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Are welcome back live from -- investments in Chicago and Illinois to stay with the largest budget gap as a percentage of its GDP and like many states California New Jersey Pennsylvania.
The -- -- various forms of Illinois and the other states are also struggling to meet their obligations because returns as we all know have been lousy right almost no net gain for the stock market over the last ten years.
Where -- where do we find return well remember earlier this week we spoke with Northwestern University professor Joshua wall.
About the pension problem he put out a report which shocked everybody a few months ago.
Saying -- the holes to be a few trillion with a T trillion dollars.
Here's what he had to -- The key question that the US is -- face is.
How are we gonna deal would be bankruptcies these this insolvency at the local and state levels are we gonna impose.
The federal level austerity.
On these cities and and and states are we gonna think you have to make cuts or we gonna take up soft -- bail out stance and what -- is showing is that if you wait until the crisis to make the decision.
It's going to be a softer bailout stance because pretty much it's going to be impossible in that state building thing.
So there you go I mean have we waited until the crisis moment is here.
Bill out what is executive director of the Illinois state board of investment.
And he joins us now bill welcome of the -- thanks for -- on Fox Business thanks for having pre adolescent pension funds are in focus for all the wrong reasons are the problems as severe as some people like the professor that we talked to.
Make it absolutely believe -- -- yes absolutely yes you you can't overstate.
The challenge confronting only of the state Illinois pension system -- Chicago pension system and I think public pensions across the country.
That's good news fur of the men and women who need you're you're either retired now or looking how -- it -- it's it's absolutely not good news is not new news.
Seems like suddenly became to this crisis point where oh my gosh what we did well and I.
I think I understand that I think that the confluence of events has been.
This -- this three or four years of just profoundly.
Bad markets coupled with a generations.
But inadequate funding and -- retirement systems.
Let's get to the first for sure.
Okay because and I and listen we Syria having all of our viewers that -- stocks know that the stock market unless you bought apple -- basically has been almost net nothing for granted.
But a lot of people still -- say that pension funds anticipated way too high -- a return you know 789%.
Average annualized return and that those expectations.
Were almost in cost I think.
That's a realistic criticism -- on the other hand for years the the the actuarial assumed rate of return.
For the state board -- investment was -- half percent.
For the last forty years state -- investment return eight point 7%.
Beyond that and that's the teachers' retirement system and Illinois distinct universities retirements has -- mind.
That the investment returns over the long term have been fairly consistent with so they did so they had a good historical basis that's using a -- like -- for some number out of an amber helped and the retirement systems in Illinois I think this is true across the country are ratcheting down to return some.
The state -- have lowered the return assumption for -- half percent to seven point.
-- are more people also retiring.
Yeah a given demographic.
Disaster disaster that's -- they've got more people retire and fewer people working less money being contributed at -- capitol right.
And bad returns -- work.
That doesn't sound like a good combination -- I and I and the that that's exactly right.
Then everybody -- -- that there are not trying to be -- are people going to have to be told I know you have a contract you know the pension is a contract.
We cannot pay you what we promised.
That happened it.
Conceptually I assume could happen but I think the consequences of that eventuality.
Would be just absolutely profound and not just for retiree but Niger and no money there to pay -- the obligations that war.
Well there policy makers and in Springfield policy makers across the country.
Budget reductions are contemplating tax increases.
In in those issues have to be.
The the alternative if it's it's.
It it's calculating.
A number of the bad scenarios which is what is the least -- -- what is the least bad scenario what's the -- bats well I'd say the -- to the good news the worst scenario is continuing to kick the can down the field.
And get to a point where it is you you can't borrow money you're you're here in -- risk breaking covenants.
And I went -- to that point and in policy makers understand we're not to that point.
But but that -- is what would have to wonder are you were not at that point because we we look at some Illinois pensions that are saying they've -- basically forty cents on the dollar funding.
47 -- -- -- -- -- decided -- state in this state employees' retirement system is about 32% under thirty so how would make up 68%.
Funding gaps unless you have 30% market apparently accidentally every year the the only the only hope the taxpayers and the taxpayers and the end.
In in and -- -- -- -- you have time to do this is not this doesn't have to be done today but what does have to be done if not today but been in this champion in the immediate future.
He's put together placed a -- dedicated revenue stream.
To to to move the funding in the right direction which is what -- -- -- the sounds like we're getting to a point where and this is a federal issue suddenly we just take Illinois issues and extrapolate them up to have the federal level which is that.
We're gonna need it either pay raise taxes.
Or be cut benefits and or services or -- some combination of the -- it and that's the that is the ugly reality that policy makers and Republican -- It is the go to go to the option but when they -- retired teacher I'm sorry member we promised you this much money we -- like that.
-- -- walk out what Internet and and strikes have garbage piling up on the streets teachers won't go to school in -- you alluded you you alluded to a moment ago you you have contractual hand in hand in constitutional consequences here I don't think you can just invalidate 200 years of contract law suit to deal with this issue I know and -- unless you use.
Like the city of democratic Michigan just try to petition the state because they don't -- what they say we can't make we just can't pay period can't pay it.
And the only way that he didn't change the -- nobody wants anybody do this but if there's no money they've got to do it right.
Well the the problem is and as I am not a bankruptcy attorney but as I understand it.
Federal bankruptcy code affirmatively exams states states -- sovereign entities -- -- -- bankruptcy.
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- The -- I like an Irish -- yeah there you go so.
So the the bankruptcy option that would require you know federal intervention so.
And I think the two situations have been just draconian budget reductions draconian tracks tax increases.
By by state entities.
Some sort of reduction in the have been pro -- dramatic reductions endorse some sort of federal inventions none of which is is.
We're open for a little good news on a Friday though.
Sorry but it's a tough situation as an absolutely bill would executive director Illinois state board of investment bill thank you very much -- -- discussion.
Maybe not the numbers are viewers wanted to hear much of the retirees but that's the fiscal reality that.
Thank you very much.
Are we just talked about higher state taxes maybe higher city taxes -- about higher federal taxes.
Listen folks were what I don't know three weeks away from the largest tax hike in American history give or take a couple of holidays and there.
And nothing's getting done there might be a Saturday vote wanted to get a vote on rich -- -- that right after the break plus our Friday inside job gonna take you inside the Shedd Aquarium.
And we're -- -- fun.
Modify a lot of serious stuff your new being we'll have a little fun in the show I promised go to a short break or.
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