Illinois targets bonds and longer payment schedule for pensions

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CHICAGO, Feb 14 (Reuters) – Illinois would issue $2 billion of bonds and extend its pension amortization schedule by seven years to give its budget some short-term relief from growing contributions, a top state official said on Thursday.

Deputy Governor Dan Hynes said state contributions to its five retirement funds account for 21 percent of the general funds budget, compared to just 3 percent in 1996 as state payments escalate under an existing 50-year plan to get pensions 90 percent funded by 2045.

“That’s the burden we are carrying. It’s unsustainable,” Hynes said in a speech to the City Club of Chicago.

Illinois has the lowest credit ratings among the states at a notch or two above junk due to its huge unfunded pension liability – $133.5 billion at the end of fiscal 2018 – and a chronic structural budget deficit.

Moody’s Investors Service warned in August that the state could risk a downgrade if it reduces pension contributions “to provide fiscal relief.”

Ted Hampton, a Moody’s analyst, said on Thursday it was too early in the process to comment on the pension proposals, adding however that “financial engineering” does not solve underlying pension funding challenges.

“Selling pension bonds means swapping one liability for another, while exposing the issuer to added investment performance risk,” he said.

Illinois sold taxable pension bonds totaling $3.7 billion in 2011, $3.5 billion in 2010, and $10 billion in 2003. Citing risks, the Government Finance Officers Association in 2015 issued an advisory against the practice for state and local governments.

Hynes said proceeds from the new issue would be deposited directly into the funds and not used for pension contributions or operating expenses.

His comments came just under a week before Democratic Governor J.B. Pritzker is scheduled to unveil his first state budget since taking office in January.

The governor wants to boost revenue by replacing Illinois’ flat income rate with graduated rates. That move requires voter approval to change the state constitution.

Hynes said $200 million of that new revenue would be allocated to pensions annually.

Pritzker is also looking at consolidating pension systems and exploring ways state assets could be used to boost pension funding.

Illinois’ pension contribution is projected to grow to $9.2 billion in the fiscal year that begins July 1 from $8.54 billion this fiscal year and rise to nearly $10 billion in fiscal 2022.

Reporting by Karen Pierog in Chicago
Editing by James Dalgleish

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