Here Come The US Pension Bailouts?

Mary Williams Walsh of the New York Times reports that Illinois is seeking a bailout from Congress for its pensions and cities:
Illinois needs more than $40 billion in relief from the federal government because of the coronavirus pandemic — including $10 billion to help bail out its beleaguered pension system, according to a letter the Illinois Senate president sent to members of Congress.

The letter, sent this week by State Senator Don Harmon, also seeks a $15 billion grant to “stabilize the state’s budget,” $9.6 billion in direct aid to Illinois’s cities, $6 billion for the state’s unemployment insurance fund, and hardship money for hospitals and nursing homes, among other things.

“I realize I’ve asked for a lot, but this is an unprecedented situation,” Mr. Harmon, a Democrat, wrote in the letter to the state’s congressional delegation, a copy of which was viewed by The New York Times. A spokesman confirmed that Mr. Harmon had written the letter.

The letter was shared with Gov. J.B. Pritzker, also a Democrat, who said this week that the federal government should provide more funding to states. Messages left for State Senator Bill Brady, the minority leader, were not immediately returned on Friday evening. Democrats hold 40 of the State Senate's 59 seats.

The letter said the outbreak had caused economic havoc in the state, which has been under a stay-home order since March 21. Economic activity has frozen up across the country, causing tax collections to evaporate while spending has soared.

Last week, the National Governors Association said states needed “unrestricted fiscal support of at least $500 billion.”

The prospects of such a measure are uncertain. Democrats in Congress have pushed to include billions of dollars in aid for states and local governments in an interim package, pairing those funds and additional money for hospitals with the administration’s request for an emergency infusion of cash for a loan program to help distressed small businesses. Republicans have balked at the request, which has led to a lapse in funding for the loan effort, known as the Paycheck Protection Program, but Democrats argue that the request has merit, and discussions with the administration are expected to continue into the weekend.

Though Mr. Harmon pointed to the pandemic as the reason Illinois needed help, the problems with its pension system far predate the coronavirus. It is considered by experts to be one of the worst funded in the nation.

The system is actually a complex family of pension funds. Five are operated by the state, for teachers outside Chicago, legislators, judges and other state workers. Hundreds of other pension funds are operated by municipalities.

The state’s pensions are particularly generous, with 3 percent annual benefit increases that exceed those offered most other places. Many of them are deeply underfunded, and local governments have had to sharply raise taxes to pay what they owe.

In his letter, Mr. Harmon noted that the $9.6 billion in federal assistance to Illinois’s cities “will dramatically impact municipalities’ ability to fund retirement systems for the police, firefighters and other first responders providing emergency services during this Covid-19 outbreak.”

The pension obligations are big enough to crowd other spending out of the state’s budget. The three main ratings firms — Fitch Ratings, Moody’s Investors Service and Standard & Poor’s — rate Illinois’s credit at just one notch above junk territory, citing ballooning pension obligations as one reason.

Some states have been able to reduce their pension obligations after lengthy court fights, but it is all but impossible for Illinois to reduce what it owes: The State Supreme Court ruled unanimously in 2015 that no cuts would be possible.
Elizabeth Bauer of Forbes also reports on why Illinois's request for pension bailout is a non-starter:
On Friday, I cited the research group Wirepoints, who had obtained a copy of a letter sent by Illinois Senate President Don Harmon to the Illinois Congressional Delegation, requesting $41.6 billion plus, for various purposes including $10 billion for state pensions and $9.6 billion in aid to municipalities, for their pension funding.

Not surprisingly, this did not go over well.

The Chicago Tribune

in an editorial earlier today:

“Even by this state’s low standards, asking federal taxpayers from California to North Carolina, from North Dakota to Texas — farmers, small business owners, teachers, nurses, bus drivers, bartenders — to help dig Illinois out of its pre-coronavirus, self-inflicted, financial hellhole is astonishingly brazen. Every member of Congress should carefully scrutinize pleas from states whose unbalanced budgets, embarrassing credit ratings and vastly underfunded pension systems predated virus outbreak. . . .

“It’s absolutely true states and cities are suffering from dramatic revenue losses due to mandatory shutdowns in the retail sector, investment losses in pension funds and high demand for unemployment resources. But to suggest Illinois is worthy of such a generous bailout given its history is preposterous. . . .

“Ever heard the one about the man who kills his parents and then begs for mercy because he’s an orphan? That’s Springfield, destroying the state’s finances and then seeking a bailout.”

The Sun Times

was no less appalled:

“Last week, [Harmon] made a politically deaf, even foolish, pitch to Washington that can only hurt our state’s chances of securing additional COVID-19 relief funds. . . .

“Harmon has proposed that about a quarter of the new money for Illinois, $10 billion, be used to bail out our state government’s cash-strapped retirement systems — a problem not even remotely related to COVID-19.

“How Harmon thought to justify this “ask” — let alone put it in writing to be picked up in publications including the New York Times, Forbes and our own Sun-Times — is beyond us. . . .

