I see that Steve Chapman noticed the same thing I did about Gov. Rauner’s first State of the State address:
Bruce Rauner, the new Republican governor, gave a State of the State address Wednesday that mysteriously failed to address the state’s huge public employee pension debt. It’s like a biography of George Custer that omits Little Bighorn.
The chance of success is about as small as Custer’s. Illinois has a bigger unfunded obligation than any state in the country, exceeding $100 billion and, by some estimates, as high as $250 billion. It has attained that distinction by failures like skipping contributions and assuming the economic good times would never end.
He concludes:
Rauner has talked about moving state workers into defined-contribution 401(k)-style pension programs. But that option does nothing to lighten the vast obligations that have already been incurred. And there is a good chance the state courts would disallow it because it would leave these workers with something less than they were promised when they were hired.
Nearly every state has followed the same basic policy of making promises today and letting someone figure out how to pay for them years from now. Illinois may be on the road to ruin, but it’s just the lead car in a long parade, passing every exit.
As I have been saying for some time the courts are likely to reject any plan from the state legislature that requires paying present public workers less than they were promised other than in a bankruptcy proceedings, something that would be unprecedented at the state level. Illinois has a limited array of alternatives: higher taxes which will be paid by fewer individuals and companies since both are leaving the state at a rapid clip, greater economic growth which it’s hard to see happening with a legislature whose only solution is raising taxes or a nationwide boom that doesn’t appear to be materializing, or cutting everything else the state spends money on as far as is necessary, possibly to zero.
The Illinois constitution protects the pensions, so the existing pension benefits cannot be changed without a constitutional amendment. Even then, contract law might preserve the benefits for current employees. In the event of state bankruptcy, the retirees and workers go to the head of the line, holders of Illinois debt get nothing.
If the stock market tanks, where will that leave the pension fund? Will there be a rush to bonds? If so, will bonds rise? If the stock market tanking is caused by a financial bubble bursting, what will that do to bonds? Will the result make today’s woes seem like good times?
I do not follow the stock market or the reasons for its ups and downs. I would speculate there would be carnage, but these things do not always play out the way they should. The rest of the world could shift to the US for a safe harbor.
Here’s a snapshot of the portfolio of one of the state’s major public pension funds, the Teachers’s Retirement System. As you can see it’s predominantly invested in equities.
That stands to reason as commenter Guarneri has pointed out any number of times. In order to meet the funds out-sized performance requirements, they’ve got to “climb the risk ladder”, making increasingly risky investments. They could never meet their targets in bonds.
That’s also one of the reasons that I start to turn purple when I hear legislators talk about investing or disinvesting for political reasons, to support some favored cause or remove support from a disfavored one. My translation of that is “we’ve got to make riskier investments”.
bob:
Judges have sweeping powers in equity in cases of bankruptcy.
What I know about the stock market is that it became unhinged from reality in the mid-1990’s. I attribute this to Clinton’s millionaire tax and Fed interest rate policy, but your China connection is also interesting. The other thing I know is that money is supposed to flow from stocks to bonds and back as as the market increases or decreases.
In the present environment, I think the bond market is even screwier than the stock market, but I do not keep up on it either. I also think that things are so screwed up globally that the US becomes attractive even though the fundamentals would say otherwise.
This is one of those things that may not play out the way they are predicted, and this is why trying to make money on these events is risky. When the upside is astronomical for you, the downside is astronomical for somebody else, and that somebody probably has more stroke than you.
I just wonder how many of these guys who get paid a lot more money than I do realize that things that can never happen actually do happen quite frequently. (I do not mean the private guys, but they can be idiots also.)