On CNBC Squawk Box, Warren Buffett put a spotlight on Illinois’ problems.
Betty Quick: There’s a question that came in from a viewer: “How do you see the unfunded pension liabilities across the United States affecting our economy over the next ten years?”
Warren Buffett: Well, if you’re talking about the corporate sector– the unfunded liabilities have been working their way down because all the new companies don’t go for defined benefit plans. In the public sector, you know, it’s a disaster.
If I were relocating into some state that had a huge unfunded pension plan I’m walking into liabilities. ‘Cause I mean, who knows whether they’re gonna get it from the corporate income tax or my employees– you know, with personal income taxes or what. But that– that liability isn’t gonna– you can’t ship it offshore or anything like that. And those are big numbers, really big numbers.
And when you see what they would have to do– I say to myself, “Why do I wanna build a plant there that has to sit there for 30 or 40 years?” ‘Cause I’ll be here for the life of the pension– plan– and they will come after corporations, they’ll come after individuals. They– just– they’re gonna have to raise a lotta money.
Betty Quick: I mean, when you say that the states that come to mind, having not looked at those statistics in a while, would be Illinois and New Jersey at the top of the list.
Warren Buffett: Well, as I say I praise by name and– criticize by category.
Illinois Retirements Costs Consume 50% of State Budget
Wirepoints explains Why Warren Buffett is right to warn about Illinois: The state’s true retirement costs now total 50% of annual budget.
Already, more than a quarter of the state’s budget is consumed by retirement costs, largely the result of overpromised benefits. Illinois can’t handle it. The state has racked up billions in unpaid bills, multi-year operating deficits and credit downgrades. It’s now just one notch above junk, according to Moody’s.
But the problem is worse than it appears. The state’s ballooning retirement promises are actually far bigger than Illinois bureaucrats say they are. When the state’s debt costs are more properly and honestly accounted for, Illinois ends up beyond crisis levels. It would take nearly half of Illinois’ $38 billion budget to pay the true costs of the state’s retirements.
Simply put, Illinois is insolvent under most realistic financial measures.
Official Numbers Just a Start
To start with, most market-based groups calculate a much higher pension debt for Illinois, using discount rates of 4 to 6 percent. Moody’s, for example, uses a rate much closer to that used by corporations. Their calculation puts Illinois’ pension debt at $234 billion – $100 billion more than the official debt.
Wirepoints also analyzed what how much more it would cost the state annually if it contributed the actuarially required payments to its retiree health obligations – instead of the minimum pay-as-you-go contributions it makes today. That would require an additional $3 billion annually – creating a true annual payment of $4 billion.
Add up all the retirement costs and Illinois should be paying $18 billion dollars today – nearly 50 percent of Illinois’ $38 billion budget.
Paying almost 50 percent of the budget into public sector retirements is an impossibility. Diverting that much would slash the monies needed to fund Illinois’ core services and create chaos in an already dysfunctional state.
Illinois in Class By Itself
Illinois is Insolvent
There are many more charts in the article that merit a closer look.
Here’s the fiscal reality. Illinois is an insolvent state that can’t pay its bills.
Mike “Mish” Shedlock
This is how Illinois will solve the problem!
http://www.foxnews.com/auto/illinois-1000-electric-vehicle-legislation
Illinois is absolutely right to tax electric cars. They use roads. They don’t pay for roads, currently, as roads are paid for using gas taxes, and they don’t buy gas. That said, $1000 per vehichle seems excessive. At the new rate of $.44/gallon for state gasoline tax, and a car getting 20 mpg would have to be driven 45,000 miles to pay $1000 in gas tax, and a car getting 30 mpg would need to be driven 68,000 miles a year. Personally, I would pay about $120/year in gas taxes at $44/year, but I don’t drive too many miles/year.
I think a tax on electric cards of about $400/year is probably about right. It’s possible that’s their goal, and they started at $1000/year so that when they reduce it to $400, it sounds like a good deal.
Miss, I’ll calling you out for phoniness and hypocrisy. Because why don’t you explain why Warren Buffet would not open a business in New York which has received far more welfare for the Ultra Ultra Ultra Rich and Rich Gigantic Corporations in the form of Wall Street bailouts and and Fed QE. Instead, you shit on workers pensions as if they were not as “sacred” as the Fraudsters fraudulent loans that your’s and my tax dollars paid for.
Jimmy Hoffa must be turning over in his concrete.
A former colleague is moving back home to Wisconsin after 20 years in Caifornia. But now he cant find work and finds that property taxes per dollar are the same or higher there with less job prospects. The coasts and south have nothing to worry about because of the sheer amount of wealth in metro areas and new jobs.
“Illinois Retirements Costs Consume 50% of State Budget”
Franklin Roosevelt said that government workers should never be unionized. The people of Illinois are now finding out why.
