According to a December, 2017, washingtonfreebeacon.com report “…unfunded liabilities of state public pension funds increased by $433 billion over the past year and presently exceed $6 trillion…”. The report continues, “Unfunded liabilities of public pension plans continue to loom over state governments nationwide. Absent significant reforms, unfunded liabilities of state-administered pension plans will continue to grow and threaten the financial security of state retirees and taxpayers alike.”
Astonishingly, the $6 trillion in unfunded liabilities average approximately $18,676.00 for every person in the United States. Alaska has the highest per capita unfunded cost per resident in the nation – $45,689. Other states in similar straits with Alaska include Illinois, Connecticut, Ohio and New Mexico. A look at unfunded state liabilities as a whole (unfunded pension debt and other debt), shows Texas, California, Ohio, New York and Illinois ranking as the five worst states in the U.S.
Pension liabilities for many cities comprise much of the long-term debt that financially strapped governments have carried. The same is true for larger, more diverse entities such as the U.S. Territory of Puerto Rico. In May, 2017 (prior to two hurricanes that devastated the island and nearly wiped it off the map), the overall public debt that the Puerto Rican government was dealing with was in excess of $123 billion. Unfunded public pension liabilities accounted for over $50 billion (41%) of that total. In July, 2013, the city of Detroit, MI filed for Chapter 9 bankruptcy protection. At the time, it was the largest municipal bankruptcy filing in the history of the nation – total unpaid debt was estimated to be between $18 and $20 billion. Unfunded pension liabilities in the Detroit bankruptcy case were established at over $1.6 billion. At the end of Detroit’s Chapter 9 case, city retirees lost $1.3 billion in future benefits as a result of the confirmed bankruptcy reorganization plan.
Detroit’s case is just the “tip of the iceberg” when it comes to the issue for other cities in the Wolverine state. Around the same time that Detroit was in bankruptcy, five other large Michigan cities were “under water” with regard to unfunded pension liabilities: Flint – $285 million; Lansing – $246 million; Warren – $207 million and Sterling Heights – $166 million. The cited figures represent only pension liabilities – the unfunded liabilities for the four cities total some $2.5 billion. Much of these cities’ pension problems stemmed from the type of plans they offered to their employees.
The Michigan cities with underfunded and unfunded pension liabilities all offered their employees Defined Benefit (DB) pension plans. In 2013, twenty cities in Michiganwere considered to be not underfunded – sixteen of the 20 offered Defined Contribution retirement plans. The differences between the two types of plans are considered by many to be a major reason why some cities are facing financial crises while others are not.
Defined Benefit vs. Defined Contribution Pension Plans:
The characteristics of a Defined Benefit pension plan include:
- Funded primarily with employer contributions during employment according to formulas and requirements set forth in the plan
- Guarantees a specified payment after retirement based upon a retirees’ salary during employment, years of service, or other factors such as age at retirement
- Creates a future liability for the employer for current employees who in many cases accept lower pay and other reduced benefits in the present in exchange for post-retirement compensation in the future
- Employer bears the investment risk of ensuring that funds committed in the present will be sufficient to cover future retirement costs
- Cost of plan administration high because investment risks require complex actuarial projections/calculations and insurance
The characteristics of a Defined Contribution pension plan include:
- Employees directly contribute money to dedicated accounts – such as a 401(k) plan – and draw against such accounts after retirement
- In many cases, employers also contribute an amount to some plans – “matching” amounts or a specified percentage of gross employee pay
- Accounts are considered to be “fully funded” in a way because post-retirement benefits equal the total value of the account (i.e. money contributed plus earned returns on the investment)
- Deposits to accounts are typically made by direct pre-tax payroll deductions from an employee’s gross pay
- Employers have no continuing obligation regarding a fund’s performance once contributions are made – the employee bears the entire burden of maintaining the account and directing investments so that assets in the fund are adequate for retirement
- Cost of administration of a Defined Contribution plan are relatively low in comparison with those of a Defined Benefit plan
Both of these types of retirement schemes are found in the public and private employment sectors. Defined Benefit plans in the private sector have one significant advantage over public sector DB plans – private sector plans are covered by federally-guaranteed insurance coverage for a large portion of their benefits. The Employee Retirement Security Act of 1974 established the Pension Benefit Guaranty Corporation (“PBGC”) that today provides such insurance. Public Sector DB plans are not covered under the act and carry no such insurance.
Today, Defined Benefit plans are becoming all-but-obsolete because of their high cost of administration and significant risk to employers. On the other hand, Defined Contribution plans are ascendant because of the obverse of those two factors.
