Illinois Warns Of "Crippling Tax Hikes", "Devastating Impact" If Largest Pension Fund Admits Reality

Tyler Durden's picture

Defined Benefit Pension Plans are, almost by definition, 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.  

We even published a note several weeks ago titled "Establishment Tries To Suppress "Dissident Actuaries" Explosive Report On Public Pensions," which pointed out that the American Academy of Actuaries and the Society of Actuaries killed a report that would have warned about the implications of lowering long-term expected returns on pension assets.  Apparently the truth was just too scary.

Similarly, Janus' Bill Gross has been warning of the unintended consequences of low interest rates for years, and reiterated his concerns to Bloomberg recently:

Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.

Two weeks ago, we decided to take a look at what would happen if all federal, state and local pension plans decided to heed the advice of Mr. Gross. As one might suspect, the results were abysmal.  We conservatively assume that public pensions are currently $2.0 trillion underfunded ($4.5 trillion of assets for $6.5 trillion of liabilities) even though we've seen estimates that suggest $3.5 trillion or more might be more appropriate.  We then adjusted the return on asset assumption down from the 7.5% used by most pensions to the 4.0% suggested by Mr. Gross and found that true public pension underfunding could be closer to $5.5 trillion, or over 2.5x more than current estimates.  Others have suggested that returns should be closer to risk-free rates which would imply an even more draconian $8.4 trillion underfunding.  

Pension Underfudning

The result which we dubbed an "Unsolvable Math Problem", is the reason why so few pension funds have dared to address this issue face on.

However, to our surprise perhaps because they realize just how near to the end really is or for other unknown reason, certain pension funds are finally taking notice, and action. In early August, Richard Ingram of Illinois's largest pension fund announced that he would be taking another look at long-term return expectations noting that "anybody that doesn’t consider revisiting what their assumed rate of return is would be ignoring reality."  Ingram's Illinois Teachers' Retirement System is only 41.5% funded and currently assumes annual returns of 7.5%, down from 8% in 2014.

And right here we get an example of precisely why US pensions are a legal ponzi, because the moment one person is willing to do the right thing, and evaluate the situation soberly, someone else promptly steps in, realizing that if just one card is removed from the house of cards, the whole thing collapses.

Enter Illinois governor Bruce Rauner, who warned that should his state's largest public pension fund do what it should have done long ago, it would put a big dent in the state's already fragile finances and lead to "crippling" pension payment hikes, Reuters reported today.

Bruce Rauner and his wife Diana

According to a Monday memo from a top Rauner aide, the Teachers' Retirement System (TRS) board could (or rather, should) decide at its meeting this week to lower the assumed investment return rate, warning that this move "would automatically boost Illinois' annual pension payment."

"If the (TRS) board were to approve a lower assumed rate of return taxpayers will be automatically and immediately on the hook for potentially hundreds of millions of dollars in higher taxes or reduced services," Michael Mahoney, Rauner's senior advisor for revenue and pensions, wrote to the governor’s chief of staff, Richard Goldberg.

As a reminder, the TRS already lowered its assumed rate of return once, back in 2014, and as a result of the even bigger underfunding hole created by the lower assumed rate of return, the state's pension payment increased by more than $200 million, according to the memo.

It is about to do it again, only this time it would have to cut the discount rate far lower, if it wishes to be even remotely realistic: recall Gross' suggestion is to lower the expected return to 4% (or even lower).  However, as we reported two weeks ago, the TRS hole is already gargantuan and about to get even bigger. Illinois' fiscal 2017 pension payment to its five retirement systems was estimated at $7.9 billion, up from $7.617 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March report by a bipartisan legislative commission. The country's fifth-largest state's unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55 percent of that gap. The funded ratio remains just under 42%, implying that any rate reductions will push the already frigthfully low funding ratio even lower.

And this is where the politicians come in.

An impasse between the Republican governor and Democrats who control the legislature left Illinois as the only state without a complete 2016 budget, however a six-month fiscal 2017 spending plan was passed in June.

Still, Mahoney has cautioned that "unforeseen and unknown automatic cost increases would have a devastating impact" on Illinois' ability to fund social services and education.

