Stock market crash leads to battle over Ill. pensions

Terry Savage:

The State of Illinois has the most underfunded public pension plans in the nation, with a funding gap that is now approaching $50 billion. The low balances in the state's pension accounts have been made worse by the stock market crash...

A financial war is brewing -- and it's likely to pit these public employees against Illinois taxpayers who are responsible for paying those generous pension promises. There simply isn't enough money in all these retirement plans to send out the promised checks. If you think Bernie Madoff had a Ponzi scheme going, wait until the wave of boomer retirement hits the reality of pension underfunding...

Could the state simply default on its pension obligations when the time comes?

James Spiotto, an attorney with Chapman and Cutler in Chicago, is an expert in municipal bankruptcies and says the law can be murky.

"There are varying levels of protection, ranging from strict constitutional rights to general statutory provisions, that might allow for some renegotiation of benefit levels in light of adverse conditions affecting the pension fund," Spiotto said.

In other words, if the state tries to cut back on the promised benefits, there will be a huge court battle.

When companies go bankrupt, the Pension Benefit Guarantee Corp steps in to cover most defined-benefit pension promises. But the PBGC does NOT cover municipal or state retirement plans.

If city, state and local pension promise are to be kept, it will be up to taxpayers to come up with the money -- either through higher tax levies or lower service levels...