Illinois pension debt

Illinois Gov. Rauner’s Municipal Bankruptcy Plan Faces Obstacles

Last week, Illinois Gov. Bruce Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

The idea is that even if towns and cities don’t follow through, the threat of bankruptcy could give them leverage in pension negotiations with workers.

But the proposal, if it ever comes to fruition, will face legal and political obstacles, according to an analysis by Bond Buyer:

Illinois statutes don’t grant any general legal authority allowing for a Chapter 9 filing, said municipal bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC. The one exemption is for the Illinois Power Agency.

The state offers assistance for stressed communities with a population under 25,000 through its Fiscally Distressed City Act. The local government must ask the General Assembly for the appointment of a special commission to consider whether the municipality meets the act’s criteria. If approved, the municipality can qualify for state financing assistance.

Spiotto said the establishment of a Chapter 9 provision could offer some benefits, but he cautioned it should be used as a last resort when all alternatives are exhausted. Any statute best serves a state and its local governments when it includes additional layers of review and is written with market access in mind.

[…]

Municipal Market Analytics partner Matt Fabian said given unions’ historically strong influence on the Democratic majority in the state, he thinks a Chapter 9 law faces a dim chances.

“In Illinois, it’s unlikely that a bankruptcy law would be passed, and even more unlikely that what might be passed would protect bondholders over employees,” Fabian said. “The cost of capital would very likely rise.” Illinois’ local governments already pay interest rate penalties for the financial distressed of the state government.

Read the full Bond Buyer piece here.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Illinois Gov. Rauner Proposes Bankruptcy As Strategy for Taming Municipal Pension Debt

Illinois Gov. Bruce Rauner didn’t touch on pensions during his State of the State address this week.

But in a list of policy proposals handed out to lawmakers, Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.

Even if towns and cities didn’t act, the threat of bankruptcy could give them leverage in pension negotiations with workers.

From the Chicago Tribune:

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

[…]

Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to “extend to municipalities bankruptcy protections to help turn around struggling communities” mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a “level field” when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Chicago Mayor Rahm Emanuel was quick to dismiss the idea that the city would use such a tactic to lower its pension costs, according to the Tribune.

Video: How Might Bruce Rauner Tackle Illinois Pensions?

How might Bruce Rauner attack the state’s pension debt? Pension360 has covered his changing views on reforms.

In this video, Illinois Policy Institute CEO John Tillman talks about the state’s pension debt and how Rauner might handle it.

Video credit: The Wall Street Journal

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Judge in Illinois Pension Lawsuit Rejects Request For More Time

Lawyers representing groups challenging Illinois’ pension reform law asked for more time to file arguments this week. The request would have extended the deadline by a month.

The judge presiding over the case rejected that request on Thursday.

From the Associated Press:

The Illinois Supreme Court has rejected a request for an extra month to file arguments by lawyers contesting the law that overhauls a state pension program that is $111 billion in debt.

Attorneys for state employees, retired teachers and others who contest the constitutionality of the law said they needed until March 16.

But the court denied the motion Thursday because it had already agreed to fast track the appeal of a lower court’s ruling. The case is scheduled to be heard in March.

The judge also rejected a request from outside groups who wanted to file additional briefs. From Pantagraph:

A lawsuit seeking to overturn changes to the state’s employee pension systems remains on a fast track.

In a decision issued Thursday, the Illinois Supreme Court denied a request from outside groups and individuals to file briefs in the case, saying the additional filings could put the court’s plan to hear the case during its March term in jeopardy.

Attorneys representing state retirees and employees who would be affected by the Legislature’s controversial 2013 pension overhaul supported the court’s decision.

Questions Surround Bruce Rauner’s Pension Proposal, But Rauner To Be Mum on Specifics Until Court Ruling

Illinois’ pension reform law currently sits in legal limbo. But if the Supreme Court deems it unconstitutional, all eyes will shift to Illinois Gov. Bruce Rauner, who will need to propose a new solution to the state’s pension woes.

On the campaign trail, Rauner supported a plan to shift workers into a 401(K)-style plan. He has since softened his stance a bit, but hasn’t offered much in the way of clarification as to the specifics of his plan.

