For Bond Buyers, Illinois is “Problem State” Until Pension Limbo Resolved

Illinois map and flagIllinois has been in a state of pension limbo since July, when a state Supreme Court ruling on healthcare premiums hinted that the state’s pension reform law would be struck down by the courts.

Now, bond buyers are watching closely how the Supreme Court rules on the state’s pension reform law – but until then, investors are marred in “uncertainty” and are calling Illinois a “problem state”.

From The Street:

Municipal debt investors are watching the appeals process that will decide whether or not the State of Illinois’ pension reform bill ends up in the wastebasket, which would send the Land of Lincoln back to square one in its attempts to battle its pension funding crisis.

“There’s so much uncertainty there,” Daniel Solender, the lead portfolio manager for municipal bonds at investment manager Lord Abbett & Co., said by phone Wednesday. “It’s hard to know what the right valuation is [for the state’s bonds].”

So far, investors are waiting and watching. Solender noted that there hasn’t been much trading in Illinois’ bonds in response to a Nov. 21 Circuit Court decision that said the reform bill was unconstitutional. If the Illinois Supreme Court upholds that decision, Solender expects a negative effect on the state’s bond values.

“For investors to get comfortable, there has to be some idea of a plan [for pension reform], and there doesn’t seem to be one [now],” he said.

Still, he is confident that Illinois has time to work out its pension issues one way or another.

Solender and other sources are looking optimistically to Governor-elect Bruce Rauner, a Republican, to address the issue. Rauner will replace Pat Quinn, a Democrat, on Jan. 12.

Illinois’ unfunded pension liability has ballooned to $111.2 billion, according to a November report by the Illinois Commission on Government Forecasting and Accountability. The Teachers’ Retirement System accounts for about half of that at $61.6 billion, the report said.

A June 24 report by Standard & Poor’s revealed that Illinois has, by far, the lowest level of pension funding in the country at 40.4% funded, followed by Connecticut (49.1%).

As part of a Dec. 1 panel in New York City that discussed municipal debt restructuring, William A. Brandt Jr., president and CEO of Development Specialists Inc., said that Illinois holds 43% of the public pensions in the U.S. According to Brandt, who is also the chair of the Illinois Finance Authority, those amount to some 652 public pensions.

“Illinois is your problem state,” he warned.

Moody’s gives Illinois’ credit an A3 rating – the lowest of any state.

Detroit’s Pension Problems Not Over Yet – As Costs Remain High, City’s Payments Remain Small


Judge Steven Rhodes approved Detroit’s bankruptcy plan last week. But he used the moment to re-iterate that Detroit isn’t out of the water yet.

One thing in particular worries Judge Rhodes, who said his “greatest concern…arises from the risks that the city retains relating to pension funding.”

Retirees have accepted benefit cuts, but pension problems still linger. Among them: Detroit’s unwillingness to make full payments to its pension systems. From the New York Times:

Documents filed with his court show that Detroit plans to continue its past practice of making undersize pension contributions in the near term while promising to ramp them up in the future. This approach is by no means unusual; many other cities and states do it, on the advice of their actuaries. Detroit’s pension fund for general city workers, now said to be 74 percent funded, is scheduled to go into a controlled decline to just 65 percent by 2043; the police and firefighters’ fund will slide to 78 percent from 87 percent. After that, the city’s contributions are scheduled to come roaring back, bringing the plan up to 100 percent funding by 2053.

This will work, of course, as long as the city has recovered sufficiently by then. The state’s contribution to the grand bargain lasts until 2023, with the foundations and the art museum continuing to kick in until 2033. Eventually the payouts will begin to shrink some as current retirees fall off the rolls. Active workers have already shifted to a hybrid pension plan, and they will start to bear most of the new plan’s investment risk. But the city faces decades of payments for retirees under the old plan.

“The city has the potential to be saddled with an underfunded pension plan,” warned Martha E.M. Kopacz, the independent fiscal expert Judge Rhodes hired to help him determine whether Detroit’s exit strategy was feasible.

Ms. Kopacz, a senior managing director with Phoenix Management Services, did find it feasible, but expressed many reservations, especially about pensions.

“The city must be continually mindful that a root cause of the financial troubles it now experiences is the failure to properly address future pension obligations,” she said in her report. Judge Rhodes said on Friday that he agreed.

Despite benefit cuts, the city’s pension costs are still high. Since the city isn’t paying full contributions, even more pressure will be put on investment returns to cover costs. From the Times:

Even after the benefit cuts, the city’s 32,000 current and future retirees are entitled to pensions worth more than $500 million a year — more than twice the city’s annual municipal income-tax receipts in recent years. Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.

Judge Rhodes’ full opinion can be read here.

Atlanta Wins Case Over Employee Pension Contributions

Atlanta skyline

A key portion of Atlanta’s 2011 pension reforms have been upheld in court, the city said Tuesday.

In 2011, the city increased employee contributions to the pension system by 5 percent – a move which workers said violated their contracts. But a judge has sided with Atlanta on the matter.

From Governing:

A Fulton County Superior Court judge has upheld Mayor Kasim Reed’s historic 2011 pension reform, siding with the city in a class-action lawsuit brought by employee unions, the mayor’s office announced Tuesday.

A handful of union workers representing Atlanta fire, police and city employees sued the city last November, claiming the pension reform that forced employees to pay 5 percent more toward their retirement benefits was in violation of their contract and, therefore, unconstitutional. Such an increase, the employees argue, must also increase their pension benefits.

But Reed and city officials argued — and Judge John Goger agreed in his ruling — that the change is allowed under Georgia law. The mayor, who championed the reform in his first term, has long said overhauling the employee retirement benefits program was critical to the city’s financial stability, and will help Atlanta pay off a $1.5 billion unfunded pension liability.

Without increasing contributions, the city can’t afford to pay the full benefits eventually owed to workers, city leaders argue.

Reed and City Attorney Cathy Hampton are expected to hold a press conference on the issue Wednesday.

Atlanta City Hall, as well as Fulton Superior Court, was closed on Tuesday in observance of Veterans Day.

An attorney for the public safety unions said he hasn’t had time to review Goger’s decision. Lee Brigham said it is premature to comment on the case and whether his clients are likely to appeal.

Read more about Atlanta’s pension changes here.


Photo Credit: “Atlanta skyline” by AreJay at en.wikipedia – Licensed under Creative Commons Attribution 2.0 via Wikimedia Commons