All that’s left for Chicago is the bankruptcy filing. From Simon Black at sovereignman.com:
While the federal government is slowly careening toward permanent, fiscal disaster, many state governments (which don’t have the power of the printing press) are already staring into the abyss…
Take Illinois, for example. It’s the most broke state in the US with nearly $250 billion in debt. And it only brings in enough in taxes each year to cover 92% of its expenses… so the problem is getting worse.
Good thing Rahm “you never want a serious crisis to go to waste” Emmanuel is the current Mayor of Chicago. You may remember, the above quote was from Rahm’s days as Obama’s Chief of Staff, as told to the Wall Street Journalduring the depths of the Great Financial Crisis…
What followed was the greatest monetary experiment known to man.
Now Rahm has another crisis on his hands – Chicago’s woefully underfunded pensions. And he’s reaching into his old bag of tricks.
Governments can only kick the can down the road for so long. Eventually, they’ve got to make some tough decisions – like who they’re going to default on. Despite the promises made by certain political representatives, it’s impossible for everyone to have everything…
And today, Rahm must choose…
Either Chicago defaults on the pension promises it’s made to city workers or it defaults on its massive debt. It’s simple arithmetic.
Rahm, it seems, has chosen the latter.
From Todd Clark, chairman of the Houston Firefighters’ Relief and Retirement Fund, on the pension fund return assumptions his fund is using:
We strongly believe, and past history shows, we can continue to achieve the 8.5 percent long term.
The Wall Street Journal, “Pensions Brace for Lower Returns,” September 8-9, 2015
The 30-year US government bond is yielding 2.88 percent, and most measures of valuation for the US stock market, even after its recent slide, are still close to historic highs. Many pension funds are lowering their return assumptions to 7 or 7.5 percent. SLL thinks even those assumptions are high. The higher the assumption, the less that must be contributed to the fund. It looks like Houston firefighters may end up getting stiffed on their relief and retirement.
States have been called the laboratories of democracy. If so, then these laboratories are like Dr. Frankenstein’s, or one of those secret, sinister installations where mad scientists supervised by demented bureaucrats cook up chemical and biological agents that can wipe out humanity. State and local governments are burdened by promises made to their employees they cannot keep. Unlike the federal government, they have no recourse to a money-creating central bank, and cannot, except through accounting legerdemain, run deficits. The states have had a variety of creative, albeit perturbing, responses to fiscal stress. In the future expect them to get even more “imaginative.”
Last week Bloomberg.com hailed an increase in the average state pension funding ratio—the percentage that a pension is funded—from 68.7 to 69.3 percent. The article was more cause for concern than celebration. The increase was the first in six years, after five years of “recovery,” and was propelled by the stock market’s hefty ascent last year. The S&P index is not going to rise nearly thirty percent every year, and pension funds have been using unrealistic return assumptions to guide their contributions (many assume 7 to 8 percent, with high quality long-term bonds, which are a good portion of their investments, yielding less than 4 percent). Ominously, the pension funding ratio is much higher than that for promised medical care. The Pew Charitable Trusts, which have done several studies on states’ funding gaps, puts that ratio at under 5 percent in 2010, and it probably has not improved much since then. The total shortfall is at least $1.38 trillion. Continue reading