by Scott Baker
How to fix Illinois’ Debt problems…and any state’s
Wall Street has created a major problem for many U.S. states. A notable case: Illinois supposedly is collapsing from debt obligations, says this latest breathless report from Zero Hedge, as well as most major media.
…and it’s all based on lies.
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A quick look at the 2016 CAFR for Illinois (pages 34 and 44) shows some $94 billion in the pension, treasurer’s and Private-Purpose Trust funds (do YOU “trust” the Trust funds? I don’t…), and with general government funds, the total exceeds $100 billion.
Pension funds cannot payout more than about 5%/year of their assets. If they did, they would go broke because they don’t generally earn more than that; the good ones that win awards earn 6%/year and do it consistently.
OK, so here’s what Illinois needs to do, adopting emergency measures to get around restrictive current laws:
- Make an iron-clad pledge by law, even in the State Constitution if they can get quick agreement, to provide for pension payouts at the current level and adjusted for inflation in the future.
- Liquidate the current pension fund and maybe some of the other liquid funds too to pay off all current debts.
- This will leave them with a great credit rating – assuming the jilted Wall Street firms don’t force the ratings agencies to downgrade the state out of spite. They might but that should go to court then.
- Put the remaining 10s of billions into a new State Bank, partnering with the beleaguered small and community banks (an FDIC state sorted list of failed banks shows dozens in Illinois: .fdic.gov/bank/individual/failed/banklist.html).
- Use that money to finance state and local businesses and individuals instead of Wall Street schemes and high fund manager fees that will no longer be necessary or advisable, saving the state 100s of millions a year.
The Public Bank could be built roughly on the model of the hugely successful Bank of North Dakota example, one of the country’s greatest banks, measured by Return on Equity, and scandal-free since its founding in 1919.
It’s simple, really, when you get outside the Wall Street-Bankster codified box of thinking. Why should a State keep an enormous fund just to spin off a few percent a year to pensioners? Who benefits from such an arrangement? The State will never go out of business, unlike an actual business that might. So why “guarantee” liquidity this way – which, as we’ve seen, isn’t even a real guarantee – when the state can always pay its obligations through normal taxation options?
The big drain on State budgets isn’t the pension obligations, it is:
- the obligations to increase the fund from which those obligations are paid:
- the fees to the managers of that fund; and
- the interest payments on the debt, all of which could be wiped out if the current pension and other special set-aside funds were eliminated and the State went back to pay-as-you-go, with just a modest cushion for the year’s expenses.
(The highly dubious assumptions of inadequate future return-on-investments are another subject I won’t get into here, but it’s something many experts have questioned).
A little less money for Wall Street, a lot more for the taxpayers and citizens. That’s a square deal worthy of the Land of Lincoln, Illinois.
This article is based on a post which appeared on OpEd News 03 July 2017.
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Instruction Manual: How To Start A Public Bank
Documentary Of The Week: How Government Creates Inequality