What Rauner's senior advisor is essentially saying, is that if the TRS does what the Fed and other central banks are forcing it to do, our political careers may be over, and that could be just the beginning.

And here is the punchline: one of Rauner's top Republican legislative allies, Senate Minority Leader Christine Radogno, urged the TRS board to delay a vote Friday to give the public time to weigh in on its possible actions. "This issue is important enough at the very least to put the TRS board on notice we don’t want them taking any action that could cost taxpayers $200 to $300 million without appropriate scrutiny,” she said. The action in question, Radogano is demanding the TRS not take, is to lower its return expectations from the ludicrous 7.5% to something realistic; instead she is suggesting the fund pretend all is well, and avoid the day of reckoning for at least a few more years, ideally until she has quit as Senate Minority Leader, at which point the TRS can by all means go ahead and admit just how terrible its underfunding truly is.

Translation: please keep your heads stuck in the sand, and dare not admit the reality of near-zero returns in the new normal, but instead keep the projected return rate at 7.5%, or else you will not only admit just how much bigger the underfunding hole truly is, but the resultant surge in public anger following the broad rise in taxes coupled with cut to pensioner benefits could lead to millions of furious voters sweeping all of Illinois' current career politicians right into the unemployment office.

Incidentally, this is precisely the fight that countless ponzi schemes, pardon pension funds, across the US will be forced to go through in the coming months, unless somehow the Fed funds a way to guarantee 8% returns every year, or else sending inflation soaring, and wiping out the fund's liabilities.

Since neither is likely to happen for a while, the biggest losers will once again be taxpayers and pensions recipients, who this time will be forced to pay - literally - because their public fiduciaries lied to them, and because other fiduciaries are hoping the lies will continue for at least a few more years.

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Fidel Sarcastro's picture

Fuck the recipients!  They were lied to and I owe them NOTHING!!

wee-weed up's picture

Looks like they're running out of "other people's" money... The bane of all socialism.

ACES FULL's picture

Quick,to the tax-serf mobile to save the day.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) ACES FULL Aug 23, 2016 9:39 PM

You've got to love it when a socialist utopia starts to come to fruition.  Reap it, peoples...


As an aside, my county just increased property taxes 9% to pay for the wealthy gubmint employees/pensions.  They claim that it's been too long since an increase.  They get more taxes as home values increase and they have been increasing.  Typical eff'n politician liars cut my pay by $1000/year.

Bumpo's picture

Pensions are glorified 401k plans. Just because you're a government worker doesn't mean you are exempt from Market Forces. Grow the fuck up and take your lumps.

jcaz's picture

Tough shit.  The rest of us are used to seeing our 401K plans get cut in market corrections- welcome to the real world.

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) jcaz Aug 23, 2016 10:00 PM


Déjà view's picture

Mark to whatever...don't want to spoil 'Feral' Reserve party.

SafelyGraze's picture

this is why it is so important that state and local governments find a way to issue money.

or scrip.

or vouchers.

or lottery tickets.

max2205's picture

I demand an ammendment for the seperation of govt religon and finance..... they don't mix. 

BeanusCountus's picture

They are 401k's until you, the taxpayer, realize it's your tax dollars that are required. This wont end well. It will pit citizen against citizen before it's all over.

jcaz's picture

Naw, not really- this will pit Capitalists against Socialists.

The Socialists will have to take the hit, period.  Doesn't matter what form-  payout adjustment downward,  age of payout raised-  there are plenty of options before we have to throw more taxpayer money down this hole.

Bottom line is that the Socialists are going to have to wake up to reality-  their people have exploited the system over the past 20 years by pulling forward 40 years of payout and screwing the people that follow them;

Time to pay the bill.


willwork4food's picture

Future Chicago 911 call:

"You have reached  911 emergency dispatch. Your call is very important to us. Please press one of the following numbers to describe the problem you are having:

Press #1 if you believe your home is being invaded by gang members. They are probably just hungry. Make them a sandwhich and politely ask them to leave.

Press #2 if your house is on fire. Make sure all people and pets are outside, then quickly start hosing the house down with water.

Press #3 if you are having a medical emergency. A trained licensed Uber driver should show up within the next hour. Please have your credit card ready.

