One Word for CPS Teachers: Save

Save.

Save as much money as you can.

Live well below your means.

The pension time-bomb is coming.

One of the most vexing problems for Chicago and its teachers went virtually unmentioned during the strike: The pension fund is about to hit a wall.

The Chicago Teachers’ Pension Fund has about $10 billion in assets, but is paying out more than $1 billion in benefits a year — much more than it has been taking in. That has forced it to sell investments, worth hundreds of millions of dollars a year, to pay retired teachers. Experts say the fund could collapse within a few years unless something is done.

via NYTimes.com.

and;

“Each day we wait to enact comprehensive pension reform, the problem gets worse,” Quinn said in a statement. “The unfunded liability will grow to more than $92 billion by the end of next fiscal year. Illinois is currently on track to spend more on pensions than education by 2016 and that is unacceptable.
— Pat Quinn

via Des Plaines, IL Patch.

If you think that taxpayers are going to fund your pensions, forget-about it.

If you think you can tax the rich to fund your pensions, forget-about it.

If you think that people are going to move into a community where their property taxes increase by 7% every year in order to fund failing schools, forget-about it.

If you think you’re going to get your COLA every year, forget-about it.

You have two options:  Save every nickel and dime you can, or plan to work until you’re in your 70’s.

Consider:

Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.  …

Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

via Businessweek.

Further:

Illinois’s backlog of unpaid bills has risen to more than $9 billion because of pension costs and falling federal aid, leaving the state “essentially treading water,” Comptroller Judy Baar Topinka said.

via Bloomberg.

$83B + $28B + $9B = $120,000,000,000 in debt.  The extra $50 million at 0.42% of the total is a rounding error.  It should also be noted that this does not include the City of Chicago (or any other municipality or county debt) which is another $12-16 billion in debt depending on who you ask.

12,869,257 people in the state of Illinois.  Every man, woman, and child owed owes $9,324.54 to the state.  If you live in Chicago you owe another 5,910.34 locally for total of $15,234.89.  (Are you feeling good about your new contract yet?)

I was just looking over the FY2013 Illinois State Budget as prepared by Gov. Quinn.  On Pg 37 we’re told that Debt Service is 5.42% of all outlays.  That’s over $3.3B per year paying principle and interest on money we borrowed.  That’s $3.3B per year we could use to hire police officers, or teachers, or fully fund the pension funds but will instead go to pay for our bad fiscal decisions of the past.

More importantly, total expenditures are $61.0B.  That means that if we (a/k/a the State of Illinois) completely stopped operating, fired all the employees, shuttered all the buildings, and spend 100% of the budget on paying off debt we’d be debt free in 2 years.

Oh, I know what you’re going to say… You’re going to tell me all about how the Chicago Teachers’ Pension Fund is not as underwater as the general state fund.  True, but it’s still broke and broken.  And there’s no money to fix it.

Then you’re going to say that this is a right guaranteed by the Illinois Constitution.  Oh ya?  Well where’s the money going to come from?  The rich?  You wish:

When New Jersey governor Chris Christie heard British Prime Minister David Cameron invite France’s wealthy to decamp to England to escape a proposed 75% tax rate, he felt something akin to déjà vu. Every day top executives of Johnson & Johnson (JNJ), Merck (MRK), and other companies commute from their homes in Pennsylvania to offices in Christie’s state, saving roughly two-thirds on their state income tax bill — and costing New Jersey’s treasury $50 million, by one estimate.

via Fortune (a/k/a CNN).

You don’t understand the Laffer Curve.

The study, by the anti-tax group Change Maryland, says that a net 31,000 residents left the state between 2007 and 2010, the tenure of a “millionaire’s tax” pushed through by Gov. Martin O’Malley. The tax, which expired in 2010, in imposed a rate of 6.25 percent on incomes of more than $1 million a year.

The Change Maryland study found that the tax cost Maryland $1.7 billion in lost tax revenues. A county-by-county analysis by Change Maryland also found that the state’s wealthiest counties also had some of the largest population outflows.

via CNBC.

