Illinois “Budget Deal” Is Likely The Death Knell For The State’s $130 Billion Underfunded Pensions

Friday, July 14, 2017
By Paul Martin

by Tyler Durden
Jul 14, 2017

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.

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.”

The Rest…HERE

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