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Wesbury’s Take on Pension Liabilities

Article by Matthew Denhart February 13, 2013 //   3 minute read
One of the great presenters at our September 18 tax conference in Chicago was Brian Wesbury. Wesbury prepared an excellent series of slides highlighting the extent of the pension problem facing his home state of Illinois. You can download Wesbury’s presentation here, and below can read a copy of his remarks explaining the slides to the audience. (You can download the transcript of the entire conference here.)
In the credit/default swap spread market ... this is the cost of buying insurance — we heard about this a lot back in 2008 — but the insurance on a bond. If you want to buy a bond and then you want to insure it against default, how much does that cost? If you’re a bad driver, you pay more for insurance than a good driver. Illinois has the highest credit/default swap spread in the nation. It’s above California, and we are approaching levels that Greece and Spain and Italy were at just a couple of years ago, to put this in context. What’s always interesting about the credit to fault swap market is that it’s ahead of the rating agencies. The rating agencies are always behind. That’s my second chart, just a map. Illinois is A. California is A-minus, but according to the credit/default swap market, our A is too high. If California really is an A-minus, we should be a B-plus these days. I did some math recently just to kind of make it apparent. If you’re thinking about buying a house or moving to Illinois, what is the cost of this unfunded liability? It’s on the very last chart. In Illinois as a whole, on average, per acre, we Illinoisans pay $729 an acre in property taxes, but if you look at that same piece of property per acre, it’s got $2,200 or $2,300 of unfunded liabilities attached to it. People can leave, but the property can’t. So if the property has to support the unfunded liabilities, it’s $2,300 per acre. Now, we all know that in the wealthier communities, Cook County, Lake County, DuPage — and there’s lots of others — that the property taxes are much higher than they are for the state as a whole. Remember, the state has a lot of farmland, and there’s very low property taxes on farmland. Jimmy John can tell us about that. You said you like farming, and so the property taxes on that farmland — but in DuPage County, for example, where I live, the average property tax per acre is $11,800. If you use the same ratios, where I live, $37,980 per acre of unfunded pension fund obligations come with your land, per acre.