October 27, 2012


Illinois Debt Takes Toll, Study Finds (MARY WILLIAMS WALSH, October 24, 2012, NY Times)

The group, led by the former Federal Reserve chairman, Paul A. Volcker, and the former New York lieutenant governor, Richard Ravitch, recommended an overhaul of Illinois' budgeting practices, to make it harder to kite money from year to year and raid special-purpose funds. It also warned that tax increases may be in store. [...]

Nearly two-thirds of the Illinois state government's $58 billion in direct debt consists of bonds the government issued to cover retirement payments for workers, including a $10 billion pension obligation bond that broke all previous records in 2003.

Yet despite all that borrowing, Illinois' public pension system is still in tatters. In fact, its total pension shortfall is conservatively estimated at $85 billion. Recent changes that raised the retirement age for new workers and limited the pensions that future workers can earn have not reduced the existing obligations.

The task force said that further reductions in pension benefits appear inevitable, though legally difficult, because the state has promised more than it can deliver.

While many states have heavy debt burdens and unfunded pensions, the task force warned that Illinois' problems had been building for decades and were advanced. The state was "insolvent" even before the financial crisis hit in 2008, the report said, but that was hard to detect because "budget gimmicks became a standard practice."

During the 2001 recession, for instance, the state started issuing a type of short-term debt permissible only during emergencies, and within certain limits. But even after the recession, the emergency borrowing continued. The money was used to pay overdue bills.

The task force noted that Gov. Pat Quinn had inherited the insolvency from the previous governor, Rod R. Blagojevich, who is serving a prison sentence for corruption. The $10 billion pension obligation bond was issued on Mr. Blagojevich's watch, and prosecutors said at his trial that he had used the transaction to raise campaign money in a pay-to-play scheme. The state paid a total $76.3 million in issuance fees, but the pension fund ended up worse off than ever, because bondholders were promised that the state would divert its pension contributions to pay their interest.

Mr. Quinn has been trying to push through some fiscal reforms, the report said, but he was running into intense opposition at nearly every turn. In August he warned that by 2016, Illinois will be paying more for public pensions than for education, and he called back the legislature for a special pension session. But lawmakers rejected his proposals.

Time appears to be running out for a relatively painless fiscal reform, the task force said.

At some point you just have to abrogate some significant portion of the existing pension obligation.
Posted by at October 27, 2012 9:18 AM

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