US - Illinois, which plans to sell $3.7bn of pension bonds next week, may seek a federal guarantee on retirement-system debts if its unfunded liabilities can’t be eliminated, according to budget documents.
Illinois's pension plans have an unfunded liability estimated at over 60%, the documents show. Governor Pat Quinn disclosed the potential need for a federal guarantee of pension debt in his $35.3bn general-fund budget on February 16, without going into specifics.
"Significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt," the document said. Or the state may raise its annual contributions, it said.
Kelly Kraft, a spokeswoman for Quinn, didn't immediately respond to an e-mail seeking comment. Colleen Murray, a spokeswoman for the Treasury Department, didn't immediately respond to a call seeking comment.
The documents underline Republicans' concern in Washington that US taxpayers may be forced to bail out public-employee pensions that have failed to set aside enough money to pay for the promised benefits. Asset values of state pension plans fell to about 76% of obligations in 2009 from 82% in fiscal 2008, according to data compiled by Bloomberg.
Republicans, who control the US House of Representatives, are backing a bill that would require state and local pensions to use more conservative assumptions than they do now to report the size of their liabilities to the federal government. The measure has drawn fire from organized labour and public officials, who say it is a way to attack unions by making their retirement benefits look unsustainable.
The estimates of the size of the shortfalls in public pension plans vary because of different methods used for calculating the costs of future benefits. The Pew Center on the States estimated last year that state pensions had $1trn less than needed to cover promised payments by the end of their 2008 budget years.
A study released in October by Joshua Rauh and Robert Novy- Marx, who teach finance at Northwestern University and the University of Rochester, respectively, said state and local pensions have unfunded liabilities of about $3.6trn, if their returns on assets were projected using Treasury discount rates to adjust for risk.
The Federal Reserve told a congressional committee in May 2009 that it was reluctant to extend guarantees to California and other municipal-market borrowers. That was one of several proposals then under consideration to help states cope with financial pressures caused by declining tax revenue.
Illinois's pension bond sale, which had been scheduled for earlier this week, was postponed two days before Quinn released his budget proposal so investors could study the spending plan. The budget, which has a $10 billion deficit, relies on an $8.75bn bond authorisation for the current fiscal year to pay off accumulated bills.
Adding your comment
We have to look at this issue from the standpoint of pension dollars were spent out of the pension fund to fund what other programs that Illinoisans have enjoyed? So yes, when we say we want Illinois taxpayers to "bail us out" it is because, over the last 30 years, Illinois taxpayers have enjoyed programs, funded directly by our pension contributions. It's their turn now to pay back what is rightfully ours. How, a pension replenishment tax, additional tollway fees, limit lottery payouts by a %, cut spending elsewhere. Over time, it took 30 years to get where we are at now, these increases should begin to fill the hole that has been dug.
Posted by: bob, 21 Feb 2011
Without the capacity to print money, Illinois seeks an end run around this pesky reality with a Federal guarantee of its bonds.
Unable and unwilling to address its structural problems except to hike taxes and stiff its creditors, Illinois, along with California and most other states, failed to plan for bad times and spent to the hilt during good times.
Should it be the responsibility of the other 49 states to backstop Illinois profligacy and general imprudence?
Perhaps more to the point, the Federal government is functionally bankrupt but for the Federal Reserve's quantitative easing that injects increasingly irrelevant fiat money. How can a bankrupt entity, as measured with generally accepted accounting principles and not government's voo-doo accounting sleights-of-hand, guarantee anything?
Posted by: Brent, 21 Feb 2011
Get the latest news direct to your inbox.
More from US
Pensions Buzz
Updating your subscription status 
This Aberdeen Asset Management hedge fund roundtable discusses what investors are looking for in hedge fund governance; lessons that have been learned from the past and how the industry is placed for the future.
The all-new Pensions and Benefits Show will be held on 12th-13th June 2013 at ExCeL, London.
The Pensions Institute provides 15 good practice principles in modelling defined contribution pension plans. These principles cover the issues such as: model specification and calibration, modelling quantifiable uncertainty, modelling member choices and modelling longevity risk.
After what has felt for many like an eternity, auto enrolment has finally arrived. As the UK's largest employers complete the process, now is an ideal time to consider some of the lessons learned so that employers with auto enrolment on the agenda for 2013, can avoid some of the pain and pitfalls that may occur along the way.
This whitepaper provides a checklist to ensure you are compliant with the new legislation.
Financial Library is a whitepapers, research and briefings distribution service that is designed to provide users a quick and easy way of keeping ahead of business and market developments.
Visitors comments Add your comment