Worcester Telegram & Gazette: Avoid fate of the Land of Lincoln
This op-ed appeared in the Worcester Telegram & Gazette on June 5, 2014.
Illinois is often considered a basket case when it comes to obligations for public pensions and retiree health care liabilities, but really how far is Massachusetts from a similar status? A look at the facts may help illuminate this point.
The fallout from Illinois’s woefully underfunded pension system continues to expand. The state has less than 40 percent of the money it needs to pay for pension obligations and a total unfunded liability of some $100 billion. Every day the pension issue goes unaddressed, Illinois taxpayers sink $17 million further into the hole.
Adding insult to injury, about a year ago Illinois had to settle fraud charges brought by the Securities and Exchange Commission. Between 2005 and 2009, the state did not inform purchasers of $2.2 billion in municipal bonds of the real risk involved by failing to disclose the impact of the unfunded pension liability on the state’s ability to manage its other obligations. This news came on the heels of a pension-driven downgrade in the state’s bond rating.
Just days ago, the chief of the Securities and Exchange Commission said that most states underestimate and fail to disclose all of their pension and retiree health care obligations when emitting new debt. The main reason: overly optimistic investment return assumptions and taking credit for payments that have not been made yet. A crackdown on such practices seems to be in the offing.
A couple of months ago, Chicago’s credit rating was cut by Moody’s to a notch above Illinois’s because of the Windy City’s towering pension liabilities. It has now acquired a new moniker — the next Detroit.
But before turning your nose up at it, you might want to take a good look at Massachusetts’s own precarious finances.
Illinois certainly created its own problems. First the state decided to pay off its pension liability over 50 years instead of the customary 30, which added to the overall cost. Then, when money got tight, it declared a “pension holiday,” reducing the state’s contribution to the pension fund by 56 percent in 2006 and 45 percent in 2007, which deepened the pension crisis.
There were institutional failures, too. State government relied on bond underwriters, consultants and lawyers to advise them about what to disclose. But these same groups were relying on the state for advice, creating a virtual circular firing squad of nondisclosure.
Contrary to popular belief, Massachusetts’s pension systems are not in much better shape than Illinois’s. And the Bay State is doing its best to make up for any advantage it may have on the retirement obligations front with its non-pension debt load.
Massachusetts per capita debt is $3,040, compared to $2,234 in Illinois.
Incomes are higher in the commonwealth, but if you measure debt as a percentage of overall income, Massachusetts is well ahead at 5.7 percent, compared to 5.1 percent in Illinois.
Just like Illinois, the commonwealth has pushed out the date for paying off unfunded pension liabilities, which reduces current annual payments to the fund, but dramatically increases the amount Massachusetts residents must ultimately pay back.
This is yet another classic example of politicians kicking the can down the road, shifting the burden to our children and the tough decisions to future state officials. Recent agreements to pull the deadline back to 2036 from 2040 are little more than an empty promise because the serious payments are still deferred for the remote future.
And Massachusetts’s real pension picture is probably worse than it appears. Our projections are based on the state pension fund earning 8.25 percent in interest each year, a very aggressive — some would say unrealistic — assumption. Moreover, the state and its municipalities are not even required to fund tens of billions of dollars in retiree health care obligations, which will balloon into ever-larger payments as they come due.
The Land of Lincoln, with roughly twice as many people as Massachusetts, officially had an unfunded pension liability of about $97 billion towards the end of 2012, compared to the commonwealth’s $26 billion.
But with the commonwealth’s state and teachers retirement systems assuming comfortably higher rates of return than Illinois’s do, the Bay State’s liability may be closer to Illinois’s than our political leaders would like to admit.
Fraud, mismanagement and a total lack of political courage have shattered Illinois’s retirement systems and the fallout is now metastasizing throughout the state’s overall finances. We in Massachusetts would do well to start addressing our own very real fiscal woes.
Iliya Atanasov is Senior Fellow on Finance at Pioneer Institute for Public Policy Research in Boston.
