CHICAGO — Illinois should issue additional pension obligation bonds if market conditions support such a borrowing and the debt is part of a broader package of pension reforms, according to recommendations forwarded earlier this month to lawmakers and Gov. Rod Blagojevich by a state-appointed advisory commission.
The state sold $10 billion of taxable general obligation pension bonds in June of 2003, using $2 billion to cover current payments owed to the pension system and $8 billion to bring Illinois’ staggering unfunded liability down from $43 billion.
The commission in its report wrote that the General Assembly should “consider the issuance of pension obligation bonds as quickly as practicable as a financing instrument to reduce the state’s pension costs, as long as there are favorable market conditions and the issuance of such POBs is a component part of a broader plan to reduce the pension systems’ unfunded liabilities.”
John Filan — director of the state’s Office of Management and Budget who sat on the 15-member commission made up of lawmakers and representatives of labor and the pension boards — cautioned this week that the administration is far from proposing such a financing.
Any pension deal would hinge on interest rates and on whether labor leaders and management could agree on a bill before it was presented to lawmakers. The commission also did not attach a dollar amount to its recommendation.
“It’s something the commission said we should take a look at if the market is right and it’s part of a larger package that labor and management can agree on,” Filan said in an interview following his discussion of the state’s pension obligations at a public finance conference here sponsored by the Information Management Network.
The commission endorsed six recommendations, including the suggestion that the state target revenue growth that tops a defined figure to provide additional funding for the pension systems, and consider the sale of assets with any profits going to the pension systems. The General Assembly should consider creating incentives for employees to continue working beyond the year they would achieve their maximum pension percentage, the report said, and lawmakers also should explore new revenue sources dedicated to reducing the pension systems’ debt.
The unfunded liability continues to represent one of the state’s most significant financial burdens. When Blagojevich took office in early 2003, the liability had grown to $43 billion from $19 billion in 1995, when the General Assembly approved a long-term amortization payment plan. The approval of additional benefits, early retirement incentives, pension payment holidays, and investment losses were blame for the growth.
The pension deal brought the liability down and a series of pension benefit reforms approved by the General Assembly earlier this year will shave another 8% off the long-term costs of paying off the liability, according to state estimates. The reforms also imposed a restriction that any future benefit increases be linked to a source of funding.
The administration has come under fire for reducing its contribution to $1.4 billion from $2.5 billion in fiscal 2006 and by another $1 billion to $1.8 billion in fiscal 2007. State officials have defended the change as being reflective of the savings associated with the pension reforms and revised amortization schedule.
The governor’s critics believe the state is shortchanging the systems. The amortization plan is still scheduled to bring the state up to a 90% level by 2045. The plans are now funded at a level of about 60% compared to 48% in 2003.
Filan defended the state’s handling of pension funding, noting in his appearance on the panel that the state will pay $7.5 billion towards the systems in fiscal years 2004 through 2007. That figure represents 7.29% of state resources.
The state contributed $5.8 billion, or 6% of resources, during the administration of former Gov. George Ryan, and $2 billion, or 3.28% of resources, and $3.4 billion, or 4.3% of resources, during the first and second terms, respectively, of former Gov. Jim Edgar. The state would have had to contribute a total of $13 billion during the current administration absent the pension bond issue in 2003.
“I think the state’s commitment towards making progress on this is very substantial,” Filan said. “The notion that the pension systems have not improved … is simply not correct.”
Whether the General Assembly would embrace additional borrowing is uncertain. Blagojevich, a Democrat, enjoys a Democratic majority in the House and Senate, but his relationship with the party’s legislative leaders has been shaky.
Illinois’ $10 billion pension deal, although winning legislative approval in 2003, a year later sparked a backlash of criticism over both the level of debt and the finance team’s decision to restructure some existing debt, pushing off principal repayment.
The finance team defended their actions as necessary to deal with multibillion dollar deficits in the first two years of the administration without tax increases or service cuts. Lawmakers responded last year by approving a series of debt reforms that limited issuance and required level principal repayment, required some competitive bidding on a portion of annual debt issuance, and banned consulting fees based on a percentage of business won.
The latter was due to outrage over the disclosure that the lead book-runner Bear, Stearns & Co. paid a prominent Republican consultant Robert Kjellander $800,000, although neither Bear Stearns, lawmakers, or state officials could say exactly what Kjellander did to earn the payment. Questions were also raised over how firms in the underwriting team won their spots. Bear Stearns and state officials have disclosed that the deal is under state and federal investigation.
The Senate Republicans’ representative on the commission, Sen. John Jones, voted against the recommendations because they were voted on as a package and he opposed the borrowing plan, according to Senate GOP spokeswoman Patty Schuh.
“We would oppose any additional borrowing given the problems the state already has and the fact that the governor just raided billions of dollars from the pension,” she said.
With a gubernatorial election looming next year, partisan bickering is heating up. Senate Republicans recently called on the Securities and Exchange Commission to investigate whether the Blagojevich administration included misleading information regarding the state’s financial condition in the offering documents for a $300 million general obligation bond deal that sold in September.
The offering statement informs readers that the pension reforms adopted earlier this year would result in a lowering of Illinois’ required annual contribution to the underfunded pension systems over the next 40 years.
The document cited estimates provided by the independent actuary of the General Assembly’s bipartisan Commission on Government Forecasting and Accountability that notes the combination of reduced benefits and revised contributions would result “in a range of net savings totaling approximately $3 billion over” the 40-year term. The commission has called the information misleading and said the state should have included the potential negative impact of the reforms.
Several investors said they did not believe the information to be material to whether they would purchase the bonds, a threshold that is used to determine whether an issuer has been fraudulent in its disclosure. Several lawyers, however, have cautioned that the SEC must make that determination.
Filan was noncommittal this week on whether the state would alter its disclosure in future offering statements. “We review our disclosure as a normal course of business every time we have a new deal,” he said.
