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Detroit, Illinois, Colorado

Yes, pensions.  No, we are not Detroit or Illinois, and won’t be for some time, even if we left things as they are.  Still, our problems are far from solved, and rather than writing foolish columns about what Detroit could have learned from PERA, we’d do better to learn from Detroit and Illinois.

Eileen Norcross from Mercatus noted that, per Detroit:

Detroit’s unfunded pension liabilities are immense, at over $9 billion on a risk-free (guaranteed-to-be-paid) basis. Unfortunately, they were valued and funded incorrectly. For years, the city assumed it would earn 8 percent annually on plan assets, an uncertain expectation that did not match the certainty of pension payments.

This “asset-liability mismatch” means the plan took a gamble that didn’t pay off. Accounting tricks during boom years made the fund look flush giving the city the impression it could dole out “13th checks” for some employees.

The way to avoid self-delusion on this point is to use a proper discount rate for your liabilities.  We’re not doing that now, and GASB has, in trying to close the loophole, only increased the incentive to chase return and end up with risk.

Then, there’s Illinois’s plan, which just became law.

The plan is receiving “sniper fire from all sides,” as one lawmaker put it. Labor unions don’t like it and are certain to take the state to court, arguing that Illinois’ constitution prevents the impairment of benefits. Some legislators also don’t like it. They would prefer to see more significant structural reforms and are worried about the very large annual payments that will affect spending in other areas of the budget.

It’s very likely that Illinois isn’t even doing much to delay the inevitable.

Posted in Economics.

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