CHICAGO - Illinois' pension system overhaul should shave $144.9 billion off state contributions over the next 30 years and trim about $24 billion off its $100.5 billion unfunded pension obligation tab, according to a review by pension fund actuaries.
The numbers are a mixed bag compared to original projections provided by the backers of the legislation approved by lawmakers in early December and signed by Gov. Pat Quinn, but they mark significant improvements for the dismally funded system.
State finance officials and members of the finance team on a $1 billion general obligation sale scheduled for next week are traveling to update potential investors and rating agency analysts on the overhaul, actuarial assessments, and other state financial data. The sale is set for Feb. 6 and updated ratings reports are expected by Jan. 31. All three rating agencies rate the state's GOs at the low-single A level.
The $1 billion deal marks the start of the state's new money borrowing plan for the current fiscal year with a $400 million sales tax backed deal expected in March and a $700 million GO sale slated for April.
The state now expects total savings of $144.9 billion "over the entire 30 year term" of the pension contribution schedule, state capital markets director John Sinsheimer tells potential investors in a roadshow presentation attached to the deal's offering statement. The legislation's authors originally estimated savings at $160 billion.
The legislation should reduce the state's unfunded liabilities by $24.3 billion in the next fiscal year, about $3 billion more than backers originally estimated.
Sinsheimer stresses in the roadshow that the state itself never projected the impact of the changes and new figures come from pension fund actuaries. He also highlights a provision of the legislation designed to enhance bondholders' position.
The state's general obligation statutes already give GO repayment a strong priority but the legislation "expressly subordinates" all regularly scheduled and supplemental pension payments and contributions to the payment of principal interest and premium on state debt. The provision covers statutory fund transfers and any pre-funded mechanism to pay off bonded debt.
The legislation "clearly states that debt service payments of all kinds .come ahead" of pension payments, Sinsheimer said.
The legislation takes effect in June and impacts four of the state five funds that make up its retirement system, leaving out the judges who will ultimately decide the constitutionality of the changes, which are being challenged by retirees and unions.
Sinsheimer said the state can't provide investors with assurances as to the timing or outcome of the legal challenge or ultimate impact except to say if the reforms are declared unconstitutional except that "the state's financial condition will be materially worse."
The 30-year plan is designed to fully fund the system by 2044. It cuts cost-of-living increases, caps pensionable salaries, and raises retirement ages for some while cutting employee contributions by 1% and shifting contribution calculations to an actuarial-based level.
If the law takes effect, the funded ratio for the state employees fund would immediately jump to 40.1% from 36.1%. The largest fund, which covers public school teachers, would grow to a 49.2% funded ratio from 42.6%. The state universities fund would jump to a funded ratio of 49.5% from 43.6%. All reach full funding ahead of schedule in 2039.
The changes won't impact fiscal 2015 state contributions as those were set late last year under the prior schedule. The state now anticipates saving nearly $1.2 billion in fiscal 2016, $1.26 billion in fiscal 2016, and nearly $1.4 billion in fiscal 2018 until 2020 when the savings drop to $716 million due to increased contributions scheduled after the state retires its remaining pension-related bonds. In 2023, the reduction in contributions over the current schedule is expected to rise back to $1 billion and hit $1.8 billion in 2029 and then $15 billion in 2044.
Beginning in 2016, the state will contribute an additional amount equal to 10 % of the savings expected from the overhaul. Supplemental contributions of $364 million begin in 2019 when the state retires its 2010 pension bonds and another $1 billion beginning in 2020 when its 2011 pension bonds are retired. If the state fails to make either form of payment the pension funds are "obligated" to ask the state Supreme Court to require it to do.
The state also discusses on the roadshow two other fiscal issues that make investors worry: its backlog of unpaid bills and the partial expiration of a 2011 income tax hike next year.
The state's three-year budget forecast anticipates the state will close out fiscal 2014 on June 30 with a $5.6 billion backlog, down from a high of $9 billion several years ago, but it could shoot up again as the state faces a $4 billion deficit in the coming years absent deep cuts or new revenues.
"It's my believe that if we are successful at reforming our pension system [which must survive the legal challenges] and we make the appropriate changes needed to address the tax rollback of Jan. 1, 2015, the unpaid bills will take care of themselves," Sinsheimer said. The state would like to reduce the level to no more than $3 billion which equates to about a 30-day delay in payment.
Quinn is not expected to outline how Illinois will deal with the income tax rollback in his state of the state speech Wednesday. He will release his proposed fiscal 2015 budget on Feb. 19.
Citi is the lead manager on the upcoming sale. Proceeds will finance projects under the state's ongoing $31 billion Illinois capital program. Investors rewarded the state for the passage of the reforms by reducing its typical interest rate penalty on a taxable GO sale last month by more than 60 basis points.
