I’ve been thinking about pensions. Actually I’ve been thinking about the State of our Union, unemployment/ underemployment, working people, Illinois obligations, dona/ gifts, defined benefits, defined contributions, deferred compensation, and bankruptcy. We are about to venture into major untested areas in 2011. There are a great many problems facing US/ us, but the issue of pensions has not yet even been put on the table of concerns for our consideration. That is going to change in the very near future. Which state or city will be the first to seek redress or forgiveness from obligations? What will be the areas of forgiveness sought? When the first hits, many others will follow!
You see on Tuesday evening President Obama will deliver his third State of the Union message before the US Congress. We were told in advance that a central topic was to focus on unemployment/ underemployment. The officially released figures chronicle a 9.3% rate. This is nowhere close to the reality. Uncle $ugar eliminates people from the rolls after a “moving” defined period of time. Then, the assumption is made that such people are no longer looking for work. Just last month 600,000 people were dropped from the calculation for this reason... as were those who took a part time job to replace the full-time one with whatever benefits that they held. Re-considering these factors raises the rate to well over 22% of our population being unemployed --- a rate not unlike the Great Depression of the 1930’s. Obama will not address this number manipulation.
We are “about” in the middle of a major economic downturn. We have clearly not yet hit bottom, but Obama will not include this in his address either. Our government has refused to admit how there can be no recovery without job growth and a return to a “fully” employed populace. The President may come close, but the political “dancing” will preclude such an admission. The myth of “the recovery” has to be continued. Right now spin, hype, smoke, and mirrors are all they have going for them. As long as the public buys it, they in the government have bought more time before any great social upheaval.
People exchange their time and skills for some form of compensation. This compensation includes wages, salaries, bonuses, benefits, and pensions. Not all employment includes benefits --- particularly pensions. In my 15 or so years in public accounting and working for the government at the FDIC/ RTC, I was excluded from any so-called pensions. I did pay into Social Security and IRA accounts and will be able, GOD willing, begin to tap into these come December when I turn 62. I am not unlike many of the workforce in this regard. But... this is beyond the scope of my column for this week.
Federal, State, and municipal governments are feeling the recession/ depression. This is showing up in the deficits, and what and who they owe. Illinois is in one of the worst positions nationally in this regard. Since they are on the “cash basis” of accounting, there is no real chronicling of what are presently the state’s accounts payables, or outstanding liabilities. We have been getting some information in the media. The numbers keep growing. And... we can speculate.
We know that Illinois has NOT been making the requisite payments each year into the pension funds to meet the coming obligations. We know that 16 years ago, under Governor Edgar, the pension funding was current. We now know that the Prairie State is in arrears. The big Q is what is the liability?
Last week, I was forwarded an analysis that really set me on end. According to a report by the American Enterprise Institute, public pensions are under funded by more than $3 trillion nationwide. Illinois pensions alone are $208 BILLION UNDERFUNDED using realistic measures. The overall level of funding is 29% --- the worst in the entire nation. Illinois SERS pensions at 23% of funding is $36 BILLION in arrears, Illinois teachers pensions at 28% of funding is $98 BILLION in arrears, Illinois Universities pensions at 30% of funding is $35 BILLION in arrears, Chicago Teachers pensions at 43% of funding is S16 BILLION in arrears, and Illinois municipal pensions at 47% of funding is $24 BILLION in arrears. To get this money, total population and corporations of the state will have to be taxed. This will not occur without a fight --- so Illinois is looking for an “out” from these obligations and also what it owes schools, health care providers, and nursing homes. Be prepared to get stiffed!
It will go to the courts in 2011. States, unlike individuals and corporations however, cannot just file for bankruptcy and just walk from what they (in theory) owe. They will need special dispensations and approvals from the US Congress. This is already being discussed in the halls of Washington, DC and in the major law firms across this nation. Is there any precedent? A central matter for the courts on these pension questions will be: were these retirement benefits free gifts (dona) from the states and municipal entities, were they from defined benefit plans, were they from defined contribution plans, or were they really deferred compensation? How these pension obligations are classified will greatly impact the pension beneficiaries standing in the courts, and the final amount actually owed.
Illinois governments have played fast and loose with the pension monies in contract and labor negotiations. More and more pensions were the bargaining chips used to negotiate down salaries and wages. Promises were made for these future agreements to get labor and services up front. Such considerations will also factor into any settlement on the liabilities! Debate on these points will occur in the courts, in the arbitration hearings, and in the streets. A central question will be “should the entire general population be held liable to provide for the retirement of the few in the employ of the governmental units?” Should all be required to pay for the benefits of those few, when they themselves are not eligible for such levels of “pensions?” Hummm...?
I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
Copyright 2010 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at firstname.lastname@example.org.
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This story was published on January 24, 2011.