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Illinois "Budget Deal" Is Likely The Death Knell For The State's $130 Billion
Underfunded Pensions
by Tyler Durden
Jul 14, 2017 10:16 PM
273
SHARES
Last August, in a post that attempted to explain why public pensions are really about $8 trillion underfunded, as opposed to the
$3-$5 trillion that you frequently see tossed around in the press, we described pensions in the following way:
Defined Benefit Pension Plans are, in many cases, a ponzi scheme. Current assets are used to pay current claims in full
in spite of insufficient funding to pay future liabilities... classic Ponzi. But unlike wall street and corporate ponzi
schemes no one goes to jail here because the establishment is complicit. Everyone from government officials to union
bosses are incentivized to maintain the status quo...public employees get to sleep better at night thinking they have a
"retirement plan," public legislators get to be re-elected by union membership while pretending their states are solvent
and union bosses get to keep their jobs while hiding the truth from employees.
And while we weren't specifically writing about Illinois at the time, that state's recent "budget deal" perfectly mimics our
point and illustrates precisely why America's underfunded pension ponzi schemes continue to grow at alarming rates, despite
going largely unnoticed by soaring equity markets, and will ultimately be the catalyst for a major correction in the U.S.
So, what are we talking about? As Bloomberg points out today, one of the ways that Illinois managed to "fix" its budget
crisis, was by simply "kicking the can down the road" on their future pension funding requirements...pensions which are
already only ~35% funded as it is.
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So, how did they do it? Well, they simply decided to continue modeling future returns at a much higher rate than they'll ever be
able to reasonably achieve. By leaving their discount rate at 7% they manage to reduce the present value of future liabilities and
thus reduce current funding requirements. In short, tweak one simple number and, like magic, your whole funding crisis
"disappears."
That spending plan, pushed through by lawmakers eager to keep Illinoiss bond rating from being cut to junk, allows the
state to sink deeper into the hole by giving it five years to phase in hundreds of millions of dollars in increased
contributions to four of its five retirement plans. Those extra payments stem from the funds decisions to roll back
forecasts for what they expect to make on their investments, which means Illinois will need to set aside more money to
ensure it can cover pension checks due in the decades ahead.
The phase-in of the actuarial assumption is another exercise in kicking the can down the road, but were not sure
how far the can travels, said Dave Urbanek, spokesman for the Illinois Teachers Retirement System, the states largest
pension, which has $73 billion of unfunded liabilities. You pay less now, pay more later.
After the stock market stumbled in 2015, Illinoiss four pension systems for teachers, state workers, judges and
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lawmakers all lowered their assumed investment rates of return, according to a March report from the Commission on
Government Forecasting and Accountability. That, along with other accounting changes, added $9.67 billion to their
unfunded liabilities, since they could no longer count on making as much on stocks, bonds and other holdings. The
teachers and state employees systems dropped their rates of return to 7 percent, while the plans for judges and
general assembly members cut their rates to 6.75 percent.
All four had negative investment returns in the 2016 budget year, according to the commission. The state university
retirement system was the only one with positive returns, eking out a gain of just 0.2 percent, the report showed.
Of course, as we recently pointed out, the silly fake math games only work so long as you have enough cash to prop up the
ponzi scheme. Remember, Madoff's ponzi only came crumbling down when he could no longer raise enough money from
new investors to fund withdraws from redeeming investors. Unfortunately, at least for Illinois pensioners who think they
have a retirement waiting for them, Illinois' ponzi is about to run out of cash and meet the same fate as Madoff's ponzi.
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For those who missed, below is a post in which we explained why Illinois' pensions could run out of money in as little as 4 years.
***
Chicago's pension funds, along with several other large public pensions around the country, are in serious trouble (we
recently discussed the destruction awaiting our financial markets here: "Are Collapsing Pensions "About To Bring Hell To
America"?").
The problem is that the pending doom surrounding these massive public pension obligations often get clouded over by
complicated actuarial math with a plan's funded status heavily influenced by discount rates applied to future liability streams.
Take Chicago's largest pension fund, the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF), as an example.
Most people focus on a funds 'net funded status', which for the MEABF is a paltry 20.3%. But the problem with focusing on
'funded status' is that it can be easily manipulated by pension administrators who get to simply pick the rate at which
they discount future liabilities out of thin air.
So, rather than lend any credence to some made up pension math, we prefer to focus on actual pension cash flows which can't
be manipulated quite so easily.