At best, Harmon’s pension ask is politically clueless. At worst, it will serve to explode efforts at bipartisanship in Washington as our nation struggles to recover from the pandemic. You can almost see congressional Republicans waving Harmon’s letter in the air and saying: ‘See, we told you. Blue states like Illinois are just being greedy. They want us to bail them out of problems of their own making, created over decades. Why should we help them?’”

Illinois left-oriented politics site Capitol Fax wrote:

“For those who might say ‘It never hurts to ask,’ yes, it can hurt to ask . . . .

“Illinois created this problem. It’s Illinois’ responsibility to solve it, not the federal government’s. This letter could even hurt all other states’ attempts to convince Congress and the president to back an aid package.”

Fellow actuary and public pensions expert Mary Pat Campbell recounts the long history of pension underfunding and overpromising in Illinois, then writes:

“As for what’s due to Illinois for COVID problems, if you want to argue the need for a bailout, it seems reasonable to start with the extra costs [unemployment insurance, Medicaid claims, tech costs for schools, PPE for first responders, etc.] as a basis for bailout numbers. Maybe you can ask for making up for lost revenue…. but note, neither of these items tie to pensions per se. . . .

As the Wall Street Journal reports, many states are looking to reduce costs elsewhere, by nixing all sorts of things like teacher raises and property tax rebates. States mentioned: Virginia, New Jersey, Tennessee, Washington state.

“You think they will be happy with perennial profligate Illinois getting a huge chunk of change specifically because they’re been irresponsible?”

On Twitter, some experts didn’t reject the idea entirely outright; for instance, Andrew Biggs, also a Forbes contributor, suggested conditioning any funds on a move to defined contribution plans:

I’ll be honest: this suggestion seems like nothing more than wishful thinking. Trying to force pension reform after already conceding the prospect of federal funds is far too risky, as politicians would inevitably craft loopholes or trade away the reform provisions for other legislative priorities.

Trying to make sense of the request

Is this simply a matter of a tone-deaf legislator?

What’s the specific purpose of $10 billion?

Does any of this make any sense?

To the best of my knowledge, Harmon has not explained himself and Gov. JB Pritzker, again according to Capitol Fax, denies having directly asked for pension money.

Insolvency is (mostly) not the issue

Last week, Wirepoints reported that various Illinois municipal fire and police pensions were so poorly funded that they were at risk of insolvency, even before the pandemic hit — for instance, the Cairo Firefighters Pension Fund was 7% funded; the East St. Louis Firefighters Pension Fund, 9%; Danville Firefighters, 16%, and so on. The list of poorly-funded plans reads like a litany of economically-struggling cities, and, in particular, the police and firefighters in Illinois, unlike municipalities or teachers, each have individual pension plans by city/district, and up until 2011, there was no serious pressure to fund them properly. On the other hand, plans for municipal workers across the state are well-funded through the Illinois Municipal Retirement Fund90% in 2018.

Regular readers will also recall that I assessed whether the plans for the city of Chicago — Police, Fire, Municipal Employees and Laborers — were at risk of insolvency, and, indeed, these plans, and in particular the Municipal Employees’ plan, are at risk of insolvency — if the city skips its scheduled contributions and never makes them up.

But the state of Illinois? Turns out, there’s a huge difference between 23% funded and 40% funded. I did the math for the largest fund, the TRS, or Teachers’ Retirement System, back in January. Even in a scenario in which assets immediately drop by one-third, then only earn 6%, rather than 7%, afterwards, and even if the state ceases contributing to the plan entirely, the plan would stay solvent until 2026.

Not, I’m not suggesting that the state should discontinue its contributions — but the point is simply that this is not an immediate crisis, which requires rapid funding in order for the state to cut its checks to retirees. This is, in that respect, wholly different from the requests for fund for unemployment or public health purposes, or, to revisit another topic I address regularly, the multi-employer pension crisis, in which plans such as Central States will inevitably become insolvent in 2025 even with their ongoing contributions, and take the multi-employer arm of the PBGC with it.

In fact, however poorly funded the state’s pensions are, this says nothing about Illinois’ basic ability cut cut these checks.

What’s the purpose of the money?

As it happens, Harmon’s $10 billion ask is nearly identical to the state’s statutory contribution to its pension funds in 2021, $9.7 billion. (The 2021 fiscal year runs from July 1, 2020 to June 30, 2021.) Is Harmon entertaining the possibility that the state will make its contributions only to the extent that the federal government funds this? Or did he somehow imagine that specifying pension funds as a use for bailout funds would garner support by assuring skeptics that it would be put to good use?

Or was Harmon hoping to boost the plans’ funded status over and above the usual contributions, to make up for asset losses?

The state has not reported on the impact of the market crash on its pension plans, but the consulting group Milliman reported the “largest single quarterly drop in the history of the Milliman Public Pension Funding Index”; from December-end to March-end, the estimated funded status for the 100 largest U.S. public pension plans dropped from 74.9% to 66.0%. Illinois, of course, was significantly less than this — 40% — even before this.

