Updated: March 24, 2011 10:58AM
You might be wondering how the State of Illinois got away with avoiding making the needed pension contributions for so many years. The answer is simple: accounting magic.
I's not so surprising to find tricks in the numbers. That's how Enron got away with all those "off balance sheet" subsidiaries. That's how Wall Street firms never had to properly value all those credit default swaps. And, similarly, that's how the state got away with promising pension payments, but never funding them.
Expected rate of return
You and I know what we hope our 401(k) investments will earn. But we can't retire on our hopes -- or historic average returns.
The state, however, can make assumptions about future investment returns in order to calculate its pension contributions.
Not only did the state plans exaggerate the expected returns, they had some help from the rules. The riskier the assets in the pension plan (stocks are considered riskier than bonds), the higher the "expected return" the plan's actuaries can use to make the plan balances look good. That encouraged more investments in stocks.
But as we're all now well aware, the stock market has not been a place for positive outcomes in the last year.
The future is now!
The fiscal pain is now upon us, though no one wants to acknowledge it. State pension plans have become even more underfunded. And soon, all those state employees, and professors, and even the state Legislature will start questioning whether they'll be getting those promised benefits.
When we've finished trying to sell our state assets -- from the lottery to the toll roads -- they'll turn to massive tax hikes, or tuition hikes, or increased user fees. It's either that or make cuts in state services -- from prison guards to State Police, from road-building to education.
The City of Chicago will face the same problem. We've already sold the Skyway; Midway Airport; the parking garages at Millennium and Grant parks, and our parking meters. While those transactions may generate a pot of money for current needs, the sales diminish future revenue sources. How will those pension promises be paid? Where will they turn?
And just like the current banking crisis, they'll blame it on the accountants.