Public-Sector Defined Benefit Plans – Underfunded by $1 Trillion:
According to a report in late 2017, public-sector Defined Benefit pension plans “appear to be underfunded by over $1 trillion… meaning that the value of the pension liabilities was more than $1 trillion greater than the value of plan assets…”, based upon the accounting rules of the Governmental Accounting Standards Board (“GASB”). [NOTE: The Governmental Accounting Standards Board is an independent private-sector organization that establishes accounting and financial reporting standards for state and local governments.]
An apt comparison to the problem with that great a sum in unfunded pension liabilities would be to consider that the entire value of all state and local borrowing on municipal bonds is almost $4 trillion – with the pension liability issue, the $1 trillion just represents the unfunded/underfunded portion of a much greater overall figure. At the same time, the vast majority of states and localities in the U.S. utilize municipal bonds on a regular basis; the number of such entities with unfunded or grossly underfunded pension debt is relatively small by comparison.
A municipal entity’s ability to pay pension obligations when due is due to two factors, the cost of the pension debt in real dollars and the entity’s “own-source” revenue with which to pay the obligation. [“Own-source revenue” is defined as “revenues raised directly by state or local governments with Federal revenues excluded.”]The ability to meet pension obligations facing states and localities in the U.S. varies greatly from one place to another (states, counties, cities and towns). The following statistics are both interesting and informative:
- The average state pension cost represents approximately 4% of own-source revenue
- The states of Connecticut, Illinois, and New Jersey have pension costs that represent approximately 15% of their own-source revenue (11% higher than average)
- Several states, including Nebraska, Iowa and Florida, have a cost-to-revenue average that is much lower than the average across other states (2% +/- range)
- Four California counties have cost-to-revenue ratios that are both debilitating and astronomical when compared to other governments – pension costs in those counties exceed 40% of their own-source revenues (36% greater than the average)
- The cities of Chicago, Wichita, Detroit, San Jose, Miami, Baltimore and Houston are among the U.S. cities that have the highest pension costs compared to their own-source revenues
Detroit, Hartford & the State of Illinois –3 Cases of Financial Crises:
The three municipalities under review in this article – Detroit, MI, Hartford, CT, and the State of Illinois share many commonalities, including the type of pensions they offer to their governmental employees. Like many municipalities in the United States, all three are obligated to their employees and retirees via a Defined Benefit Pension Plan (described in brief earlier in this article).
The DB plans are both a “burden” and a “blessing” for those who govern, and those who are governed by them. The Pension boards, commissions and authorities – as well as taxpayers – bear the heavy burden of administering, funding and managing the underlying crises that once “flew under the radar”, financially speaking, but have of late burst into the sunlight of financial mismanagement, failed oversight, and irresponsible governance.
Such “blessings” are borne by covered employees and retirees who enjoy guarantees and protections not found in other “golden years’” plans. In recent years, many municipalities have attempted to escape their onerous DB pension obligations by using benefit “buyouts” or other measures to change the financial impact and burdens that DP plans carry.The legal ability of state and local governments to cut or eliminate defined benefits varies from state to state and plan to plan.
In many states, pension benefits, once earned, have constitutional or other contractual or legal protections. Many older plans that originated in the period between the 1960’s and the mid-1980’s have near-ironclad provisions that disallow benefit cuts, material, changes, and the like. Some DB plans allow changes under certain conditions such as arms-length negotiations between government representatives and worker advocates that may result in lowering of benefits or changes in formulas setting amounts of COLA’s, future benefit increases, etc.
Detroit, Hartford and Illinois – of the three (all putatively “bankruptcy code-qualifying” “municipalities”) the City of Detroitis the only one that has filed forand gone through Chapter 9 bankruptcy.
Detroit once was an industrial “giant” spanning several industrial sectors – from automobiles to steel, to other heavily-unionized trades. The Detroit of old is a place of the past. Prosperity has been replaced by crushing debt.
Detroit’s slow slide into bankruptcy and beyond began in the late 20th century, continued into the 21st century at a quickening pace and culminated with the City filing for Chapter 9 bankruptcy on July 18, 2013. To date, it is the largest municipal bankruptcy filing by debt in the nation’s history. With a population of 700,000, Detroit is also the largest U.S. City by population to file for bankruptcy.
The City’s debt stood at $18.3 billion when the bankruptcy petition was filed. Approximately 60% of the total was tied directly to retired public employee pensions, healthcare, and related benefits. As a dollar figure, the unfunded pension obligation was $10,980,000,000.
