PAT QUINN: We're going to have epic reform when it comes to dealing with this pension issue that has confounded our state for many, many years - previous governors, previous legislatures. Now we have to act. Now, I didn't create the problem, but I'm here to solve it. That's my job. And I know I was put on Earth to get this done.
(SOUNDBITE OF GROUPLOVE SONG, "TONGUE TIED")
CAITLIN KENNEY, HOST:
Hello, and welcome to PLANET MONEY. I'm Caitlin Kenney.
ZOE CHACE, HOST:
And I'm Zoe Chace. That was Illinois Governor Pat Quinn you heard at the top. Today is Tuesday, May 29.
KENNEY: On the show today, what do you do when you make a promise you can't keep? That's what states across the country have done to their retirees. They have pension funds that are running out of money and may not be able to pay out all the money that they promised.
CHACE: But we have a possible solution. It's painful. It's ugly. It's unpopular. It can be found on a tiny set of islands halfway around the world. That's coming up. But first, the PLANET MONEY indicator from Jacob Goldstein.
JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator - 1.9. Prices in Germany, they are rising at an annual rate of 1.9 percent. This is according to figures out today. And this is the lowest inflation has been in Germany since 2010. Now, German inflation, this - despite how it may sound, this is not just some random data point that I picked to fill up the indicator today.
It's actually a huge deal for the future of the European economy. And this is because there is basically one institution right now that in the short run is sort of keeping the European economy afloat, and that is the European Central Bank. People are pushing for the ECB to do even more, to be more aggressive. But the fear always with central banks being aggressive is inflation. So this news that inflation is really low in Germany right now, that's good. It gives the ECB more room to maneuver, more room to keep the European economy going.
CHACE: Yeah. And let me just say when Caitlin and I were in Germany, there was this incredible fear of inflation from college students to older people who had seen their currency be devalued because of inflation. Like it's a very, very real, visceral feeling in Germany. And so the lower inflation rate that you're telling me about in Germany, that's good news for the European Central Bank's rescue plan because it might mean that Germany is going to be more supportive of what the ECB needs to do.
GOLDSTEIN: Thanks, guys.
KENNEY: OK. On with the show. You hear a lot about how states all across the country have problems with their pension funds - Rhode Island, California, Pennsylvania, New York. But the state with the most problems is Illinois. We talked to one Illinois' problems. Here she is.
TRACY WELCH: My name is Tracy Welch, and I proudly teach for Urbana School District in Urbana, Ill.
CHACE: Tracy has been teaching in Illinois for 20 years. And as a state employee, the state has promised to pay her pension when she retires. But it's becoming clear the state might not have the money to do that.
KENNEY: Tracy's pension fund, the Teachers' Retirement System of Illinois, is only 46 percent funded, which means right now it has less than half the money it's promised to pay out.
WELCH: My concern is - truly the bottom-line concern is that if there will actually truly be money in those funds. That's a big worry. I've put in money over the last 20 years into the pension fund. And we're concerned that it won't be there.
CHACE: Unfortunately for Tracy, the guy who is running her pension fund, who's managing the money, he has the same fears she does.
DICK INGRAM: Where we are in Illinois right now is that I can't look the 25-year-old teacher in the eye and say, you're absolutely certain to get the promises that have been made to you.
KENNEY: This is Dick Ingram, executive director of Tracy's pension fund. Dick says the reason he's worried about breaking his promise to teachers like Tracy is that the state of Illinois has broken its promises to him.
INGRAM: We are in the circumstances we are because there has been a systematic lack of funding from the state of Illinois over decades. There have been years that they've paid whatever they could afford. There have been years where they've paid little or nothing.
CHACE: Dick says missed payments over the years have added up. At this point, the state of Illinois owes his pension fund and all the other state pension funds $83 billion. That is what they've been promised. So let's go now to the guy in charge of the state, Illinois Governor Pat Quinn.
Do you have the money?
QUINN: Unfortunately, prior to my arrival, governors and legislatures almost year after year did not pay what they should have paid into our retirement systems for public employees. I think one of the most difficult problems that Illinois government has faced for more than three decades, 35 years.