From the Chicago Tribune:

With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

[…]

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

Would Rauner’s 401(k) plan work? Would it be constitutional? What are the specifics? And is that still his plan? From the Chicago Tribune:

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Illinois is expected to make $6.6 billion in pension payments in fiscal year 2015. The state is saddled with over $100 billion of pension debt.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Illinois Pension Contributions To Rise By $700 Million in 2015

Illinois’ payments to its pension systems will jump by almost $700 million in 2015 after three of its state-level systems lowered their assumed rates of return.

From the Journal-Standard:

The total state contribution to the five state-funded pension systems next year is $7.537 billion. That’s an increase of more than $680 million over the amount the state had to contribute to the systems in the current fiscal year.

The numbers are compiled by the pension systems, but were reviewed and contained in a report by the state actuary issued Wednesday by Auditor General William Holland’s office.

The increase for next year’s budget is sharply higher than the increase in the current state budget. This year, lawmakers only needed to find an additional $100 million to meet the pension obligations. It was the smallest increase in years after a series of $1 billion hikes.

No reason was identified for the increase, although the report did note that three of the five systems lowered the estimated rate of return they expect to receive on their investments. Pension systems get their money through employee contributions, state contributions and investment income. When the systems expect to make less on their investments, the difference is usually made up with higher state contributions.

Cheiron, the state’s actuary, said last year it thought the three biggest pension systems were being overly optimistic about how much investment income they could earn. Since then, the Teachers Retirement System, State Universities Retirement System and State Employees Retirement system, all cut their expected rate of return on investments.

The Judges Retirement System and General Assembly Retirement System had previously cut their estimates.

Illinois shoulders approximately $111 billion in pension debt.

Is Illinois America’s Greece?

A recent piece in The Economist wonders whether Illinois’ pension debt might lead the state down the same path as Greece.

From the Economist, and re-published by Business Insider:

Illinois is like Greece in one obvious way: It overpromised and underdelivered on pensions and has little appetite for dealing with the problem, says Hal Weitzman of the University of Chicago Booth School of Business.

This large Midwestern state, with a population of 13 million (Greece has 11 million, though a far smaller GDP than Illinois), has the most underfunded retirement system of any state and the largest pension burden relative to state revenue. It also has the highest number of public-pension funds close to insolvency, such as the one looking after Chicago’s police and firemen.

[…]

The state devotes one in four of its tax dollars to pensions, which is more than it spends on primary and secondary education.

Mainly as a result of this gargantuan pension debt, Illinois’s bond rating is the lowest of all the states, which means dramatically higher borrowing costs.

When the state government failed to address pension underfunding in its budget for 2014, two credit-rating agencies, Fitch and Moody’s, cut the state’s bond rating, which in Moody’s case put Illinois on a par with Botswana. (An incensed editorial in the Chicago Tribune asked what Botswana had done to be so insulted.)

The main reason for the pension debacle is decades of underfunding. “Everything was always done with a short-term view,” says Laurence Msall, head of the Civic Federation. “Unique to Illinois is the idea that you don’t have to pay for pensions and you don’t have to follow actuarial recommendations.”

Whereas most other states follow the rules set by the Governmental Accounting Standards Board (GASB), which, however imperfect, require some budget discipline, Illinois has mostly ignored them.

Read the entire piece here.

Bruce Rauner Named Most Important Player in U.S. Pensions

Institutional Investor magazine has released its list of the 40 most influential people in U.S. pensions. Topping the list is the man who now governs a state with one of the worst pension problems in the country: Bruce Rauner.

From Institutional Investor:

Republican Bruce Rauner, the victor over Democratic incumbent Pat Quinn in the recent Illinois gubernatorial race, may regret he ever wished to win elective office. Rauner, onetime chairman of Chicago private equity firm GTCR, has had no real profile on retirement policy but finds himself staring at what may be the most serious pension mess among the states.

As of June 30, 2014, Illinois’s pension debt had reached $111 billion; Moody’s Investors Service reported in September that the state’s three-year average pension liability over revenue was 258 percent, five times the median percentage for all 50 states.

In 2013, Quinn persuaded the legislature to pass a bill raising the retirement age and cutting cost-of-living increases for beneficiaries. But the Illinois constitution holds that pensions cannot be “diminished,” and a coalition of public employee unions sued. And on November 21, Sangamon County Circuit Judge John Belz found the law unconstitutional, declaring, “Protection against the diminishment or impairment of pension benefits is absolute and without exception.”