The history of Detroit’s march to bankruptcy is long and complicated. The history is not just about bankruptcy. There is also a heavy political element in the Detroit bankruptcy. Politics as much as anything got in the way of sound, practical and reasonable governance. Detroit’s debt, while heavily pension and retirement-related, is massive and unmanageable by any standard.
The length of the bankruptcy proceedings covered a total of seventeen months from the date of filing to the date when financial control of the city was returned to local authority. That period was much shorter than anticipated by the majority of those closely following the case. Prior to and after the bankruptcy filing, during the pendency of the case, and thereafter, the proceedings at all stages were and have been complicated and rancorous.
A brief summary of the various stages leading up to and beyond the bankruptcy filing follows:
- April, 2012, Michigan Governor Rick Snyder and City officials agree that state will have greater financial oversight of Detroit; City to receive state financial assistance in exchange (six-member financial review team appointed for 60-day review)
- February, 2013, Governor Snyder announces that “…the state is taking financial control of the city…” due to the city’s “…failure to meet deadlines set by the state government.”
- March, 2013, Governor Snyder declares “state of financial emergency” for Detroit; Snyder appoints bankruptcy attorney Kevyn Orr as Detroit’s “emergency manager”
- May, 2013, Financial “health report” issued by Emergency Manager Orr stating that the City was “…clearly insolvent on a cash-flow basis”. In addition to other dire facts and figures, the report stated that “…one-third of the City’s budget goes toward retiree benefits”.
- June, 2013, City stops making payment on pension obligations and some other unsecured debts; Emergency Manager Orr asks some creditors to forego 90% of what they are owed; “offer” is rejected by creditors
- July, 2013, one day before bankruptcy petition is filed, two of Detroit’s largest municipal pension funds file suit to prevent the emergency manager from slashing retiree benefits
- July 18, 2013, Chapter 9 voluntary bankruptcy petition filed (filed by Emergency Manager Orr on the approval of Governor Snyder)
- August, 2013 – October, 2013, various legal proceedings ensue pitting creditors against the state, city, and some individuals; at issue are challenges to the filing of, and the city’s eligibility to file a voluntary petition under Chapter 9; 109 objections are filed against finding eligibility
- December, 2013, U.S. District Court Chief Judge Rhodes (acting as mediator) ruled that Detroit was eligible for Chapter 9 bankruptcy
- October, 2013, it was revealed that the city had spent $23 million for lawyer, accountant and consultant fees; a dispute over the fees ensued, with some questioning Emergency Manager Orr’s close professional ties to a law office creditor, Jones, Day (his former partners) and the source of the funds used to pay their $11 million fee (billed at the rate of $1,000 per billable hour)
- October, 2013, to November, 2014, the emergency manager, working with city-hired attorneys and consultants, and creditors and other objectors wrangle over Chapter 9 reorganization plan (“plan of adjustment” of debts)
- November 7, 2014, Chief Judge Rhodes approved and confirmed the city’s Plan of Adjustment, calling the negotiations and especially the results a “Grand Bargain”
- December 11, 2014, the City of Detroit exited bankruptcy; control of city finances returned to the city subject to 3-year period of financial oversight by the Detroit Financial Review Commission
The bankruptcy petition set forth some of the causes that led to the filing: shrinking tax base caused by shrinking population (a 39% drop between 1950 and 2013), cost of municipal pension obligations and high administrative costs, indiscriminate borrowing to cover budget deficits, poor record keeping / antiquated computer infrastructure; property tax receivables at 47% of taxes owing (as of FY 2011), and government corruption (2 municipal employee pension plans had paid a “13th month pension check” to retirees for over two decades). In the end, causation was not an overriding factor; what mattered was that Detroit – via Chapter 9 bankruptcy – had a second chance.
Detroit’s “Grand Bargain” was the silver lining surrounding the trials and travails of the bankruptcy process and proceedings. In the end, Detroit was able to fairly quickly return to financial solvency because of a rather mad assortment of “angels” that stepped forward to craft an “out” for the city.
Again, another topic too complicated to relate in detail in this article.
The full story is perhaps best told in a 2017 case study titled “Detroit’s Grand Bargain: Philanthropy as a Catalyst for a Brighter Future” (Irene Hirano Inouye Philanthropic Leadership Fund, The Center of Philanthropy & Public Policy, University of Southern California).
