previous year. Each fiscal year from 2009 to 2012 ended with a larger stack of unpaid bills — $8 billion at the end of fiscal year 2012 — and each year these bills were ignored when projecting balance for the next year’s budget.

Underfunded Retirement Promises Are Crowding Out Other Needs

It is widely recognized that Illinois  has the worst unfunded pension liability of any state. Its five retirement systems had a total of $85 billion in unfunded liability in 2011 (Table 2), and the figure has increased since then. Dealing with some of the lowest funded ratios of public pensions in the nation has contributed to the state’s ongoing fiscal crisis. Illinois’ pension problems were cited by Moody’s Investors Service when it downgraded the state’s bond ratings in January 2012, making Illinois’ credit rating the lowest of all fifty states. However, Illinois has done nothing to reform state employee pensions since that time and it is doubtful that anything will happen before 2013.

Table 2 describes the five retirement systems the State of Illinois is responsible for funding: Teachers Retirement System (TRS), State University Employees Retirement System (SURS), State Employees Retirement System (SERS), General Assembly Retirement System (GARS), and Judicial Retirement System (JRS). It also shows the Illinois Municipal Retirement Fund (IMRF), which the state administers but the local government entities are responsible for funding. Most of the state’s
$85 billion in unfunded liabilities are in the three largest funds, TRS, SURS, and SERS. All five state funds have funding ratios below 41 percent. The IMRF has a much higher funding ratio because of a state law that obliges local governments to make “annual required contributions” (ARC).



click on chart for sharper image

The Way Pension Costs Are Reported Can Obscure the Problem

Illinois’ pension systems are likely in a more dire fiscal condition than they seem. Illinois’ three largest pension systems discount future pension liabilities using an assumed rate of return on investments of around 8 percent. Since the financial crisis, ongoing economic instability in Europe, and worries of a double-dip recession, many believe that this assumed rate of return is overly optimistic. Most state pension systems have exceeded an 8 percent rate of return over the past several decades, but the rates have been much lower in recent years. Lower discount rates will soon be required in Illinois and other states.

Under new rules approved by the Governmental Accounting Standards Board (GASB) in June 2012, Illinois will be required to report liabilities using “market rates,” which are typically closer to 5 percent. Although this change will no doubt have a positive impact by more accurately estimating the level of state liabilities, it reveals an even more precarious financial position. For example, “under the new rules, the Illinois Teachers’ Pension System [TRS], one of the country’s worst funded, would have shown just an 18 percent funding ratio as of July 2010.”

Schools

In Illinois, total preK-12 education spending per pupil slightly exceeds the national average, but the proportion that comes from the state’s own resources is low in comparison to other states. In the 2008-2009 academic year Illinois was ranked forty-eighth in per-pupil education revenues from state sources, but tenth in per pupil revenues from local sources. Illinois’ heavy reliance on local property taxes to fund education means that disparities between wealthy and poor communities are reflected in the quality of the schools.

During the 2009-2010 academic year, Illinois’ wealthiest elementary districts spent about $24,000 per pupil while the poorest districts spent about $6,000. A 2010 national study found that Illinois has the second-highest disparity between high-poverty and low-poverty schools.

Illinois has the third highest number of school districts of all U.S. states. More than 200 of Illinois’ 868 school districts have only one school.

Underinvestment in Infrastructure

Crowding out has also become increasingly evident in the case of Illinois’ aging infrastructure. In 2010, the American Society of Civil Engineers (ASCE) Infrastructure Report Card gave Illinois an overall grade of D+.140 The state’s infrastructure is in urgent need of immediate repairs to meet basic standards of public safety, and in need of expansion and modernization to accommodate future growth. However, as Illinois continues to struggle to pay its pension, Medicaid, and debt obligations, the state’s infrastructure condition will only worsen. Illinois state agencies estimate that infrastructure needs over the next twenty to thirty years will exceed $300 billion. But the state does not have a comprehensive capital improvement plan, and the information needed to make an accurate assessment of the condition of Illinois’ infrastructure is incomplete.

Condition of Illinois’ Infrastructure

The poor condition of Illinois’ infrastructure — including highways, roads, bridges, trains, buses, dams, locks, and buildings — has become critical.

A FY 2011 survey of Illinois’ highways and roads by the Illinois Department of Transportation indicated that approximately half of Illinois’ highways and roads were in Fair or Poor condition. According to the Federal Highway Administration, in 2010 over 15 percent of Illinois’ 26,000 bridges were structurally deficient or functionally obsolete.

Illinois’ mass transit infrastructure is also lacking: in 2010 approximately one-third of mass transit bridges and structures; maintenance facilities; and buses were not in a state of good repair. Nearly two-thirds of Metra and CTA passenger rail cars were in a “marginal” state. Nearly half of Metra and CTA train stations were past their useful life, and about one-third of CTA and Pace buses were in the last quarter (or less) of their useful life. Little state funding is available to address these needs.

Local Government Fiscal Stress

Local government taxing jurisdictions weave a complex web in Illinois. According to the 2007 Census of Governments, Illinois has more units of government than any other state — nearly 7,000. This includes 102 counties, 1,400 townships, 1,300 municipalities, 868 school districts, and about 4,000 special taxing districts such as library, fire protection, forest preserve, and park districts.

In Illinois, the fiscal condition of thousands of local governments is intertwined with that of the state. At present, neither is in a position to help the other. The state’s fiscal stresses have led to cutbacks in transfers of state revenues to local governments, exactly at the time that local governments are most in need of assistance.

Everything above, starting with "What Would It Take Calculations" were pieces snipped from the 69-page PDF.