Press #4 if your next door neighbor is playing their music too loud, your cat is stuck in a tree or you have rowdy drunks in your front yard. A car will be out to take a report within the week.

Press #9 if you or a loved on has been in a major auto accident or a random shooting and can see massive amounts of blood all around you. You are 3rd in line."

"Thank you for calling the 911 Emergency dispatch. We pride ourselves on serving the community 24/7."

Doom Porn Star's picture

" this is precisely the fight that countless ponzi schemes, pardon pension funds, across the US will be forced to go through in the coming months, unless somehow the Fed funds a way to guarantee 8% returns every year, or else sending inflation soaring, and wiping out the fund's liabilities. "


This concept of 'inflating away the debt' also implies inflating away the value of all the credit/currency.

You can't inflate away the debt without destroying the entire collateralization and derivatives stacks upon which it has been erected.

.GOV and the FED cartel banks sure as hell want their phony ledger debts paid but are considering destroying the present monetary system to get out of paying their own outstanding debts to the citizenry.

jerry_theking_lawler's picture

Well, my local government wants to raise taxes because 'they' didn't follow the law and had 3 cases of wrongful imprisonment judgements against them. Each at about 6 million. They wanted to borrow to pay and then they were told they couldn't. So it has to come straight out of the budget. They said they will borrow for other things that they can to pay.....but millages are going up (after recent assessement hikes). People are starting to get pissed.

I mentioned in the local paper comment section that maybe the property tax should be abolished completely and funding for local government found by other means...since this amounts to rent payment on my property and if I don't pay, they take it. Its like extortion from organized crime....Let's just say I opened a can or worms...and most of it was worms jumping in my direction. The amount of angst against all .gov is starting to get pretty high.

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) jerry_theking_lawler Aug 24, 2016 8:02 AM

" tax should be abolished completel..."

Agreed.  Property taxes don't allow people to own property.  Stop paying the government and they take your property, selling it to pay for their vote buying schemes.

Agent_Orange's picture

If a 9% increase in property taxes equated to a $1000 increase to your annual property tax bill, it means you were already paying $11,000/year in property taxes....downsize, dude.

PositiveChanges's picture

Sorry, we're tapped.

Apparently, so are our customers.

Good luck with increasing taxes on bankrupted in value assets.

Restaurant chains are already pulling out. Expect the dyke to burst.


America's Small Businessman/majority payer of the local burdens.

And sheep wonder why rents go up in a wage declining environment, even as the promised prosperity through taking other people's labor and savings never materializes. 



RafterManFMJ's picture

Everything the State says is a lie, and everything it has it has stolen.

Friedrich Nietzsche

Offthebeach's picture

There are unlimited fiat Federal Reserve notes/Electric Federal Reserve credits.

tarsubil's picture

The Federal debt doubles every 8 years. So bailing these out with 8.5 triillion along with 1 trillion annual deficits and a 3 trillion bank bailout will do the trick and help us get to 40 trillion in 2024.

SubjectivObject's picture

Reduced services, it's what's for dinner.

Reduced services, reduced pension benefits; works for me.

Offthebeach's picture

Slavery will fill the gap.
Old slavery you got food and housing in return for work.
New Slavery you work and get Slave owner cit/federal Reserve note for food and housing .

Old slavery your children were born slaves.

New Slavery your childred work to pay interest on old Fed notes while being loaded with further Fed debts.

See the difference?

rbg81's picture

I have a neighbor who is a State U professor and expects to retire at 60 with a full pension (really, he brags about it).  The guy is aso a flaming liberal who supports every entitlement program there is ("It's for the kids!").  Well, as it turns out, his pension is underfunded AND his teachers union is getting all kinds of flack about its new contract.  Why?  Because the State is out of $$ and doesn't want to raise taxes.  And now he's crying about his troubles.  Of course, when I pointed out that the Medicaid expansion under Obamacare had sucked all the $$ out of the State budget for things like education, his head almost exploded.  Maybe for the first time in his life, he started to realize that all the things he advocated for are coming back to bite him in the ass--big time.

