Debt Option #1: Front-Loading Pension Payments

Long before I was elected to the House, I’ve been talking about Illinois’ pension crisis (here, here, here and here, to name a few). Since that time, our accumulated pension debt has risen from “just” over $100 billion to somewhere in the neighborhood of $133 billion.

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Our annual payments to the 5 State plans is climbing every year as a result of the “Edgar Ramp”, a compromise bit of legislation which provides that payments to the plans will increase each year until they reach $20 billion in 2045, when the plans are supposed to be funded at 90%.

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The Center for Tax and Budget Accountability (CTBA) has suggested a proposal to resolve the pension debt crisis by re-amortizing the payment schedule, creating a level-dollar plan that CTBA says will save the state $67 billion and gets the pension systems to 70% funded by 2045. To bridge the higher contributions called for in the first several years of the re-amortization plan, CTBA suggests issuing $11.2 billion in “pension obligation” bonds. The proceeds from these bonds would be used to “front load” the payments due to the pension funds over the next 5 years, and would presumably allow the remaining payments to the fund to become a level to mildly decreasing obligation as opposed to the increasing payments under the ramp. Between 2019 and 2030, the payments to the fund would be greater than would be due under the ramp, but beyond that would stay flat and then decline. The chart below shows CTBA’s estimate of the effect of the front-loading.

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CTBA

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Without going too deeply into the weeds on this, the CTBA proposal differs from the pension bond issuance that happened under Governor Blagojevich, because the proceeds from these bonds are meant to be paid into the plans over and above the normal payment required under current law, while the Blago-bonds substituted for money which was used for other budget items and not paid into the plans (the so-called “Pension Holiday”).

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While the idea of moving to a level-payment option has attractions, there are several things which make this particular proposal a risky proposition:

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  • The proposal’s “re-amortization” plan is to achieve 70% rather than 90% funding by 2045, which keeps the plan underfunded for a longer period of time;
  • There’s no intention of achieving a higher funded ratio unless asset growth is more favorable than projected.  With current actuarial funding assumptions ranging between 6.75%-7.25%, that’s a pretty high bar that we haven’t been able to meet over the past number of years, which has led to an even higher level of unfunded debt;
  • The plan seeks to achieve “cost savings” by issuing $11.2 billion in pension obligation bonds. This is not savings; it’s nothing more than adding hard debt to the current debt and shifting of the risk of loss from the pension funds to the bondholders. The proponents are banking pretty heavily on achieving gains from investment returns higher than the interest paid out to bondholders. Given Illinois’ current bond rating, the interest rate on those bonds is likely to carry a pretty high premium. Throw in a recession, which is pretty much a certainty over the period of time that these bonds will be outstanding and you won’t even get that.

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If, between 2019 and 2030, when the level option becomes less than the payment due under current law (see figure above) Illinois can find $4 billion per year in actual budget cuts and cost savings in the operation of State government to fund the increased up-front payment, this plan may work. But given this state’s fragile fiscal situation, piling up debt with the hope that things will all work out over the next 25 years is asking an awful lot.

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One Response to Debt Option #1: Front-Loading Pension Payments

  1. Bill Sergeant says:

    Let the voters have a say , This is a Ponzi scheme , not one pensioner paid in enough to receive the benefits they are getting and the number of people receiving these pensions is increasing and they are living longer

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