Illinois pension obligations

in the last video we talked about pensions and how they're defined benefit plans and how they could get underfunded or how there could be temptation for people to under fund them in this video I want to make things a little bit more concrete by looking at actual numbers especially at the state level so right over here it's a map of obviously the United States and what it shows is is how funded the pension liabilities are in the different states so for example actually you know Texas for example 83% of their pension liabilities are funded they've set aside eighty-three percent of the right amount of money to fund their pension obligations not a hundred percent it is underfunded but it's not crazy California pretty high seventy eight percent but one of these states is probably jumping out at you probably because it has been shaded in red and that is the state of Illinois and Illinois is in trouble because it's only funded 45% of its pension obligations and then Illinois really jumps out because it's it's it's in red but there's a lot of states that are pretty close to Illinois Louisiana 56% Oklahoma 56% Kentucky 54% West Virginia 58% and this is an issue because they've set aside in the past very little money for the pension obligations that are starting to hit now especially that you have a retiring baby boomer population and in order to meet those obligations those promised obligations they're going to have to dig into money that was being spent other places that going in the past when they were under funding the pension they were able to fund other things nicely it but not fund the pension and kind of kick the can down the road but now that they're there can can't be kicked any further it's going to have to go the other way around you're gonna have to take money from other things to fund your pensions and to make it clear let's focus on the state of Illinois so this right over here there's a couple of things going on in this kind of yellow ochre color and I'll circle it in yellow ocher they were talking about the total liabilities and just to make this graph clear it's not just the yellow core part this total liabilities the entire height of each of these bars is the total is the total liabilities and you see how it has just completely it's completely blossomed here and there's a lot of things that go into the total liabilities the same things that we talked about in the last video there are things like return on investment return on investment if you're in a low interest rate environment like we are now for example my money in my savings account I think is getting like 0.4% interest it's getting pretty much no interest if you're in a low interest rate environment if you're not getting good returns and a lot of pensions tend to go into very safe assets but those are getting very low returns you're going to have to set aside more money and so you see these of these obligations essentially just just growing dramatically on top of that you have things like cost-of-living adjustments cost-of-living adjustments these are attempts at at kind of factoring and inflation how much things are costing in that region but there are also sometimes negotiated and sometimes and especially in the case of illinois' they've grown faster than the rate of inflation and so you have these liabilities and you see that they're getting less and less well funded so if we go right over here and this is what this Green Line is the funding ratio so how well funded are these liabilities read say the red part of the bar is a part that is not paid for and the Green is the ratio of the red is the ratio of or is the ratio of what is funded essentially this higher part it's the ratio of this this this part right over here to the entire bar so it's the ratio of this to the entire bar and you see right over here Illinois's is in a boy is in a bad situation they're total liabilities are 138 billion this is in million so it's 138 thousand million so it's 138 billion this is for one state and 85 or 86 billion of that is unfunded that they have to figure out somewhere to get the money because of the bright amount of money was not being set aside and to do that they're going to have to dig in into other things so this right over here this is the pension contribution so let me circle this so in this yellow color once again is the pension contribution and now the state they're going to have to in order to in order to get to a funded position they're going to have to make up for all of the underfunding of the past and also the the other factors that are making this obligation even larger they're going to have to dig into other things and so you see right over here in yellow these are the pension these are the contributions that they're going to have to make for the pension and you see that growing it's going growing to in excess by 2018 of 6 billion a year but what's really fascinating about this graph is it's passing up total education funding in the state so the cost of funding retirements so the cost of funding retirements for people who have already done service for the state but aren't in service to the state right now is going to pass up is going to pass up and this is happening very soon is going to pass up actual spending on a statewide basis on education and at the state level education is a major major major expenditure so it's going to be passing up a major expenditure or very important educate expenditure for the future of the state based on past obligations and to understand where this is going and just to understand Illinois situation there's 750,000 illinois easy item notices Illinoisans illinoisians who are member of the state's 5 pension system so this is the Teachers Retirement System this is the state universities Retirement System this is the state employees retired system this is the judges Retirement System you see there's a lot fewer judges in that there's many more teachers who have been retired many who have been in the state universities and this right over here is the General Assembly very few people who are in the Illinois State Assembly and you can see kind of comparable salaries this is the retirement benefit not just the salaries this is how much on average these folks are getting once they retire on an annual basis so you see that they're pretty reasonable especially for the judges especially for the judges although that they are they are a small fraction but in all fairness this was promised to these people they planned they probably took lower compensation while they were working with the expectation that they would be able to get these benefits once they retired they also probably stayed in the jobs longer this is a way of retaining in because they knew that they were going to get this benefit so you might say oh these are really really great benefits but at the same time these people probably sacrificed other things in order to get these benefits now but it's a very hard question when you look at this you like okay you say well these people they've done service they put these expectations but the same time you're like well you know this is really cutting in and this is just one thing that I'm showing it's really cutting into very important areas of investment for the entire state so the whole reason of really just surfacing this this whole pension issue is just to put this in and hopefully people understand what the issues are because that's the only way that that fairly hard decisions are going to have to be made decisions on cutting necessary investment or restructuring or who knows what it might be I don't I don't envy the people who have to make these decisions