KENNEY: So what do we have here? Promises upon promises broken again and again. It's an impossible situation. There's legally binding contracts, constitutional requirements to pay, but no one's got the money. How do you solve this?
CHACE: Well, there is one possible solution. Tracy's is not going to like it. Dick Ingram's not going to like it. And most of the state government is probably not going to like it. And it's unclear if it will even work.
KENNEY: The solution is 7,000 miles away from here, from Illinois. Just to get there you have to take a nine-hour flight from Chicago to Honolulu, then another eight-hour flight from Honolulu to Guam. Then you get on a little plane and go about 50 minutes to Saipan, the capital of the Commonwealth of the Northern Mariana Islands. It's a U.S. territory. They call it the CNMI for short.
SIXTO IGISOMAR: The CNMI is actually forefront in every problems that those pension funds are having. We're forefront in everything. Nobody just ever saw it.
KENNEY: This is Sixto Igisomar. He used to run the pension fund for the CNMI. This tiny little chain of islands, this could be the ghost of Christmas future for Illinois. The CNMI sounds exotic but remember; it's a U.S. territory with a U.S.-style pension fund.
CHACE: This pension fund has a lot in common with the pension fund for Illinois, so let's just take it in steps. One, both funds are defined benefit plans. What that means is the government pays you the same amount each month no matter how long you live.
KENNEY: Number two, just like in Illinois, the government is supposed to put the majority of the money into the pension fund. And just like in Illinois, the government of the CNMI has been skipping payments - lots.
CHACE: Three, just like in Illinois, the money the fund is supposed to give you each month, it's protected by the Constitution. You can't touch it.
KENNEY: OK. So very similar except the CNMI - much worse. Illinois has good pension plan. The CNMI has a really generous pension plan. Just ask Ruth Tighe. She's a former employee of the commonwealth's energy office.
RUTH TIGHE: At the time when I retired, there was a law on the books that said you only had to work for three years. And if you worked for the government for three years, you could retire and start collecting your pension at age 62.
KENNEY: Another thing - the fund would continue to pay benefits to your spouse and your children long after you died even if you adopted those children after you retired. Many retirees did this. They adopted their own grandchildren.
CHACE: The CNMI has even less money than the Illinois fund. And if nothing changes, it's going to run out of money in two years, in 2014. So remember; we promised you a solution. And we're going to be the only people in this story who keep our promise. Ready? Here it is.
IGISOMAR: If we're playing poker, the fund is holding an ace card. And bankruptcy or receivership were those variations of the ace cards. They were basically saying, you know what? I'm really sick and tired of playing with cheaters. I'm going to throw this card down.
KENNEY: Bankruptcy - businesses and people use bankruptcy all the time when they have debts they'll never be able to pay back. Bankruptcy court is basically a legal way to level with everybody. Listen; we can't pay you back. Even though there are legally binding contracts that say we have to, we can't, so let's hash out a solution.
CHACE: The problem is when a business is in bankruptcy the creditors, people who aren't going to get paid back all the way, they're generally the banks - people with a lot of money. But in this case, the creditors of the Northern Mariana Islands Pension Fund, they're the retirees - old ladies, people like Ruth. They're the ones that are going to get less than they were promised.
TIGHE: I have a mortgage payment that I'm making that's nearly a thousand dollars a month. I don't have any air conditioning. I don't have any TV. And I look at it as, you know, my life - I can't imagine where I am going to be able to find and go make up that 300 some-odd dollars a month that I'm not going to be getting.
KENNEY: Another big problem - a U.S. public pension fund filing for bankruptcy - it's never been tried before. It's unclear if it's even legal.
CHACE: And so last month, April 17, when the CNMI formally filed for Chapter 11 bankruptcy, it was huge news.
KENNEY: Well, huge news to some people, people like bankruptcy lawyers. David Skeel is a law professor at the University of Pennsylvania.
DAVID SKEEL: The way I first heard about it is a colleague of mine over at Wharton sent me an email with a story about the filing and said, have you ever heard of anything like this happening before?
KENNEY: Skeel hadn't because there's a huge legal question at the heart of this bankruptcy filing. By law, U.S. states and commonwealths cannot file for bankruptcy. So the question is, is the pension fund part of the state or separate from it?
