Pritzker administration pitches Illinois pension bonds and reamortization
CHICAGO — Take more time and borrow more money: those are among the components of Illinois Gov. J.B. Pritzker's plan to deal with the state's $133.7 billion of unfunded pension liabilities.
Illinois would extend its existing payment schedule for the pension liabilities by seven years and use a combination of asset transfers, $2 billion in bonding, and supplemental contributions to deal with the massive pension gap under a plan the Pritzker administration laid out Thursday.
A temporary pension buyout program would also be extended.
“Collectively, these five actions will expand our tax revenue base, invest in priorities that will grow our economy, and we’ll be able to put our pensions on a sustainable path that keeps our promises to retirees,” Dan Hynes, a deputy governor, said during a speech to the City Club of Chicago.
“No solution to Illinois’ pension crisis will be easy,” said Hynes, a former state comptroller. “If we’re honest with ourselves, each choice involves sacrifice; each path involves pain.”
The pain does not extend to employees and retirees. The administration is not proposing any wage or benefit cuts or pension policy reforms. The Illinois Supreme Court has shot down benefit cuts and Pritzker opposes putting a constitutional amendment on the 2020 ballot to loosen the state constitution's pension clause.
The timing of the plan remains tricky because some pieces would take time to put in place and Illinois has little breathing room for missteps, with two of its bond ratings hanging on the final notch above speculative grade. Several market participants said they were still digesting the news and details were sketchy.
Hynes said the bond issue still must be evaluated to ensure it makes financial sense and the state is sensitive to the need to create a level of comfort for rating agencies and “to make sure the rating agencies understand where we are heading.”
The agencies have warned Illinois to tread cautiously on pension contributions, the amortization schedule and borrowing.
“In general, any efforts to boost current contributions would be credit-positive for the state, while efforts to defer or reduce contributions for fiscal relief would revive questions about pension plan sustainability,” Moody’s Investors Service said in a recent report. Moody’s rates Illinois Baa3 with a stable outlook.
The administration is banking on the plan to potentially trim the roughly $9 billion fiscal 2020 contribution by as much as $800 million, according to sources. Rating agencies may have a tough time swallowing any plan to extend the amortization schedule and cut near-term contributions until all pieces of the plan are in place and there’s certainty that it will result in material improvement in the funded ratio, now at 40.1%.
Under the proposal, the state would extend the current pension buyout program now underway, which is projected to save $400 million in the current budget, and earmark a new dedicated revenue source of $200 million annually from a graduated tax to supplement statutory contributions. To enact, lawmakers must agree to put a constitutional amendment on the 2020 ballot and then voters must approve the shift from a flat tax.
Pritzker on Monday announced a task force to examine potential assets that could be transferred to the pension system similar to what’s under consideration by a handful of states. New Jersey has transferred it lottery.
The state would issue $2 billion of pension obligation bonds. Bond proceeds would go directly into the funds and would be used only for paying down the liabilities. “No skimming off the top to pay this year’s pension payment. No using bond proceeds to pay for operating costs,” Hynes said. No additional details were immediately available.
Former Gov. Rod Blagojevich won approval for a $10 billion of general obligation pension bonds in 2003 with $2.7 billion going to cover near-term contributions and former Gov. Pat Quinn won approval to issue short term bonds for $3.5 billion in 2010 and $3.7 billion in 2011 to cover near-term contributions. All were sold as taxable and all masked the state’s operating deficits.
“We would look to move forward with this bond only if the calculation makes sense for taxpayers — and if the interest rates are lower for the bond than what we are currently paying for the pension debt,” Hynes said.
Finally, the state would extend the current 50-year amortization schedule by seven years. The target of reaching a 90% funding ratio would remain intact. The administration defends plans to re-amortize the schedule put in place in 1995 with a back-loaded ramp.
“This plan was well-intentioned, no doubt. And at first, it seemed to work — the systems were 70% funded in 1997,” Hynes said. “But there were hidden flaws, and unanticipated hiccups” as markets crashed and members lived longer.
The original architects calculated that in 2020, payments would total about $4.9 billion for pensions, not the $9 billion now anticipated. Contributions consume about 20% of the state’s general fund budget which for fiscal 2019 totaled $38.5 billion. “It’s unsustainable,” Hynes said.
During questioning, Hynes acknowledged the risk to the state’s rating from the borrowing and re-amortization. Hynes said the hope is that rating agencies “will give credit” to the state for the “new functionality in Springfield,” where the Democratic governor enjoys Democratic majorities.
“You have to move the needle with cash and asset infusion,” and Hynes said he believes the new dedicated revenue will be “warmly” received by rating analysts. “I believe the rating agencies are going to say ‘let's see how this works,’" Hynes said.