Is Illinois America’s Greece?

Illinois flagA recent piece in The Economist wonders whether Illinois’ pension debt might lead the state down the same path as Greece.

From the Economist, and re-published by Business Insider:

Illinois is like Greece in one obvious way: It overpromised and underdelivered on pensions and has little appetite for dealing with the problem, says Hal Weitzman of the University of Chicago Booth School of Business.

This large Midwestern state, with a population of 13 million (Greece has 11 million, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen.


The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’s bond rating is the lowest of all the states, which means dramatically higher borrowing costs.

When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana. (An incensed editorial in the Chicago Tribune asked what Botswana had done to be so insulted.)

The main reason for the pension debacle is decades of underfunding. “Everything was always done with a short-term view,” says Laurence Msall, head of the Civic Federation. “Unique to Illinois is the idea that you don’t have to pay for pensions and you don’t have to follow actuarial recommendations.”

Whereas most other states follow the rules set by the Governmental Accounting Standards Board (GASB), which, however imperfect, require some budget discipline, Illinois has mostly ignored them.

Read the entire piece here.

New Jersey Pension Funding Drops 20 Points As New Accounting Rules Kick In

New Jersey seal

The funding status of New Jersey’s pension system dropped 20 points this week as the state’s Treasury Department began measuring funding using new accounting rules.

From Reuters:

In a document released on Tuesday after a bond sale, the state revealed that one of its five main pension funds will have insufficient assets to cover projected benefit payments within 10 years.

Under new pension accounting standards, issued by the Government Accounting Standards Board (GASB), the New Jersey system’s overall funded level stands at 44 percent for fiscal 2014, compared to the 63 percent previously determined by standard actuarial methods. Eighty percent or more is generally considered healthy.


New Jersey Treasury Department spokesman Christopher Santarelli said in a statement that the retirement system had current assets of about $40 billion.

But he added that the new pension reporting system, based on actual contributions, “underscores the urgent need for additional, aggressive reform of a pension and health benefits system that if fully funded would eat up 20 percent of New Jersey’s budget.”


The GASB rules measure a retirement system’s net position as a percentage of total pension liability.

The net position uses market asset values instead of actuarial ones. In the case of more poorly funded systems such as New Jersey’s, it also uses lower discount rates that make the liabilities appear much higher.

Fitch said the funding drop “wasn’t a surprise”, but that pensions remain a serious problem. From Fitch:

The significantly weaker pension figures released by the state of New Jersey today in a supplemental bond sale disclosure are not a surprise, in Fitch’s view. The state is the first to disclose materially weaker pension metrics following its conversion to new accounting requirements under GASB statement 67.


For more than a decade, the state has severely underfunded the actuarially calculated contributions needed to progress toward full actuarial funding, even following extensive plan reforms, and the state cut its already insufficient contributions for fiscal years 2014 and 2015 to address unexpected structural budget weakness. The governor has convened a special pension taskforce to propose options for additional pension reform and is expected to make a proposal to the legislature in early 2015. Fitch’s Negative Outlook at the current rating level reflects the concern that state corrective action to address its budgetary and pension challenges will be difficult to achieve and sustain over time, particularly given its narrow liquidity, limited fiscal flexibility, and the risk that litigation may defer or dilute pension reforms.

Fitch continues to believe that the new GASB pension standards represent a step forward in improving pension transparency. For example, the requirement to calculate total pension liabilities under the more conservative entry age normal cost method, rather than the multiple options allowable under the old standards, will increase the comparability of governments’ pension liabilities. Although most large public plans already used entry age normal, New Jersey did not, and the materially higher total pension liabilities that it disclosed under the GASB 67 standard reflect in part this switch.

Read Fitch’s full statement here.

BNY Mellon Launches Service To Aid Pension Funds’ Compliance With New GASB Rules

Stack of papers

BNY Mellon has announced a new “regulatory support group” to help its pension fund clients to prepare for and comply with new GASB accounting standards, which went into effect last June. From a BNY Mellon press release:

BNY Mellon has developed reports that will enable plan sponsors to seamlessly compile Statements of Net Assets and Net Changes, new requirements called for under GASB 67. The reports are easily customized and available to clients through Workbench™, BNY Mellon’s technology portal. Additional solutions are designed to help clients meet their GASB 67 performance reporting requirements, with capabilities that feature:

–       Annual money-weighted returns integrated into existing standard and interactive reporting

–       Money-weighted returns available across all return types, including net-of-plan expenses

–       Returns reported by calendar or fiscal periods, as well as customized time periods

–       Extended time-period returns reported on an annualized or cumulative basis back to inception date.

“As new standards like GASB 67 continue to impact plan sponsors, they need investment servicers with a solid understanding of the financial regulatory landscape,” said George Gilmer, BNY Mellon head of Asset Servicing for the Americas.

The new GASB rules are designed to improve transparency and accountability in the financial reporting of public pension funds.