SKEEL: That is the $64,000 question.
CHACE: The pension fund in the CNMI is saying, we can declare bankruptcy because we are not part of the government.
SKEEL: They need to show separateness. They need to show they are not just a branch of the commonwealth, but they really are a separate entity.
KENNEY: This bankruptcy case for this small chain of islands in the middle of the Pacific Ocean will be decided this week. And it has huge ramifications beyond the Northern Marianas all the way back to the mainland.
SKEEL: Folks who do not want pension funds to be able to file for bankruptcy or to restructure are probably watching with terror. Folks who think there's no alternative but to figure out a way to restructure the pension I think are watching to see if this is another avenue. If this case ends up concluding that a pension fund can file for bankruptcy, I think we will have some pension funds thinking about it and at least considering taking that plunge.
CHACE: So we have our solution. It's incredibly painful. It's possibly illegal. So we called up Dick Ingram, the head of that pension fund in Illinois, asked him, what do you think?
INGRAM: We're not the Mariana Islands. You know, we're a multibillion-dollar pension fund. We're - you know, we're in a much different place. We're in, you know, a much stronger financial position despite the fact that, you know, we're 46 percent funded.
KENNEY: But if things don't go the way you're hoping, is bankruptcy ever an option that you would consider for the fund?
KENNEY: Remember; Igisomar said that bankruptcy is the last ace you throw down in the game of poker. In Illinois, they're still in the middle of the game. They have a few more rounds to go. The question is, who's bluffing and who's not? Dick Ingram, he wants to send this message to the state - if you don't fund us now and we run out of money, you'll have to pay later.
INGRAM: State law says that the state has to pay the benefits if we can't. So it's - you know, it's - you know, at that point we become just an administrator and send them the payroll. And, you know, they pay it.
KENNEY: And what if they can't pay?
INGRAM: Well, that's decades away.
CHACE: In the game in Illinois right now, no one's willing to say the word bankruptcy. They're trying other things - raising the retirement age, messing with the health care benefits, decreasing the cost-of-living adjustment. They've raised taxes.
KENNEY: Remember the ghost of Christmas future, Sixto Igisomar in CNMI? He has a message for Illinois - good luck with those little changes.
IGISOMAR: It's what we've tried and attempted already. Every time I read an article that came out or a decision was made, a discussion, you know, headed by the governor or the pension decide to do this, we've tried it already. We've done it already.
KENNEY: Sixto says his pension fund tried a bunch of those things five years ago, back when they were only 46 percent funded, where Illinois is today. The CNMI pension fund will run out of money in two years if nothing changes. The Center for Retirement Research at Boston College gives the Illinois Teachers' Retirement System about 20 years if they don't change.
CHACE: That gives them a little more time to figure something out, maybe something that the little islands in the Pacific haven't thought of yet.
(SOUNDBITE OF SONG, "TONGUE TIED")
GROUPLOVE: (Singing) Don't wave no goodbye. Don't take me tongue tied. Don't kiss me goodnight. Don't.
CHACE: I want to give a little credit today to the Reuters MuniLand blog. It's written by Cate Long. And it's where I found this story about the CNMI pension fund bankruptcy. It's a great blog.
KENNEY: And before we go, we have some very big news for us here at PLANET MONEY. We just launched our very own iPhone app. It's available in the App Store now. If you search for PLANET MONEY, you can find it, download it. It's free.
CHACE: It's awesome. It - basically it's all the PLANET MONEY content that you want, like, all together. So the podcasts are there, all these amazing graphics that we've been doing, the blog posts, the radio stories - everything's there. And it's great. You should get it.
KENNEY: Yeah. You can download stuff so you can listen offline if you're on the subway or not connected to the Internet.
CHACE: Feel free to let us know what you think about the app or any questions, comments about today's show. Email us at firstname.lastname@example.org. Find us on Facebook, Twitter, Tumblr. I'm Zoe Chace.
KENNEY: And I'm Caitlin Kenney. Thanks for listening.
(SOUNDBITE OF SONG, "TONGUE TIED")
GROUPLOVE: (Singing) Don't.
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