Bankruptcy law would help ease Illinois pension liability, expert says
The state’s ability to negotiate a better pension debt deal may rest with congressional approval of a state bankruptcy option, according to one financial expert.
Mark Glennon, the founder of WirePoints — an Illinois economic and political news website — told Chicago City WIre he advocates of such an option.
“Our congressional delegation should be working on such a bill,” Glennon said.
He said the ability to wipe out the debt was key in most cases.
“Just defaulting on a debt doesn't eliminate it," he said. "The creditors can still come after you. The purpose of bankruptcy is to legally eliminate some debts in an equitable manner.”
One of the debts that Illinois would be better able to manage would be pension liabilities, Glennon said.
“The unfunded pension liabilities and other unsecured debt could be cut in bankruptcy," he said. "That would be the primary benefit of doing it.
“Right now, in my view it is essential that the state eliminate some of its debt, and the lion's share of our debt problem is unfunded pension liabilities.”
The state is in billions of dollars of debt due to pension and health insurance benefits for retired government employees, according to the Illinois Policy Institute. While the state appears to owe $83 billion to its pension funds, the institute has said that only takes into consideration the unfunded liability of the state system. The institute calculated that all retirement benefits-related debt at the state and local levels totals at least $203 billion.
A report published by the American Legislative Exchange Council (ALEC) has estimated the cost is about $362 billion. The report uses a 2.3 percent return rate for its calculation. However, the Illinois Teachers’ Pension uses a 7 percent rate, which is down from last year where it was 8 percent, according to reports.
The crisis was something that was predicted in 2013 by economics Nobel Prize winner Eugene Fama.
“The [state’s] pension liability is much worse than [the reported $100 billion that] people think," Farna said, according to a WirePoints report. "You’ve made a promise to your employees that you’ll pay them a certain fraction of their income that is usually indexed. Which means it’s a risk-free real outcome. What’s the risk-free real rate? Is it anywhere near 7.5 percent [the approximate rate Illinois assumes]? It isn’t. Historically, it’s like 2 percent. A 2 percent discount rate would approximately triple Illinois’s pension liabilities."
Glennon said there are only two ways that the pension liabilities could be cut.
“One is by amending our state Constitution to eliminate the pension protection clause, which might not work for other legal reasons. The second is a federal bankruptcy," he said. “Federal bankruptcy allows you to cut pension obligations regardless of the state constitutional guarantee. That would be the primary purpose of getting federal authorization for states to file bankruptcy themselves.”
However, Glennon said nobody is advocating for bankruptcy as a good or recommended option.
“Nobody is saying that states have to take the option if Congress authorizes them to take it," he said. "Just having the option would allow them to negotiate and find a better agreement with pensioners and other creditors then they can currently. Because those pensioners and creditors know that the state has no option but to pay up in full.”
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