Josh Barro has a lengthy post at Bloomberg explaining Illinois’s public pension mess and how it got so bad:
This month, the Teachers’ Retirement System of the State of Illinois made a dire announcement to its members. TRS, which covers most public-school teachers in Illinois outside Chicago and has more than 360,000 members, said the following:
“If the General Assembly does not continue to provide all of the funding called for in state law, calculations done by TRS actuaries show that the System could become insolvent as soon as 2030. Preventing insolvency may include significant changes for TRS — new revenues must be generated and if they are not benefits may have to be reduced.”
The teachers’ fund is one of the country’s worst-financed statewide pension systems, reporting that it is only 47 percent funded. And that’s if you buy the system’s rosy accounting assumptions, including that it will achieve 8.5 percent annual returns on its assets. This level is tied for the most aggressive investment assumption among state pension funds in the country, and the fund has had to get creative in an effort to meet it. Pensions & Investments magazine says it has the fourth-riskiest pension investment portfolio in the U.S., with less than 17 percent of its investments in fixed income and cash.
Perhaps the teachers’ fund will be fabulously lucky, and rich investment returns will cover pension costs so taxpayers won’t have to. But the odds of that are vanishing. Indeed, the system’s funding status is so poor that it achieved a 23.6 percent return on investments in 2011 and still managed to shave only $2 billion off its $46 billion unfunded liability. And it’s not as though the fund can make such gangbuster returns consistently — in 2009, it returned negative 22.7 percent.
Closing the TRS funding gap — and the gap at the State Retirement Systems of Illinois, which is only 36 percent funded — will depend on taxpayers’ willingness to start paying far more than they ever did for pensions. And as the TRS statement makes clear, that is far from a sure bet, meaning that pensioners may see their benefits cut.
Read the whole thing (if you have a strong stomach). Hat tip: Mike Shedlock.
I gather that Mr. Barro has never lived in Illinois. If he had he might be familiar with Article XIII, Section 5 of the Illinois state constitution:
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.
It’s my understanding that this provision has been fully litigated. My interpretation of that is that, at least in theory, Illinois taxpayers’ willingness may have little or nothing to do with it. An Illinois court, exercising its powers in equity, could order that the pensions be paid. If funds are not available, the court could raise taxes without a by-your-leave from the legislators. Illinois Supreme Court justices are appointed, serve for a term of 10 years, and are themselves members of the retirement system of the state.
Legislators might amend the constitution. I strongly suspect that Illinois judges will not be amused.
I honestly don’t think it will go that far. I think it’s more likely that future government employees in Illinois will bear much of the burden in the form of reduced pension benefits. However, the idea that there’s any easy or painfree way for the citizens of Illinois to escape the consequences of decades of legislative and executive incompetence is just plain wrong.
I would also draw your attention to Article I, section 10, clause 1 of the U. S. Constitution:
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
which I interpret as explicitly denying to state legislatures the power to alter contractual terms after the fact. That’s what I meant by “not be amused”, above. Prudently, Medicare and Social Security benefits are explicitly not contractual obligations. But under Illinois law public employee pension benefits are. The Illinois legislature doesn’t have the power to release Illinois from the bonds they’ve put it in. The courts do have the power to do so but I strongly suspect that judges will go to some lengths to keep that from happening.