The PJ Tatler

Moody's: True Unfunded Liability in Illinois Pension Fund is 65% higher than the State Says

The worst funded US pension system is actually worse off than previously thought. Moody’s Investors Service has calculated that the true underfunding in the Illinois pension system is 65% above what the state says it is.

Sheesh. Can anyone in the Illinois state government add and subtract?

In its report titled “Adjusted Pension Liability Medians for U.S. States,” Moody’s calculated the unfunded liabilities for Illinois’ three largest state-run pension plans at $133 billion, compared to the state’s official calculation of $81.3 billion.

Illinois’ pension funds use overly optimistic assumptions in calculating their unfunded liability, including an expected 8% yearly average investment return. The new Moody’s methodology uses more realistic market rates based on high-quality corporate bonds. The rate Moody’s used for fiscal year 2011 was 5.67%, resulting in a $52 billion increase in the state’s unfunded liability.

Moody’s has yet to publish their report on fiscal year 2012 liabilities. However, the market rates they’ll use to calculate the unfunded liability have already been determined. As of June 30, 2012, that rate was equal to 4.13%. That means Illinois’ official $97 billion underfunding is set to approach $200 billion under the new Moody’s methodology.

The Illinois Policy Institute estimates that Illinois’ unfunded liability — using the lower market rates — exceeds $200 billion.

It’s laughable, then, that as the Illinois’ pension crisis balloons, Springfield is trying to find a middle ground between House Speaker Michael Madigan’s and Senate President John Cullerton’s bills. Neither addresses the true size of the problem, nor offers a solution to end the pension crisis.

Madigan’s plan only reduces the unfunded liability to 2011 levels, at which point the state was already in a full-blown crisis. Even more, Madigan’s plan doubles down on the state’s failed defined benefit program by implementing a pension funding guarantee that would ensure more tax increases for Illinoisans.

Cullerton’s plan reduces the unfunded liability by even less than Madigan’s proposal.

The reality is, a $200 billion problem requires a real and sustainable solution.

That means moving away from defined benefit plans and embracing 401(k)-style plans going forward.

The state has already been fined by the SEC for securities fraud — misleading investors about shortfalls in funding the pension plans from 2005-2009. Now we find a huge discrepancy for 2011 and probably 2012 as well.

But this is par for the course for Illinois, as explained by an SEC representative:

Illinois didn’t adequately disclose cuts in annual payments to its retirement funds, the agency said. Its pension debts swelled as it borrowed and used accounting techniques that delayed for years steps to shore up the systems, the agency said.

“The state knew that the plan was unmanageable, but failed to disclose the significant risks to those who bought its bonds,” Elaine Greenberg, Philadelphia-based head of the SEC’s municipal and pension enforcement unit, said in an interview. “We hope that our heightened scrutiny of pension disclosure will continue to serve as a warning to other state and municipal issuers.”

Neither plan being offered in the legislature has a ghost of a chance to succeed. That’s because the unions are fighting tooth and nail to prevent any changes to their lucrative defined benefit plans. So the state will continue to have this massive pension bomb hanging over their heads while the Democrats who run the state seek to satisfy both the needs of the budget and the demands of the unions.

Good luck with that.