(National Sentinel) Unfunded pensions: The Land of Lincoln has been wrestling with underfunded pensions and over-promised benefits now for years, but in recent months the situation has gotten so bad that Illinois could be the first U.S. state to declare bankruptcy.
Political stalemate — the Legislature is dominated by Democrats and the governor, Bruce Rauner, is a Republican who won office, in large part, on a promise of reforming benefits and stopping the bleeding — is not helping. There is no agreement from either branch on how best to move forward, and neither side appears willing to give in.
“We’re like a banana republic. We can’t manage our money,” said Rauner, as reported by CBS News, after the legislature failed to pass a full 2017 budget earlier this month.
Moody’s Investor Service, a ratings agency, downgraded Illinois’ general obligation bonds earlier this month to the lowest rating, referencing the state’s growing pile of unpaid bills and skyrocketing pension debt. The state has the lowest credit rating in the entire country; low credit ratings make borrowing money even more expensive because riskier bets mean higher interest rates.
“Legislative gridlock has sidetracked efforts not only to address pension needs but also achieve fiscal balance, allowing a backlog of bills to approach $15 billion, or about 40 percent of the state’s operating budget,” Moody’s noted in an analysis.
The state’s poor fiscal health has prompted some to compare it with cash-strapped Puerto Rico, which is facing a historic restructuring of its massive $70 billion in debt.
Both are also alike in that they suffer from pension crises. CBS News reported further:
So how did the state’s pensions balloon into such a crisis? First, the pension problem has been a long time in the making. The state has more than 660 government pension funds, which are sometimes called defined benefit plans because they promise workers will receive a specific pension when they retire.
But critics say some of those pensions carried overly optimistic assumptions, especially given periods of market turmoil like the global financial crisis, which ate into investment returns.
Worse, the legislature did not require itself to fully fund pensions, meaning tax revenue was redirected to other line items, such as infrastructure and schools.
This fiscal tsunami is being repeated all over the country. Illinois, should it go bust, won’t be the last state to do so.
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