You’re confused how a state and raise taxes and lose revenue.  It happens all the time.  I wrote a piece about cigarette taxes in Cook County; raised taxes, lost revenue.

The more you tax something the less of it you get.

You tax income, you get less income.  You tax babies, you get less babies.

Even the left-loving Bono (of U2 fame) moves his wealth around to avoid taxes.

In Illinois, if we quadrupled the state income tax on those with adjusted gross income over $500k it would take over 13 years just to get current state pension liabilities square.  This would not cover the additional debt of Chicago Teachers, Chicago Police & Fire, or any of the billions and billions of general debt.

So take your 16% raise and start saving.  Save like your life depends on it.  Because it does.

IL Pension Hole Analysis

I wrote this a few weeks ago as a comment on a retired teacher’s blog.  The post there was about how we need to “tax the rich” in order to fund the teachers’ pensions.  I was asked to comment on the post by a retired teacher I know.  Analysis follows:

There is no one sided solution to this problem. Perhaps if Springfield moved on this a decade ago it could be solved with “funding” but at this time both sides are going to have to give.

According to Crain’s Illinois’ unfunded pension liabilities are $86 billion. See: http://jamesbosco.com/2012/06/19/illinois-pensions-are-the-worst/

According to the Il Dept. of Revenue there were 36,682 returns filed in the state with over $500,000 in AGI. These returns paid $1,633,991,633. See: http://www.revenue.state.il.us/AboutIdor/TaxStats/2010/IIT-NetIncome-2010-Preliminary.pdf

If we (a/k/a Illinois) doubled the tax on these folks with AGI over $500k we could bring in an extra $1.63B assuming no one flees the state (which would happen.) So doubling the tax on “the rich” would cover 1.9% of the current pension liabilities.

If we quadrupled the tax that would cover less than 7.6% of the current pension liabilities. So it would take over 13 years of quadruple taxation on those making over $500k per year just to get current pension liabilities square. This would not cover the additional debt.

Union members can sit around pointing fingers but it’s not going to solve the problem. Illinois is broke. Everyone’s going to have to give more than they want. Of course, the “rich” can always move to Indiana or Wisconsin. Then they contribute nothing; that doesn’t help retired teachers one bit. So I recommend that you be careful what you wish for.

– – –

We cannot solve our problem by eating the rich.  We must grow the size of the pie. … Well, growth and inflation.

Eat the Rich vs. Obama

I was reading this story:

President Barack Obama will officially launch the battle over the impending fiscal cliff this morning, announcing a plan to extend the Bush-era tax cuts for people earning under $250,000, while letting the rest of the tax cuts expire.

via Business Insider.

This got me thinking about how much money will really flow into the Treasury from “the rich”?  I remember this from awhile back.

If you have not seen… it’s just plain excellent.
[youtube http://www.youtube.com/watch?v=661pi6K-8WQ?rel=0]

Bankrupt Stockton Chicago

Yesterday’s news:

Officials in Stockton said Tuesday that mediation with creditors has failed, meaning the Central California city is set to become the largest American city ever to declare bankruptcy.  …

The river port city of 290,000 in Central California has seen its property taxes and other revenues decline, while expensive investments and generous retiree benefits drained city coffers.

via NY Daily News.

Tell me something I don’t know, right?

Stockton, with 300,000 residents and $700 million in debt, would be one of the largest cities ever to file for Chapter 9 protection, according to municipal finance experts and bankruptcy officials.

via WSJ.com.

Humm…. ok.  Let’s compare that to Chicago.

Calling local government debt “staggering,” Cook County Treasurer Maria Pappas announced Tuesday that the $108 billion debt tab across various governing bodies in the county translates to $63,525 per Chicago household and nearly $33,000 per suburban household.

via Chicago Sun-Times. (Sept 29, 2011 — we now know the number to be higher.)

Math (not new math, the old fashioned kinda math.)

Stockton:
$700M / 290,000 residents = $2,413.80 of debt for every man woman and child in Stockton.

Chicago:
$63,525 * 1,033,022 households = $65,622,722,550 in total debt;
$65,622,722,550 / 2,695,598 people in the city = $24,344.40 of debt for every man woman and child in Chicago.