Of coarse, Governor Pritzker cut his tax cost by taking the toilets out of a building he owns, to cut his property tax. Other unprivileged property owners will be left to make up the difference. But as Charlie Munger, one of Buffett’s guys said to those hurting in the 2008 recession, the unprivileged property owners should “just suck it up and cope.”
Buffett: “…and they will come after corporations, they’ll come after individuals. They– just– they’re gonna have to raise a lotta money.”
Didn’t Buffett once say, “raise my taxes”? Didn’t he complain that his secretary paid more % in taxes than he did? Now is his opportunity to put his money where his mouth is- and he declines. Imagine that.
The end result of our financial condition will be to tax everyone into the poor house and then have politically connected individuals and organizations buy our homes for pennies on the dollar.
As WildBull points out in a comment above, pensions were never sound. They were always intended as a way to buy votes. In contemplating the future of pensions, there is an important thing to remember: In the US, over half of all voters now either work for government directly (Federal, State, County, City, Schools, Armed Forces), or work for a company tied heavily to government. They system has bifurcated: Government employees get lavish defined benefit pensions, while private employees get Social Security and defined contribution pensions.
The public unions negotiated lavish pensions, and it was easy, because they people the union was negotiating with were also public employees, who also got the pensions. If I negotiate with myself, am I going to promise myself wonderful things? Most likely, yes. But, backed by the growth of government, and the growth of their power at the ballot box, they have the power now to enforce that the promised they made to themselves come true.
It is unrealistic to think that these pensions, regardless of how ridiculous they are, will ever be reduced. My expectation is that states like Illinois will make some “attempts” to solve the problem, and that the Federal government will then bail them out. Thus, the expense to finish funding under-funded states like Illinois will flow to all states.
Almost hundred and stil worried about his financial future ….Admirable !
Classic catch 22,state pensions were created decades ago when the US was an industrial powerhouse,they could easily afford all those lavish pension.Those days a long gone,industrial base have collapsed relocated to China leaving states with no possible way to pay those soaring costs other than raising taxes and fess out the as to buy time,it is what it is.
State pensions in perpetual Democrat states were sweetheart deals between the politicians ( that also benefit ) and the public labor unions. Pension plans are a great way to buy votes now, but postpone the pain until you are long out of office.
Gov. Pritzker’s $3.4 billion tax hike: How to fan the ‘Illinois Exodus’
As shown in the past Uncle Warren will do anything as long as he knows he will get bailed out. He days of analyzing businesses are largely over, now his efforts are focused on aligning with the Fed. This is also why he’s gotten much more political in recent years, including a very chummy relationship with Chicago hero Obama.
I’m not criticizing Buffett to defend Illinois in any way, it’s just he should have been allowed to fail in 2008 should certainly not be paraded around as some paragon of wisdom and virtue. He still appears on our screens and in headlines by the grace of TARP.
Mish – to ask the obvious question, now what? Illinois can not continue long status quo. What are the possible next actions or repercussions?
Next comes the exit fee for leaving Illinois.
I wonder why Mish is still there, well most of the time.
I pick your answer as the most likely, toll to leave Illinois. Tool booths at the Indiana border. Eazy pass bar codes tattooed on foreheads. Your money returned less 30% handling fee if you come back in, kinda like a deposit on a soda bottle. Republicans can leave free of charge, but with 200% tarrif to reenter. Lots of new toll taker jobs too.
Reminds me of the time Candid Camera set up a road block on a remote northern Delaware road at the PA border. “Delaware is full today. You can not enter until someone first comes out.
The rest of the country will be robbed by debasement. Otherwise there will be tanks in the streets and the system will collapse. All the money spent on public indoctrination over the past century and a half, seems to work, after all…..
They will demand a federal bailout. “It’s for the children!” will be their slogan.
Hillary would have given it to them too. Public unions are 7 out of the top 10 of all time largest political campaign contributors in the history of elections in America. And they give 99.9% to democrats.
Curious Cat.
Let me have a go at answering your question.
The pension funds will have some assets/money in them. They dont have enough money in them to pay out everyone, but as most of those payments will happen in future years, they can meet their obligations for now.
What is almost certain though, is at some point they will run out of assets/cash, and no longer be able to pay what is owed.
The fair way of dealing with, imo, this is to take account of the shortfall now, cut benefits in accordance with the estimated deficit, and pay on that basis. That way everyone in the fund takes the pain equally. If however, the let the fund run on and no new money is found, it will collapse. If that happens, those who retired earlier will benefit as they will have been receiving 100% of their pensions and benefits. Those who have only just retired or havent yet retired at the time of the collapse, will lose everything.
As far as I know, there is no bankruptcy process that will allow the state pension funds to be resolved, and nor is there the political will to do the right thing.