Warren Buffett Would Not Locate a Business in Illinois: Let's Explore Why

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Warren Buffett would not locate a business in Illinois. His reason? Unfunded liabilities.

On CNBC Squawk Box, Warren Buffett put a spotlight on Illinois' problems.

Betty Quick: There's a question that came in from a viewer: "How do you see the unfunded pension liabilities across the United States affecting our economy over the next ten years?"

Warren Buffett: Well, if you're talking about the corporate sector-- the unfunded liabilities have been working their way down because all the new companies don't go for defined benefit plans. In the public sector, you know, it's a disaster.

If I were relocating into some state that had a huge unfunded pension plan I'm walking into liabilities. 'Cause I mean, who knows whether they're gonna get it from the corporate income tax or my employees-- you know, with personal income taxes or what. But that-- that liability isn't gonna-- you can't ship it offshore or anything like that. And those are big numbers, really big numbers.

And when you see what they would have to do-- I say to myself, "Why do I wanna build a plant there that has to sit there for 30 or 40 years?" 'Cause I'll be here for the life of the pension-- plan-- and they will come after corporations, they'll come after individuals. They-- just-- they're gonna have to raise a lotta money.

Betty Quick: I mean, when you say that the states that come to mind, having not looked at those statistics in a while, would be Illinois and New Jersey at the top of the list.

Warren Buffett: Well, as I say I praise by name and-- criticize by category.

Illinois Retirements Costs Consume 50% of State Budget

Wirepoints explains Why Warren Buffett is right to warn about Illinois: The state’s true retirement costs now total 50% of annual budget.

Already, more than a quarter of the state’s budget is consumed by retirement costs, largely the result of overpromised benefits. Illinois can’t handle it. The state has racked up billions in unpaid bills, multi-year operating deficits and credit downgrades. It’s now just one notch above junk, according to Moody’s.

But the problem is worse than it appears. The state’s ballooning retirement promises are actually far bigger than Illinois bureaucrats say they are. When the state’s debt costs are more properly and honestly accounted for, Illinois ends up beyond crisis levels. It would take nearly half of Illinois’ $38 billion budget to pay the true costs of the state’s retirements.

Simply put, Illinois is insolvent under most realistic financial measures.

Official Numbers Just a Start

To start with, most market-based groups calculate a much higher pension debt for Illinois, using discount rates of 4 to 6 percent. Moody’s, for example, uses a rate much closer to that used by corporations. Their calculation puts Illinois’ pension debt at $234 billion – $100 billion more than the official debt.

Wirepoints also analyzed what how much more it would cost the state annually if it contributed the actuarially required payments to its retiree health obligations – instead of the minimum pay-as-you-go contributions it makes today. That would require an additional $3 billion annually – creating a true annual payment of $4 billion.

Add up all the retirement costs and Illinois should be paying $18 billion dollars today – nearly 50 percent of Illinois’ $38 billion budget.

Paying almost 50 percent of the budget into public sector retirements is an impossibility. Diverting that much would slash the monies needed to fund Illinois’ core services and create chaos in an already dysfunctional state.

Illinois in Class By Itself

Illinois is Insolvent

There are many more charts in the article that merit a closer look.

Here's the fiscal reality. Illinois is an insolvent state that can’t pay its bills.

Mike "Mish" Shedlock

Comments (26)
No. 1-14
Curious-Cat
Curious-Cat

Mish - to ask the obvious question, now what? Illinois can not continue long status quo. What are the possible next actions or repercussions?

Tengen
Tengen

As shown in the past Uncle Warren will do anything as long as he knows he will get bailed out. He days of analyzing businesses are largely over, now his efforts are focused on aligning with the Fed. This is also why he's gotten much more political in recent years, including a very chummy relationship with Chicago hero Obama.

I'm not criticizing Buffett to defend Illinois in any way, it's just he should have been allowed to fail in 2008 should certainly not be paraded around as some paragon of wisdom and virtue. He still appears on our screens and in headlines by the grace of TARP.

thimk
thimk

governments are already under budgetary duress , look at the civil confiscations and usurious fees levied. As long as there is a party willing and able to lend to Illinois the day of reckoning is postponed . the feds have eliminated the risk premium . so how does Moab Utah look like as a possible relocation area ?

Realist
Realist

Mish, Warren, and various businesses should move north to Canada. Well-run pensions there. Mostly all fully funded. They invest all over the world; and not just stocks and bonds; they buy real estate, infrastructure, farms, timberland, power plants, toll roads, etc. In other words; the money in their pension plans is not just a government iou that eventually will be reneged on. It's difficult to understand how the US can do such a crappy job with their pensions.

lol
lol

Classic catch 22,state pensions were created decades ago when the US was an industrial powerhouse,they could easily afford all those lavish pension.Those days a long gone,industrial base have collapsed relocated to China leaving states with no possible way to pay those soaring costs other than raising taxes and fess out the as to buy time,it is what it is.

FromBrussels
FromBrussels

Almost hundred and stil worried about his financial future ....Admirable !

Carl_R
Carl_R

As WildBull points out in a comment above, pensions were never sound. They were always intended as a way to buy votes. In contemplating the future of pensions, there is an important thing to remember: In the US, over half of all voters now either work for government directly (Federal, State, County, City, Schools, Armed Forces), or work for a company tied heavily to government. They system has bifurcated: Government employees get lavish defined benefit pensions, while private employees get Social Security and defined contribution pensions.

The public unions negotiated lavish pensions, and it was easy, because they people the union was negotiating with were also public employees, who also got the pensions. If I negotiate with myself, am I going to promise myself wonderful things? Most likely, yes. But, backed by the growth of government, and the growth of their power at the ballot box, they have the power now to enforce that the promised they made to themselves come true.

It is unrealistic to think that these pensions, regardless of how ridiculous they are, will ever be reduced. My expectation is that states like Illinois will make some "attempts" to solve the problem, and that the Federal government will then bail them out. Thus, the expense to finish funding under-funded states like Illinois will flow to all states.

KidHorn
KidHorn

The end result of our financial condition will be to tax everyone into the poor house and then have politically connected individuals and organizations buy our homes for pennies on the dollar.

RonJ
RonJ

Buffett: "...and they will come after corporations, they'll come after individuals. They-- just-- they're gonna have to raise a lotta money."

Didn't Buffett once say, "raise my taxes"? Didn't he complain that his secretary paid more % in taxes than he did? Now is his opportunity to put his money where his mouth is- and he declines. Imagine that.

RonJ
RonJ

"Illinois Retirements Costs Consume 50% of State Budget"

Franklin Roosevelt said that government workers should never be unionized. The people of Illinois are now finding out why.

Of coarse, Governor Pritzker cut his tax cost by taking the toilets out of a building he owns, to cut his property tax. Other unprivileged property owners will be left to make up the difference. But as Charlie Munger, one of Buffett's guys said to those hurting in the 2008 recession, the unprivileged property owners should "just suck it up and cope."

Casual_Observer
Casual_Observer

A former colleague is moving back home to Wisconsin after 20 years in Caifornia. But now he cant find work and finds that property taxes per dollar are the same or higher there with less job prospects. The coasts and south have nothing to worry about because of the sheer amount of wealth in metro areas and new jobs.

flubber
flubber

Jimmy Hoffa must be turning over in his concrete.

Quatloo
Quatloo

This is how Illinois will solve the problem! www.foxnews.com/auto/illinois-1000-electric-vehicle-legislation