From the Preface to the Inouye fund study:
The Irene Hirano Inouye…Fund elevates and amplifies the role of
philanthropic leadership strategies… through the development of
cases that can stimulate conversations with foundation trustees and
executives. In that spirit, this case describes the City of Detroit as it
teetered on the brink of financial collapse in 2013, and the uncommon
role that philanthropy played in resolving the crisis. The case
examines how philanthropy catalyzed a brighter future for Detroit and
the bold leadership that was required to do so… (emphasis added)
The Philanthropic Leadership Fund outlines the “Grand Bargain” in the following manner – the genesis of the “Grand Bargain” (the “seeds” of the scheme) began the process,the pivotal role of philanthropy followed next,the role of the state proved to be critical,the participation of the Detroit Institute of Art was both pivotal and critical, and the sacrifices of Detroit’s municipal retirees showed in the end who the heroes of the scheme really were.
The “Seeds of the ‘Grand Bargain’…” were found in the person of the U.S. District Judge who was handling the Detroit bankruptcy. It was his idea to concentrate on settling the Defined Benefit pension issues (the largest part of Detroit’s debt) as a way to lead lesser creditors to the bargaining table. The Judge used the Detroit Institute of Art, along with its high-value world-renowned art collection as leverage to work his will with balky creditors. In the end, the “seeds” included a plan crafted under the direction of the Judge to create an art trust that would allow the DIA to financially leverage the valuable works instead of selling them off to pay down debt.
That part of the 5-part scheme outlined in the Fund’s case study worked – the “seeds” were planted and began to grow.
The Judge again played a key role in stitching together his unlikely roster of players when he pitched the idea of foundation involvement and other philanthropic assistance in dealing with Detroit’s debt crises. He gathered the heads of twelve foundations – among them the Ford Foundation, the Kresge Foundation, the John S. and James L. Knight Foundation and the Charles Stewart Mott Foundation – to begin persuading them to help find a solution to Detroit’s insolvency. Over a short period of time, some thirteen foundations pledged a total of $374.5 million to the “debt adjustment plan” fund.
After recognizing the foundation’s support for the City of Detroit, the state in the guise of Governor Rick Snyder saw no reasonable way to refuse governmental participation and quickly got the legislature to commit to an up-front contribution of $190 million (the equivalent of $350 million over a twenty-year period). The commitment by Snyder and the state legislature were the easy pieces of the scheme. The next part would not prove to be as easy.
The participation of the Detroit Institute of Art in the “grand bargain” was crucial to the success of the plan in that the over $100 million pledged by the institute was a significant amount in and of itself. The real benefit, however, lay in the restructuring of the DIA so that its continued survival with the valuable collections intact would be assured. The major players – the judge, the Governor, and the heads of the foundation “angels” – crafted the art trust, noted earlier in this article, that was used as a leverage vehicle for utilizing the assets of the trust to help fund the end of Detroit’s financial crises. For months leading up to that point, the future and fate of the DIA and its collections had been in doubt.
The final piece of the Detroit bailout puzzle centered on the municipal retirees – civilian and law enforcement alike – who were put to the test early on when they were asked to give up 34% and 10%, respectively, of their future benefits. That turned out to be a non-starter. After much wrangling and back-and-forth, it was decided that the law enforcement sector would take cuts of 1% to future cost-of-living increases and the civilian sector agreed to a 4.5% cut in monthly benefits and the total loss of cost-of-living adjustments. A small percentage of the latter group were also required to give back a share of annuity “bonuses” received in earlier years.
A September, 2017, report out of Hartford, CT titled, “Hartford pension recipients are right to be worried about potential bankruptcy” led with “The I-Team spoke with a pair of retirees from Detroit who’ve been through it (i.e. bankruptcy) and they said people relying on a Hartford city pension are right to be worried.” As of this writing, Hartford has not filed for Chapter 9 bankruptcy protection.
In that same month, rumors about a possible bankruptcy filing loomed large in Hartford and throughout the state. Hartford’s Mayor, Luke Bronin, backed by the City’s Treasurer and the president of the City’s Court of Common Council, said that the City would likely file for bankruptcy if “…the state fails to pass a budget or doesn’t provide additional state funding.” Connecticut was then carrying a $3.5 billion budget deficit and there were no signs that the gap could be easily closed.