Depending on various appeals, Rauner, 57, could try to implement his campaign agenda for pensions, which includes capping the current program and shifting members to a defined contribution plan — though he has begun to talk of just shifting new employees to avoid legal problems. Rauner has said he’d seek to keep benefits from rising faster than inflation and would eliminate employees’ ability to receive large pay hikes before retirement to beef up their pensions.

The odds of pushing these reforms through a Democratic-controlled state senate remain long, made worse by allegations that Rauner (and separately, Chicago mayor Rahm Emanuel [No. 4]) accepted contributions from executives affiliated with firms that manage Illinois pension plans. Rauner has not publicly responded to the allegations.

The ranking clearly reflects not what Rauner has already done, but the power he will have in the coming years. If the Illinois Supreme Court strikes down the state’s pension reform law, lawmakers will have to start from scratch – and Rauner will be at the helm.

Photo By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Illinois Asks Supreme Court to Fast-Track Pension Reform Hearing

Illinois’ Attorney General on Thursday requested that the state supreme court hold hearings on the state’s pension reform law as soon as January and no later than March.

From Reuters:

Attorney General Lisa Madigan filed a motion to accelerate the state’s appeal of a Nov. 21 Sangamon County Circuit Court judge’s ruling that the law aimed at easing Illinois’ huge pension burden violated protections in the state constitution for public worker retirement benefits.

“A prompt resolution of those issues is critical because the state must either implement the act, or in the alternative, significantly reduce spending and/or raise taxes,” the motion stated.

At stake is an approximately $1 billion cut in Illinois’ contribution to four of its pension systems in fiscal 2016 under the law. Republican Governor-elect Bruce Rauner, who takes office next month, has a Feb. 18 deadline to present a budget to the Democrat-controlled legislature, which has until May 31 to pass the spending plan with simple majority votes. A three-fifths majority vote on bills would be needed after that date to have a budget in place by July 1, the start of fiscal 2016.

[…]

The reform law was enacted in December 2013 to help save Illinois’ sinking finances. It reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits salaries on which pensions are based. Employees contribute 1 percent less of their salaries toward pensions, while contributions from the state, which has skipped or skimped on its pension payments over the years, are enforceable through the Illinois Supreme Court.

Illinois had $104 billion of unfunded pension liabilities at the end of fiscal year 2014.

Illinois Borrowing Costs To Rise In Wake of Ruling Overturning Pension Reform

Illinois already has the lowest credit rating of any state in the country. But it could see its borrowing costs rise further after a court law week overturned the state’s pension reform law.

From Bloomberg:

Illinois bonds are set to weaken after a judge struck down a plan to address the biggest pension deficit among U.S. states, according to Wells Capital Management.

Illinois 10-year obligations yield 3.68 percent, or about 1.4 percentage points above benchmark municipal debt, data compiled by Bloomberg show. At that yield spread, the smallest since July, the debt isn’t attractive given the legal developments and the potential financial strain, said Robert Miller, who helps oversee $35 billion of munis at Wells Capital.

The lowest-rated U.S. state plans to appeal the Nov. 21 ruling that its constitution protects cuts to public pensions, which face a $111 billion shortfall. The decision marks the latest challenge to emerge for the incoming governor, Bruce Rauner, who takes office Jan. 12. He also has to grapple with a $2 billion budget hole from expiring increases to income-tax rates.

“You would expect on this news that spreads would widen out,” said Miller, who’s based in Menomonee Falls, Wisconsin. “The pension is definitely a looming problem and something they need to deal with.”

Some Illinois bonds weakened after last week’s pension decision. Taxable debt maturing in June 2033, the state’s most frequently traded securities, changed hands Nov. 21 at yields as high as 5.42 percent, Bloomberg data show. The debt’s spread to Treasuries was about 0.3 percentage point more than the average for the past five months.

If history’s any guide, the court decision will keep inflating the state’s relative borrowing costs. In July, Illinois yields surged after a separate court ruling signaled the 2013 pension fix might be in jeopardy. The law would save an estimated $145 billion over 30 years by reducing cost-of-living adjustments and raising the retirement age.

The state is appealing the circuit court’s decision to the Supreme Court.

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