Illinois is in deep "sheet" and the primary proposals under discussion all involve tax hikes and more pandering to public unions which will do nothing but drive businesses away.

My six-point alternate proposal would put Illinois back on a track towards fiscal sanity and also encourage businesses to relocate to Illinois.

[StandAndDeliver1]

This could get very interesting,very fast.

[StandAndDeliver1]

I drove around Dallas on vacation and then drove back to Chicago. It’s striking how all the roads and bridges in Chicago look so old by comparison.

[StandAndDeliver1]

Earlier this year there was a long article from an urban planning journal that said the talk in that industry was how precipitously Chicago had declined in the last decade by almost every measure.

Daley abandoned ship at the right time for him.

[muawiyah]

Chicago's roads and bridges looked that way after the first 2 winters.

You drop the same climate on top of Dallas and you'd get the same sort of surfaces, particularly if you used salt to clear the ice.

[cgbg]

A major trend in the next five-ten years will be baby boomers deciding where to live when it is time to retire (and they don’t need to commute any more).

One factor they will look at is _future_ local and state tax rates.

The only elderly left living in Illinois in ten years could be Medicaid recipients—and think about what that will do for local and state revenues vs spending.

Illinois does not have a lot of time left to fix this.

[cripplecreek]

FReepers like to beat up on Detroit but its going to look like a utopia compared to Chicago when somebody finally cuts the umbilical.

[Lurker]

I can’t wait for the day all those LINK cards stop working.

[Nailbiter]

This year Illinois taxpayers will contribute $14.15 million to the General Assembly Retirement System. Under new accounting rules from Moody’s, the Illinois legislature’s pension system is only 13 percent funded.

From the below link when I researching Obama’s pension.

http://illinoispolicy.org/blog/blog.asp?articlesource=5166

Wonder if the legislators will forgoe their pensions /sarcasm

[cripplecreek]

You drop the same climate on top of Dallas and you'd get the same sort of surfaces, particularly if you used salt to clear the ice.

True dat. Seemed to me that the roads in Texas get a lot slicker in rain than ours do in the north.

[RegulatorCountry]

It’s been like that for a long time. Winter is rough on roads. Chicago has plenty of it, Dallas not so much. Chicago on the whole is a much older place, too. Chicago is well kept compared to Philadelphia, though. There are sections in town where it is impossible to dodge the steel plates bolted over giant potholes. There’s something very Blade Runner-ish about crossing that bridge ocer the Schuykill into New Jersey. Maybe it’s all the barrel fires and street bums in every nook and cranny. Had a flat tire with a rental car on that bridge once. I wouldn’t stop until I got off the bridge and to something clean and well lit. I’d never seen a Pep Boys store at the time but man was I ever relieved.

[Don Corleone]

Earlier this year there was a long article from an urban planning journal that said the talk in that industry was how precipitously Chicago had declined in the last decade by almost every measure.

DETROIT II ...without the baseball team.

[fhayek]

Same in Buffalo, and Detroit. One of the things that has always bugged me about “investing in infrastructure” was that governments should be maintainng roads and bridges on a contiuous basis. There are ostensibly plenty of dedicated revenue sources to keep these thing in good repair (fuel taxes, registration fees, tolls, milage fees, etc). Yet the liberals have to raid these revenue streams to fund their welfare state. As Maggie Thatcher once famously said, sooner or later you run out of other people’s money. Socialists raid funds meant for infrastructure maintenance, they tax everything that moves, and some things that don’t, they borrow until the lending window slams shut, and they still need more. THEN they try to tell you that borrowing money to upgrade infrastucture is some wonderful, bold initiative. It is, in my opinion, a damning indication of poor stewardship on the part of government.

[astounded]

Richard Daley is a common criminal, a thief, who got out one step ahead of the law. We still have common criminals in charge, Rahm Emanuel, and worst of all Barack Obama.

[StandAndDeliver1]

You drop the same climate on top of Dallas and you'd get the same sort of surfaces, particularly if you used salt to clear the ice.

In the suburbs,rural Illinois, WI, IA the infrastucture doesn't look rusty and crumbly.

[B.O. Plenty]

ELECTIONS HAVE CONSEQUENCES:

..even in Illinois.

The only thing that you can conclude from this is that the majority of the voters who actually go vote like the government that they elected. I would suppose that they don't give a rat's ass that the Ill government is broke and getting broker. They have no idea, nor do they seemingly care, what happens when Ill cannot pay their payroll, let alone their supplier bills.

Maybe someday even the moron level voter will finally realize that if they keep electing lunatics to run things, they will keep getting lunatic policies.

...but...*sigh*.... maybe not

[StandAndDeliver1]

I can’t wait for the day all those LINK cards stop working.

The company that owns Jewel food stores is up for sale,and their stock has gone from about $50 to about $2.50 in the last several years. Let's see what happens to the grocery business when those link cards stop working.

[junta]

All this after the GOP hack/criminal govenor Ryan spent billions on roads.

[StandAndDeliver1]

I can’t wait for the day all those LINK cards stop working.

Wal-Mart cashier in Skokie,IL told me that 90% of their food customers use LINK cards!

Whole Foods cashier in Evanston,IL told me 2/3 of their customers use LINK cards!

[StandAndDeliver1]

Ten years ago, after I got creamed by the prices at Navy Pier, I vowed I would never again choose to go to Chicago for entertainment (I occasionally acquiesce to somebody else in a group.)

A friend who loves Chicago, told me that he would never live their again with the way they kill you with parking and traffic tickets.