Sunday, November 15, 2009

Why Chicago, Cook County & Illinois Are Going Broke (part II)

In Illinois unfunded liabilities for pensions have soared past $95 billion dollars. A major factor in this frightening deficit is the role of public sector unions. Before I continue, I must emphasize that I draw a sharp distinction between private and public sector unions.

Private sector unions involve a dynamic interplay between owners and workers in which both parties are forced to contend with market forces and fiscal realities. Historically, when a company was profitable and a labor market was tight, companies and unions were able to reach accords that resulted in higher wages and benefits. And as markets and profits contracted, unions are forced to concede to economic realities and agree to wage cuts and layoffs, as recently seen with auto marker unions. Ultimately the auto market unions realized that if they did not agree to painful concessions the companies would continue hemorrhaging with the end result of a total loss of employment and income for all workers.

On the other hands, public sector unions do not enjoy this dynamic interplay for a multitude of reasons:

1. Private companies have tremendous incentives to minimize expenses (worker compensation) because the money in question is their own. On the other hand, politicians and bureaucrats have little or no incentives to control expenses because they are spending the public's money. The end result is a pension plan with billions of dollars in unfunded liabilities.

2. If a private company is inefficient and unprofitable, both owners and workers face a threat to their livelihood, which forces them to function within the boundaries of economic reality. On the other hand public sector workers face little or no consequences when a government bureaucracy offers horrendous service while simultaneous costing the public billions of dollars.

3. Poor performing companies in competitive markets will be castigated by diminished profits and by going out of business. Politicians can be voted out of office. But, to remove public sector bureaucrats is virtually impossible.

Budget catastrophe escalates while law makers watch

November 13, 2009

While the Tribune was right to emphasize the Minority Report of the Pension Modernization Task Force ("Just send your $7,000," Nov. 8), even that report understates the full extent of the calamity now at hand. That report showed that unfunded liabilities of the five pensions that the state guaranties total $95 billion – roughly $7,000 for every person in Illinois. In fact, the broader problem is over twice that size:

Illinois has over 600 other municipal pensions with at least $62 billion in unfunded liabilities, aside from the five pensions guaranteed by the state,. Those pensions are generally ignored and were not part of the task force report. Their deficits are reported biannually by the Illinois Department of Insurance and the reports are on their website. That $62 billion deficit figure is from the 2007 report – before the markets tanked – so the 2009 report will likely be much worse.

Retired state workers also get state-paid health care, which has also been mostly ignored. That's another $40 billion unfunded liability, based on an earlier study by the Civic Committee of the Commercial Club of Chicago, and $2 billion more per year is required just to cover the growth in this liability.

Add these two items to the $95 billion state-guarantied pension debt and you get $197 billion, which is roughly $15,000 for every person, or $60,000 for every family of four in Illinois. Most families don't have resources to pay off a debt that size and shifting an even higher burden to everybody else would spark a genuine tax revolt.

Keep in mind that the unfunded pension liabilities are worsening at the rate of $8 billion per year just on the five state-guarantied funds, according to the Civic Committee. That's in addition to annual budget deficits being incurred in brazen violation of the Illinois Constitution's balanced budget requirement, which are now projected at roughly $14 billion. Add on that $2 billion per year needed to stay even on retiree healthcare, and the real annual shortfall is roughly $24 billion.

Governor Quinn's proposed tax increase would raise $3 billion per year; Dan Hyne's proposal, $5.5 billion, so neither plan gets remotely close to funding the budget deficits or stopping further bleeding on pensions and health care. The already-accumulated deficits of $60,000 per family are on top of all that and have no chance of being whittled down. Nobody has proposed any solution or scenario that begins to address all this.Illinois is hopelessly insolvent.

-- Mark Glennon, Wilmette

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