Stu Elsample's picture

Obama's supporters' pension mess coming home to roost...and King Nigger Boy didn't even bail them out. That's some thanks for their loyalty (stupidity)

delacroix's picture

how can a fund with $6.5t liabilities be underfunded by $8.4t

tarsubil's picture

This will help us get to 80 trillion by 2032.

SeattleBruce's picture

What could possibly go wrong?

TxExPat's picture

6.5T = "Today's liabilities".  one of the problems is the the non-retired members of the pension plan are continueing to acrue benefits, (which drives up future liabilities).  "Cash on Hand/In the Plan" throws off income at a low rate, but not enough to cover current, much less future liabilities.  the 8.4T is what they would have to have on hand to pay out what they have promised with out raising contributions (private) or taxes (public) on the part of the plans sponser.  One of the reasons so many private plans have closed/switched to a 401k status is the gap between the benefits/returns.  (Zero Interest rates are indeed, making things worse).

The Math is brutal and ugly, but fortnately for the politicians, they, and most of the great American public are math impared.

Like watching a slow motion train wreck, it's interesting, but you don't want to be around it or part of it...


dexter_morgan's picture

defined benefits plans are ponzi schemes, but they get the early adopters re-elected time and again until they run out of other peoples money

Dormouse's picture

Elected officials, all of them, that have supported this sort of scheme should be rounded up and given psychological examinations and IQ tests to be published publicly. Those who are found to have known this was a scam should be sentenced to hard labor for the rest of their lives. Those deemed too stupid to have known should be executed along with any offspring.

SeattleBruce's picture

Don't need to go to all this trouble testing - just look at who voted for the Porkulous bailout in 2008, out of which the Tea Parties were born.

wisehiney's picture

They are going to be even worse off when they get sued for calling those poor tax hikes "crippling".

They should use a nicer, more pc term.

Like "Hilarious laughter inducing tax hikes"

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) wisehiney Aug 23, 2016 9:34 PM

Midget tax hikes.

KickIce's picture

Or they might have unintended consequences or this is a great monetary experiment and we don't know how it ends - yuk, yuk, yuk.

Newspeaktogo's picture

Now that's a funny comment right there. Sad, depressing and outright sickening. But funny.

booboo's picture

Illinois voters are among the dumbest, straight ticket democrat voters on the planet, fuck them and let them eat it, they voted for it.

cowdiddly's picture

I would not live in a pure Democrat run shithole state if you paid me to go there and the cost of living was free. They always have to jack the taxes higher and higher but never and I mean NEVER do they look in the mirror and admit the problem.

You are right they deserve every bit of the anal raping they receive. They remind me of the old biblical flagellators beating theirselves.

mkkby's picture

Actually this governor may be doing the right thing.  He's saying protect the taxpayers by not changing the assumed rate of return.  This will cause the fund to go broke sooner, and he may be planning for a Detroit-style forced crash/burn.

Since the future ROR cannot be known, assume a very high amount.  Then you never have to add more cash to burden the taxpayer.  When the fund runs out, those gov retirees are fucked royally -- not the taxpayers.

PTR's picture

Avoid Oak Park then, if you know what's best for you.  Gorgeous architecture, great walkable downtown, but liberal utopia.  They Obama and Bernie so hard, that's the main reason I could never move back.

the late idi armin's picture

yep Oak Park, the smugiest self important bunch of navel gazers in the union. I fear for them when the urban primatives in Austin don't get their checks.

brown_hornet's picture

Oak Park...highest per capita braless women in Ilinois.

StychoKiller's picture

The best time to get out of Illinois:  "Just before the bullets fly!"

BabaLooey's picture

My PaPa called Illinois "The Land Of Stinkin"

Guess he was right.

dexter_morgan's picture

At one point in recent years, of all the states that share a border with Illinois all had massive unfunded liabilities except one - Wisconsin. And getting it fixed it nearly shut the state down and got the guvna recalled. I think they tried the recall twice if I'm not mistaken, the capitol was  taken over by Uof W madison young skulls full of libtard mush, and 14 democrat legislators left the state for ........Illinois for several weeks in an attempt to prevent Walker's plan from going through. 

Not many serious complaints about him any more.