And, presciently, the Brookings Institute reported in late February that

“[public] plans are changing their asset allocations to chase higher investment returns. Two decades ago, about 90% of pension plan assets were invested in ordinary stocks and bonds. Today, that has fallen to just 60%. Instead, public-sector pension plans have ramped up their investments in private equity, real estate, commodities, and hedge funds. Ironically, the rise in actively managed, high-fee investments in the public sector is happening at the same time that private sector investors are pouring their own money into passively managed, low-cost mutual funds.

“The effects I’m describing are being felt today, in the midst of the longest and strongest bull market since World War II. If another recession hits, or even if we experience a period of middling investment returns, states would be forced into another round of cost-cutting that would harm teachers and make the teaching profession even less attractive to the next generation. Teachers may not be aware of those risks, but they’re real—and they’re growing.”

Does Harmon want to use the money to make up for asset losses? That’s no better an answer. Common sense should have dictated that, after years of high asset returns, a stock market correction would inevitably occur, even if no one could predict when. And funds which invest aggressively and riskily simply must accept that losses are a part of the picture. In that respect, Illinois’s pensions were never really 40% funded in the first place, if you consider an inevitable crash built into the asset values in the first place.

What next?

Has Harmon set back Illinois in its quest for federal funds? Congress will ultimately need to decide not merely how much money to allocate, but how to divvy up the funds, whether it’s proportionately based on population, or by assigning relatively levels of “need,” or whether funds are allocated based on the relative degree of political power of their Senators and Representatives.

Frankly, I find the idea that states whose budget holes now are the result of profligate spending in the past, should get “extra” money by the federal government to fill those holes, dismaying. It feels depressingly unfair to states which have been responsible with their finances. But there may be little choice in the matter, for fear of causing even more harm if those states can’t cut checks for workers expecting them.
I couldn't agree more, Illinois's pension train wreck started years before COVID-19 and it will continue years after unless they clean up their stinking pension sewer once and for all.

Using the crisis to ask for a pension bailout is quite disturbing to me. It's bad enough private equity funds which Illinois's state and city pensions invest in are asking and getting a bailout (with some good arguments behind this bailout), now this request by State Senator Don Harmon takes it to another level.

Illinois has mismanaged its public pensions for years and it's beyond outrageous, and quite disgusting actually, that they are using this pandemic as a justification to bail these pensions out.

The sad part of it is pension bailouts are coming. It might not be right away, but it's only a matter of time because many chronically underfunded US public pensions getting slammed hard from coronavirus are one step closer to insolvency.

And remember what I keep telling you, pension bailouts are all about bailing out Wall Street which includes big banks and their big private equity and hedge fund clients that need perpetual funding.

It has nothing to do with bailing out pensioners but politicians will make it look that way.

Again, it may not be right away, but mark my words, Congress will eventually bail out many chronically underfunded pensions and the Fed and Treasury will just monetize this debt.

The problem? Just like keeping zombie companies alive, they will keep zombie pensions alive to make sure the elite on Wall Street are able to keep tapping them in perpetuity for their next fund.

And then we wonder why after every major crisis, inequality keeps soaring to unprecedented levels.

George Carlin was right: "It's a big club, and you ain't in it. You and I are not part of the big club."

Below, Sean Carney, head of municipal strategy at BlackRock, and Bloomberg's Flynn McRoberts examined the new revenue plan for the state of Illinois as it faced mounting pension liabilities. They spoke on "Bloomberg Daybreak: Americas" over a year ago.

Also, in October 2019, at the Futures Industry Association conference in Chicago, Gov. Pritzker spoke on his taking office and working to pass a balanced budget. He shared his ideas on why Illinois' future can be better and attract more businesses, his approach to building a tech industry in Chicago and his thoughts on the ongoing corruption investigation that's involved a variety of public figures.

The discussion on pensions starts at minute 20 and he discusses some of the plans they implemented to address the ongoing crisis but doesn't address the lousy governance underlying all these pensions and why they should amalgamate all their public pensions at the state level.

Third, Mohamed El-Erian, chief economic advisor at Allianz, joins "Squawk Box" to discuss why he believes the US economy could contract as much as 14% this year due to the coronavirus crisis.

Fourth, Sen. Marco Rubio has written a letter to Treasury Secretary Steven Mnuchin and Small Business Administration Administrator Jovita Carranza on ways to replenish the stalled Paycheck Protection Program. He joins "Squawk Box" to discuss his ideas.

Fifth, former FDA commissioner Scott Gottlieb joins "Squawk Box" to discuss steps businesses can take to reopen while also ensuring a safe work environment.

Lastly, Dr. Anthony Fauci appeared on Good Morning America this morning sharing the latest updates surrounding the country's plans for coronavirus as well as possibilities of a second wave. He warned against reopening the economy too soon and said many antibodies tests need to be validated.

Update: Senator Mitch McConnell said he'd rather see states declare bankruptcy than get a federal bailout. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”

Senator McConnell can say what he wants but if state pensions going bankrupt hurt his donors (private equity funds and hedge funds), he will change his tune.