Moments ago we saw the following amusing headline crossing the BBG:
- ILLINOIS TEACHERS' PENSION FUND CUTS RATE OF RETURN TO 8% FROM 8.5%
It's amusing because these are the same teachers who were demanding, and received, higher pay - 17% higher over four years in fact - following a several day strike. It is even more amusing considering that in a fiscal year in which we saw QE2, Operation Twist 1 and 2, and LTRO 1 and 2, the nation's largest pension fund, Calpers, managed to eek out a measly 1% gain (and this is including the end of June surge following the then announced European bailout which turned out to be yet another dud). It is, however sadly, most amusing, because it may be a harbinger of something truly sad: the advent of the "PIIG bailout" to America, when a US state demands a Federal bailout. We have seen how eager Europe has been to bailout its insolvent nations. We are next about to see just how "united" the US is when its own solidarity is tested as state after state repeat the European bailout experience. But hey: at least we have the dollar so all should be well.
From the WSJ:
Now that Chicago's children have returned to not learning in school, we can all move on to the next crisis in Illinois public finance: unfunded public pensions. Readers who live in the other 49 states will be pleased to learn that Governor Pat Quinn's 2012 budget proposal already floated the idea of a federal guarantee of its pension debt. Think Germany and eurobonds for Greece, Italy and Spain.
Thank you for sharing, Governor.
Illinois now has some $8 billion in current debts outstanding and taxpayers are on the hook for more than $200 billion in unfunded retirement costs for government workers. By some estimates, the system could be the first in the nation to go broke, as early as 2018.
For years, states have engaged in elaborate accounting tricks to improve appearances, including using an unrealistically high 8% "discount" rate to account for future liabilities. To make that fairy tale come true, state pension funds would have to average returns of 8% a year, which even the toothless Government Accounting Standards Board and Moody's have said are unrealistic.
The city is already facing upwards of a $1 billion deficit next year with hundreds of millions of dollars in annual pension costs for retired teachers coming due. But despite the fiscal imperatives, the negotiation didn't even discuss pensions. The final deal gave unions a more than 17% raise over four years, while they keep benefits and pensions that workers in the wealth-creating private economy can only imagine.
As a political matter, public unions are pursuing a version of the GM strategy: Never make a concession at the state level, figuring that if things get really bad the federal government will have no political choice but to bail out the pensions if not the entire state. Mr. Quinn made that official by pointing out in his budget proposal that "significant long-term improvements" in the state pension debt will come from "seeking a federal guarantee of the debt."
So when the time comes to bail out Chicago we can just tell America's insolvent state(s), who will soon pursue the MAD strategy of Europe's PIIGS, to demand a bailout with the ECB. We are confident the ECB will be more than happy to comply: after all quite soon Mario Draghi will realize that his goal should be to push the EUR down not up, and taking on more and more bailouts and money printing is precisely what he should be doing to once again retake the lead in the global FX race to debase.
After all, as it was already made clear earlier, Obama's promise in exchange for European votes, is to bail out Europe. It is only fair that Europe reciprocate after the election.
Quid pro quo.
And now: the End of the Beniverse