Some people in Connecticut – including Mayors and other elected officials lay the blame for the state’s financial crisis squarely on two factors, the attitudes of the Governor and other state-level officials and the state’s “small-town mindset”. The state, with 3.5 million residents and over 169 small towns and cities, is hard pressed to compete with larger, less provincial states and governments. For one, Hartford has approximately $8 billion on its property tax rolls – over 50% of that figure is tax-exempted properties. Second, the state does not allow for either local sales taxes or income taxes, something that puts a further crimp on Hartford’s ability to maneuver financially. Third, promises of certain funding levels from the state are often not honored. In the last fiscal year, Hartford was slated to receive $89.5 million in pass-down state revenue – the amount actually received was $37.2 million, a shortage on the “promise” of $52.3 million. An already financially strapped city like Hartford cannot meet its obligations when faced with such huge funding gaps, false promises and “hope”.
Hartford also struggles constantly with pension issues that plague many other municipalities. In Connecticut, as in just three other states, public employee pensions are governed primarily through collective bargaining between municipalities and worker advocacy groups such as unions. In nearly all other states, the state’s legislature plays a significant role and holds one distinct advantage – pension rights, benefits, and the like can be changed by laws enacted by the state legislature. In Hartford, the Mayor and Court of Common Council hold the power over employee pensions.
Like the city of Detroit that is heavily burdened with Defined Benefit retirement plans, Hartford offers its municipal employees a plan that burdens the city’s coffers greatly – the 2017 contribution was $41 million and the 2018 contribution is projected to be $3 million greater.The current pension plan is, according to the Hartford mayor’s office, “one of the largest strains on the municipal budget”.
As recently as June, 2017, Hartford’s Mayor was considering a change in the type of retirement plan it would offer to city employees. The proposed plan is a based upon the Defined Contribution plan- model where participants would voluntarily invest a minimum of 3 percent of their gross salaries in exchange for the city matching any employee contributions up to a maximum of seven percent. The plan would affect new hires only; those under the current plan would be ineligible. Vesting in the plan – on combined employee and city contributions – would be after the fifth year of employment. The newly proposed plan would cover only non-union employees who make up just 10% of the city’s current workforce.
Response to the mayor’s proposal was tepid in the days following its preview. One councilman held firm to his criticisms – “I’ve said before, employees who do this are taking a risk of outcomes without any defined benefit, ultimately, without a traditional pension. Many people prefer a traditional pension because it is predictable, not subject to fund managers who want to gamble with investments.” A big question seems to center on how the city’s pension commission would, with reasonable safety, invest the Defined Contribution plan contributions.
Hartford, at this date, continues to struggle with financial uncertainty, mostly based on short-handed revenue projections, tight financial support from the state, and ever-increasing pension costs that, until now, the city’s leaders have been unable to adjust or change to a less onerous alternative.
State of Illinois:
“Could Illinois be the first state to file for bankruptcy?” That was a fair question in June of last year when posed by media and financial sector pundits. What appeared at the time to be a short-term financial squeeze was turning into a very serious problem for Illinois.
But municipalities have a singular advantage over Illinois and all of the 50 other states – those entities are putatively eligible to file for Chapter 9 bankruptcy protection.
Illinois is not now eligible to file for bankruptcy because it does not meet the definition of a “municipality for Chapter 9 bankruptcy purposes. The U.S Bankruptcy Code defines a municipality as “…a political subdivision or public agency or instrumentality of a state.” The short-term prospects that Congress will change the law to allow states to qualify as Chapter 9 Municipalities are slim. That leaves Illinois in a bad financial position that may only get worse before it even starts to get better.
According to a late 2017, report in the FiscalTimes online edition “Illinois is the only state in the nation that has been operating without a balanced and complete budget for almost two years”. At the end of 2017, the Illinois state legislature failed to meet the deadline for completion of a full 2018 budget. In early June, 2017, Moody’s Investor Service downgraded Illinois general obligation bonds to its lowest investment grade rating. Moody’s said that the downgrade was a result of the state not paying its bills which resulted in an “untenable backlog” and the “…state’s mounting pension deficit”. The result of the Moody’s downgrade gives Illinois the lowest credit rating for any state in the nation.
Illinois is not unlike Puerto Rico or Detroit in carrying a massive unfunded pension liability that own-source revenues cannot possibly cover. The state has more than 660 government Defined Benefit pension plans. At the end of Fiscal Year 2017, the unfunded pension liability for the state’s five major DB plans had grown by 25% over the course of one year. The unfunded debt for those 5 plans alone stands at $251 billion.Illinois is in almost as dire straits as Puerto Rico but even the island territory has an advantage that Illinois lacks – Puerto Rico can file for Chapter 9 bankruptcy because Congress passed a law to allow it to file for such relief. Not so for Illinois.
