Illinois pension obligations

In the last video, we talked about pensions and how they're defined benefit plans and how they could to get underfunded or how there could be temptation for people to underfund 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 is a map of, obviously, the United States. And what it shows is how funded the pension liabilities are in the different states. So for example-- actually, Texas, for example, 83% of their pension liabilities are funded. They've set aside 83% of the right amount of money to fund their pension obligations, not 100%. It is underfunded, but it's not crazy. California, pretty high, 78%. 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 Illinois really jumps out because 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 underfunding the pension, they were able to fund other things nicely, but not fund the pension and kind of kick the can down the road. But now that the can can't be kicked any further, it's going to have to go the other way around. You're going to 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 ochre-- they were talking about the total liabilities. And just to make this graph clear, it's not just the yellow ochre part that's total liabilities. The entire height of each of these bars is the total liabilities, and you see how it has just 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. If you are 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 obligations essentially just growing dramatically. On top of that, you have things like cost of living adjustments. These are attempts at kind of factoring in inflation, how much things are costing in that region. But they 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, this is what this green line is, the funding ratio. So how well funded are these liabilities? Say the red part of the bar is the part that is not paid for. And the green is the ratio of the red or is the ratio of what is funded, essentially this higher part. It's the ratio of this part right over here to the entire bar. And you see right over here, Illinois is in a bad situation. Their total liabilities are 138 billion. This is in millions, so it's 138,000 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 some way to get the money because the right 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. Let me circle this. So in this yellow color, once again, this is the pension contribution. And now the state, they're going to have to-- in order to get to a funded position, they're going to make up for all of the underfunding of the past and also the other factors that are making this obligation even larger. They're going to have to dig into other things. So you see right over here in yellow, these are the contributions that they're going to have to make for the pension. And you see that growing. It's 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 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-- and this is happening very soon-- is going to pass up actual spending on a state-wide 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, very important 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-- I don't know how to say this-- Illinoians, Illinoisians, who are members of the state's five pension system. So this is the Teachers Retirement System. This is the State Universities Retirement System. This is the State Employees Retirement System. This is the Judges Retirement System. You see there's a lot fewer judges than that. There's many more teachers who've 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, although they are a small fraction. But in all fairness, this was promised to these people. They planned. The 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 employees, 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 say, well, these people, they've done service. They put these expectations. But at the same time, you're like, well, 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 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 envy the people who have to make these decisions.