Pension news out of Chicago keeps getting worse.
In 2013, the Illinois legislature took a feeble stab at fixing some small aspects of the Illinois pension problem.
The legislation, signed by then Governor Pat Quinn reduced the 3 percent compounded cost-of-living adjustment for retirees established in 1989, raised the retirement age for workers 45 and under, and imposed a limit on pensions for the highest-paid workers.
That was a step in the right direction, albeit a small one.
2013 Pension Reform Unconstitutional
Today we learn the Illinois Supreme Court Finds 2013 Pension Reform Law Unconstitutional.
In a unanimous decision, the seven justices declared the law passed 18 months ago violates the state constitution because it would leave pension promises “diminished or impaired.”
“In enacting the provisions, the General Assembly overstepped the scope of its legislative power. This court is therefore obligated to declare those provisions invalid,” Justice Lloyd Karmeier said in writing the court’s opinion.
State rep Rep. Elaine Nekritz, D-Northbrook hits the nail on the head with her analysis. “In its ruling today, the Supreme Court struck down not only the law but the core of that balance. Now our already dire pension problem will get that much worse and our options in striking that balance are limited. Our path forward from here is now much more difficult, and every direction will be more painful than the balance we struck in Senate Bill 1.”
Underfunding Just Got Worse
On Tuesday, I noted the dire state of Illinois pensions on CNBC with Rick Santelli. (See Chicago Board of Education to Default on Bonds? Rick Santelli and Mish Discuss on CNBC).
Here’s a video clip.
Illinois pension underfunding estimates range from $130 billion to $200 Billion. Those numbers assume two things.
- The 2013 Legislation was constitutional
- Pension plan assumptions of 7% or more will be met
Assumption number 1 just went out the window. It is my strong belief that assumption number 2 will soon follow.
Expect Negative Returns
I expect returns in stocks and bonds over the next seven years to be negative! For further discussion as to why, please see Valuations: Maybe I am Crazy.
Chicago Teachers ‘Highly Insulted’ Over Request for 7 Percent Pay Cut
On top of the already mounting fiscal issues, and in spite of the fact the Chicago Board of Education has a $1.5 billion hole, Chicago Teachers ‘Highly Insulted’ Over Request for 7 Percent Pay Cut.
The Chicago Board of Education wants teachers, social workers and other union members to take a 7 percent pay cut by paying their own pension contributions, according to the Chicago Teachers Union.
CTU President Karen Lewis, who led her members to strike in 2012 for the first time in 25 years, accused CPS of being “broke on purpose” and of retaliating against the union for opposing the mayor in his recent re-election campaign.
“Once again, the board has created a fiscal crisis in order to justify its continued attack on our classrooms and communities. By citing its so-called $1.5 billion deficit, the mayor is proposing a reduction in teaching staff which will result in larger class sizes and the loss of teaching positions,” Lewis said in a press release.
“The CTU is highly insulted,” said union spokeswoman Stephanie Gadlin, who planned a press conference on Wednesday.
Union Alternate Universe
In what alternate universe is Karen Lewis living to believe this is a manufactured fiscal crisis?
How is a state that has a $9 billion budget deficit hole going to bail out a single school district that is $1.5 billion in the hole?
Give Taxpayers a Chance
Today’s ruling more than ever shows the need to pass a bankruptcy law. I have been pushing for that as has Governor Rauner.
A May 5 Chicago Tribune editorial viewpoint said the same thing: Pass a Bankruptcy Law, Give Taxpayers a Chance.
Many people view bankruptcy as a “nuclear option” for local governments in Illinois — a bad choice that will only bring disaster. Actually, if we do it the right way, it may be the best path for averting true financial devastation in communities statewide.
Under federal law, state governments can’t file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can’t seek protection under bankruptcy law.
First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.
Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements. Only a constitutional amendment can get this done right now (unless the Illinois Supreme Court declares otherwise in a pending case). [We saw the answer today]
Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit’s.
The bottom line is this. Illinois taxpayers deserve a fighting chance. For years elected officials have been avoiding their fiscal responsibility by applying Band-Aids instead of structural solutions. As a consequence, local governments across the state are close to broke, owing billions of dollars in unpaid bills, pensions and retiree health care liabilities.
Per Household Liabilities
Census QuickFacts shows there are 4,772,723 Illinois Households as of 2013. To be generous, let’s round that up to 5 million.
Let’s also ignore my dire prediction of negative gains for seven years while placing the underfunding level at $200 billion.
To make the funds actuarial sound, Illinois households need to come up with $40,000 each. If instead of assuming 7% returns one assumed 2% returns (yield on the 10-year bond), the hole is closer to $500 billion.
And what if the stock market dives 30-40% over the next two years as I believe likely?
Image from Sun Times. Jan. 3, 2013 photo, a “Pension Promise” sign is seen as Illinois state union members and supporters rally in support for fair pension reform in the at the Illinois State Capitol in Springfield Ill. | AP file
A promise is a promise, not an eternity. Marriage is a promise as well.
And this promise was not even an honest one.
Contracts made under coercion and threats are not even valid. But even valid contracts can be broken. That is precisely why we have bankruptcy law instead of debtor’s prisons.
In this case, corrupt politicians made bargains with corrupt union leaders at taxpayer expense. Unions further contributed to the mess with coercion and threats. Any sensible person knew these promises could not be met.
Sue For Divorce
The result of the unholy alliance between corrupt union leaders and corrupt politicians was a shotgun marriage made in hell.
Taxpayers need to sue for divorce. The way to do that is bankruptcy court. I repeat Miracles Not Coming; Bankruptcy the Sensible Option.
Mike “Mish” Shedlock