In order for the situation to be comparable, the dazzling urbanites of Chicago would have to earn 10 x as much as the poor downtrodden folks of Stockton.

Back to the Census:

Chicago Per Capita Money Income in Past 12 Months — $27,148

Stockton Per Capita Money Income in Past 12 Months — $20,176

So the average joker in Stockton has to work for about a month and a half (2413 / 20176 *365 = 44 days) to pay off their portion of the debt.

The average joker in Chicago has to work for nearly a year (24344 / 27148 * 365 = 327 days) to pay off their portion of the debt.

And so I ask you which one of these municipalities should really be filing for bankruptcy?  Which is in worse financial shape?  Who’s employee’s should be more worried about their pensions?  Who’s politicians are doing the right thing by dealing with the issue square-on and not trying to pawn it off on future generations?

I’m just asking.

Hat Tip to Anthony Curran for the concept of this post.

More Bad News on the Pension Crisis

If I was Rahm I would so totally throw Daley under the bus on this issue.

The debt from 10 Chicago-area pension plans swelled more than 600 percent to $27.4 billion between 2001 and 2010, according to a study released Monday by the nonpartisan Civic Federation. That’s $8,993 for each man, woman and child in Chicago, according to the report.

The shortfall comes on top of more than $83 billion in unfunded pension liabilities at the state level, driving the cost up to nearly $15,000 per Chicagoan, the report shows.

via chicagotribune.com.

Shear insanity.

 

JP Morgan: Public Employee Pension’s Set to Explode

But they wanted to keep the story to themselves:

JPMorgan recently circulated a “strictly confidential” report among leaders at the bank and with trusted hedge fund allies outside of the bank which details an impending public pension crisis. And we mean big time nastiness.

Massive cuts in services will have to happen, or massive tax increases will have to happen, or both, to keep many pensions and municipalities from going over a cliff. The politicians know that disaster is coming. JPMorgan and their hedge fund buddies know that it’s coming. The public, though it has a sense of impending doom, still doesn’t grasp the avalanche that is headed toward states and cities in the very near future.

Charlie Gasparino details in the attached article that JPMorgan did not want the information in the report to become public because it feared angering the politicians in the municipalities and states where default due to public pensions is a very real possibility. Many local politicians are lying when they tell their fire fighters and teachers that pensions are in good shape. According to what the report supposedly says these workers should probably start making alternative plans for retirement. But to say that is very messy politically.

JPMorgan didn’t want to lose its very profitable muni bond underwriting business in these same localities, which is determined to a large degree by these same lying local politicians, so this information was kept quiet.

via AgainstCronyCapitalism.org.

To the actual article:

OK, it’s no secret that nation’s public pension funds are in big trouble, holding large “unfunded” liabilities owed to public workers once they retire. But most politicians (New Jersey Gov. Chris Christie is an exception) will tell you the problem is fairly containable, that there are simple fixes — such as raising taxes on the rich or pruning benefits. …

Not so, warns a “strictly confidential” report JP Morgan issued last year. It describes in straightforward, frightening detail how underfunded pensions are huge ticking timebombs for many of the nation’s big cities and states.  …

Nationwide, the actual size of unfunded public pension liabilities is four times larger than the $900-plus billion that officials are ’fessing up to. That’s right, the bank sees a $3.9 trillion hole; to plug that, states and cities will need large tax hikes, massive budget cuts or both. Plus, public-sector unions will have to accept smaller retirement packages, and later retirement ages, to keep the pension systems going.  …

In New York, for example, JP Morgan said state officials would have to immediately cut spending by 12.3 percent or raise taxes on everyone by 7.4 percent. And they’d need to make these tax hikes and budget cuts permanent for the next two decades to fully fund public-employee pensions.

New Jersey faces an even bigger hole. Even after Christie’s reforms, it would still have to cut spending 30.8 percent or raise taxes another 17.2 percent, keeping them in place for two decades, to solve the problem.
via NY Post.

No word on how Illinois fares.  But as we are the #1 unfunded pension state in the union it’s no doubt a bad, bad, bad situation.