Illinois’ “pension crisis” has been gathering momentum for several years – analysts attribute it to several factors, including: pension managers use of overly optimistic assumptions about returns and growth (negatively affected by periods of market turmoil and uncertainty like the global financial crisis of 2008 – 2009), lax full-funding requirements for DB plans, inadequate employer contributions and benefit increases, a shrinking tax base (Illinois has lost residents for the past three consecutive years) and lower-than-expected wage growth.
The Illinois pension crisis has been called “…the worst in the nation”. The crisis, fueled by the growing cost of Defined Benefit pension plans, has forced the state and many of its municipalities to raise taxes and cut back on other governmental programs. An illinoispolicy.org study noted that “The (Illinois pension) crisis threatens to burden taxpayers with massive, ever-escalating taxes to bail out a system that is not sustainable – government-worker pensions consume a fourth of the state’s budget.”
The illinoispolicy.org study pointed to several significant drawbacks to DB plans that have negative impacts on both those who govern such plans and those governed by them, such as:
- DB pensions guarantee future benefits –retirement, healthcare, and C.O.L.A. – for the life of a retiree
- Retirees neither own nor control their retirement accounts – “pooled” accounts and resources are controlled by politicians and state officials leaving them open to be used as “political slush funds”
- Typically, DB plans do not have sufficient money to pay out future benefits with taxpayers being expected to make up any shortfalls and bail them out (*)
(*) Today, Illinois taxpayers contribute more than three times what state workers contribute to their own retirement plans
The state’s pension crisis is further fueled by some of the following factors:
- Politics plays a significant role. Politician’s on the hunt for votes grant unionized employees overly-generous pension benefits
- In contrast to the private-sector where full retirement usually comes in an employee’s mid-sixties, public-sector employees (60+%) fully retire in their mid-50’s
- Automatic annual C.O.L.A. adjustments of 3% compounded
- Employee/Retiree contributions of between 4% to 8% of what they eventually receive in retirement benefits (e.g. a recently retired 30-year tenure employee contributed about $145,000 over his 30-year work life on expected lifetime benefits of $2.2 million – 6.5%)
- Retirement payouts that on average are $71,000 annually with a lifetime payout in excess of $2 million
- Inherently flawed and unsustainable DB plans based on assumptions re: expected returns and mortality rates – 60% of Illinois’ unfunded pension liabilities are based on failed assumptions
Today, pension costs in Illinois account for 25% of the state’s budget; in contrast, the average pension cost is only four percent across most of the remaining states. By the year 2025, it is anticipated that the state will pay more of its education budget on teacher pensions than it will on classroom and teaching initiatives. The Illinois pension situation is a problem fairly begging for a reasonable solution, but It’s a problem without an easy or ready one.
The illinoispolicy.org study highlights the following list ofpossible solutions is found:
- Force politicians to lead-by-example and willingly opt for Defined Contribution plans instead of current cost-prohibitive DB plans
- Offer 401(K)-style plans for all new hires and future government employees
- Offer optional 401(K) plans to current government employees (instead of the current insolvent, politician-administered and failed DB plans)
- Require educators and education administrators to contribute some amount to their pension plans
- Remove the state from administering local school district pensions
- Limit the future growth of pensionable salaries
- Fight for the right to file for Chapter 9 bankruptcy as a “Chapter 9 ‘municipality’…” (to ease the way to restructuring debt, renegotiating existing contracts and reforming pensions)
Attaining the right to file for Chapter 9 bankruptcy as a recognized “municipal entity” is critical for the State of Illinois to escape the depths of insolvency and debt. As of this writing, there is no Congressional initiatives to grant states such as Illinois Chapter 9 municipality status.
State public pension plans are now underfunded by nearly $6 trillion according to a report from the organization State Budget Solutions(“SBS”). Today’s underfunded dollar amount is up nearly $900 billion since the last (SBS) in-depth report in late 2014. Nationwide, the unfunded public-sector pension deficit stands at 35% overall.
This article looked at three governmental entities – Detroit, Hartford and the State of Illinois – and did not cover states and localities that are having their own pension crises. California, for instance, currently has underfunded and unfunded government pension debt in excess of $1 trillion. The state of Pennsylvania, a state with a modest population level when compared to California has an unfunded pension liability that exceeds $74 billion (some PA “reformers” that the deficit grows at the rate of $172 per second).
And, so it is with a majority of the rest of the states, some of the nation’s largest and iconic cities, and lesser units of government nationwide.
Photo credit: Wikipedia