2018-05-14 10:50 by Karl Denninger
in States , 321 references 
The State of Illinois has a very large unfunded pension liability and will likely have to pay much of it off by raising taxes. The Illinois Commission on Government Forecasting and Accountability estimated the state’s unfunded liability at $129.1 billion in mid-2017,[1] which was about 19% of state personal income.[2] Benefits to public employees are protected under the Illinois Constitution, and a recent attempt to reduce the unfunded liability by reducing retirees’ benefits was struck down by the Illinois Supreme Court.[3] So, assuming that the state can’t reduce its current pension obligations and that it wants to maintain its current level of services, Illinois residents are going to have to pay higher taxes. What’s the best way to do it?
From bad questions come bad answers.
The State Constitution can be amended. There are multiple ways to do it, I might add, and what is being proposed here can quite-easily lead to a rather lawless manner of amendment.
In our view, Illinois’s best option is to impose a statewide residential property tax that expires when its unfunded pension liability is paid off. In our baseline scenario, we estimate that the tax rate required to pay off the pension debt over 30 years would be about 1%. This means that homeowners with homes worth $250,000 would pay an additional $2,500 per year in property taxes, those with homes worth $500,000 would pay an additional $5,000, and those with homes worth $1 million would pay an additional $10,000.
Oh really?
The rest of the paper goes on to try to explain how it raises the revenue and why it will work, which devolves down into "property can't get up and walk out of the state."
True enough, but not material.
The Fed is full of people who handle zero-coupon bonds all day long. A zero coupon bond is one that is sold at a discount to its face value representing the future payments that otherwise would be made in coupon. Since the amount of the coupon is known, so is the discount at original issue. It's very easy to figure out the discounted cash price since one knows the amount to be paid and when.
Well?
Let's take their example. A property "owner" with a $250,000 house would pay $2,500 a year. Let's assume this really does retire the debt in 30 years. Well then, that means the zero coupon basis of the property just went down by $75,000 (30 years * $2,500.)
As The Chicago Fed notes the market will instantly reprice the property downward to account for this tax liability. But guess what -- assessments are on value!
So what happens?
Said owner goes to the county assessor and immediately protests his taxes, because his house isn't worth $250,000 -- it's only worth $175,000. He's not going to pay $2,500 a year -- not the first year, and not any year after that either.
So what happens next?
The state comes up short, and what do they do? They raise the tax again.
Guess what? The property owner now gets the new discount figured out almost instantly by the market and he protests again.
Eventually someone picks up either a ballot or a lot of people pick up rifles, having been dispossessed of virtually the entire value of their property.
Oh, and as for businesses? They can leave, and they can do so quickly. Most businesses lease their property and most leases are either "triple net" or similar. There will be plenty of walk-outs over this and lending covenant violations by the owners of said buildings, with the businesses telling the owners of the property to sue them if they'd like but they consider this a force majure event and ain't sticking around to get reamed in this fashion.
Those businesses that do remain will raise prices, which of course will be just fabulous for all those people who just saw 30% of their home equity go up in smoke.
Finally if you think Illinois residents have "benefited" from the past "services" of said employees, well, that old bridge over the Chicago River (pick one) might get dropped into said river if you run that load of crap on too many people.
Leaving aside the political ramifications of this, which might well not remain peaceful, the economics simply don't work. What's worse is that the Chicago Fed knows this because the Chicago Fed, like all banks (Federal Reserve or not) are bond dealers and are well-versed in exactly how instruments that behave like bonds have discounted cash flows either accruing to them or flowing from them impact their valuations.
Good luck Illinois. With this sort of horsecrap flying out of the mealy-mouthed folks who ought to be considered felons you're gonna need it.