And a quick look at MEABF's cash flows quickly reveals the ponzi-ish nature of the fund. In both 2015 and 2014, the fund
didn't even come close to generating enough cash flow from investment returns and contributions to cover it's $800mm
in annual benefit payments...which basically means they're slowing liquidating assets to pay out liabilities.
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Of course, like all ponzi schemes, liquidating assets to pay current claims can only go on for so long before you simply
run out of assets.
So we decided to take a look at when Chicago's largest pension fund would likely run out of money.
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On the expense side, annual benefit payments are currently just over $800 million and are growing at a fairly consistent pace
due to an increasing number of retirees and inflation adjustments guaranteed to workers. Assuming payouts continue to grow
at the same pace observed over the past 15 years, the fund will be making annual cash payments to retirees of around $1.3
billion by 2023.
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Investment returns, on the other hand, are much more volatile but have averaged 5.5% over the past 15 years. That said, the
fund took big hits in 2002 (-9.3%) and 2008 (-27.1%) following the dotcom and housing bubble crashes.
But, just to keep it simple, lets assume that today's market is not a massive fed-induced bubble and that the MEABF is able to
produce consistent 5.5% (their 15-year average) returns every year in perpetuity. Even then, the fund will only generate
roughly $500mm per year in income compared to benefit payments growing to $1.3 billion...see the problem?
Which, of course, means that the fund has likely just entered a period of perpetual cash outflows which will not stop until either
(i) the city decides to cut back retiree payments or (ii) the fund runs out of money.
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And, putting it all together, even if Chicago's largest pension generates consistent positive returns for the foreseeable future, it
will literally run out of cash in roughly 6 years.
And while we hate to be pessimistic, lets just take a look at what happens if, by some small chance, today's market gets
exposed as a massive bubble and we have another big correction in 2018.
Such a correction would force the fund to liquidate over $1.5 billion in assets in 2018 alone....
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....and the system would run out of cash completely within 4 years.
The risk associated with America's pension ponzi schemes have largely been overlooked by investors to date because so long as
they can meet annual benefit payments then plan administrators can just continue to 'kick the can down the road' and pretend
that nothing is wrong.
Of course, that strategy ceases to work when the pensions actually run out of cash...which could happen sooner than you
think...and when it does, America's retirees will suddenly find themselves about $5 trillion poorer than they thought they
were.
Select your preferred way to display the comments and click "Save settings" to activate your changes.
It's what the 2nd Amendment is there for.....Act now, of be slaves to the jew world order, and wash a jew's
smelly feet!
Oh, and don't forget to build a wall with many, many weaponized security guards (jobs, jobs, jobs!) to keep
everyone in.
The stock market has been on a tear since 2009. How the hell have these funds not been making money?!?
jb
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But the roots of the problem have nothing to do with the phoney "drug war"(aka price support),
the lack of infrastructure investment, the job-destroying wage arbitage/outsourcing?
Better to blame human frailties for not being upstanding citizens doubtless like yourself.
Not "Common tax-paying man" fault that these folks with issues are most of the time snowflakes that dont
believe in God any more .... too bad, should be believe in the church, they were where the destitute went.
Have an inkling not to far down the road, this country will get back to that ... the destitute population is going to
grow. Mark it down.
(Now it's playing in your head, to, isn't it?) ;)
When the government is extorting citizens for victimless "crimes", to pay for services not rendered, all the while
spending trillions on useless wars and racking up trillions in debt which can never be repaid, perhaps it's time to
realize that this shit needs a revolutionary change.
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My response: Truly sad. Text below which I constructed months ago appears to fit the situation in Illinois very well
at this time. What a tragedy for the Land of OBAMA ... oops I meant to say Land of LINCOLN. President LINCOLN
now turning over in his grave.
====
In a society where all lies, all deceptions, all corruptions are accepted, that society will lose control of everything.
Chaos will begin to take over, and the only way that chaos will be slowed down will be when dictatorial control, or
maybe even a police state is formed, where thought and behavior is fixed, and anybody out of bounds is punished.
Eventually, the chaos has to be controlled. Were not headed toward socialism; we could very well be headed toward
a dictatorship in our world. Is this hard to grasp?
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Communism would work if everyone was doing it (worldwide), because people wouldn't have anything to compare it
to.
the gangsters run the show, they fuck you all over and laugh in your face...you won't do shit....
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