Illinois Explores Ways to Pay Down Pension Debts

(Bloomberg) -- Illinois needs $134 billion and may hold a yard sale to raise it.

Governor J.B. Pritzker, a Democrat who took office last month, is turning to business experts to figure out how to chip away at the massive debt in the state’s employee retirement system that’s left the government’s credit rating dangling just one step above junk. Among the options it will weigh: How to use the state’s other assets -- like buildings and roads --- to pump more money into the pensions.

No state is struggling more with its retirement obligations than Illinois, but the steps it’s exploring aren’t unprecedented. New Jersey handed its lottery system over to its pensions, ensuring that politicians won’t shortchange them as badly as they have in the past, and Connecticut has considered following suit. Arizona sold its capitol to raise cash after the last recession. And former California Governor Arnold Schwarzenegger proposed selling 11 state office buildings, though the plan was scrapped by his successor.

The creation of a panel of experts to consider such plans marks an early effort by Pritzker to contend with an issue that eluded his Republican predecessor Bruce Rauner, much of whose term was marred by a clash with the Democrat-led legislature over the budget. That divide kept Rauner from contending with the retirement system, whose debt has grown since the Illinois supreme court struck down a 2013 plan to cut benefits.

"It’s a very good sign -- I think it shows the gravity that they’re viewing the situation with," Gabe Diederich, a municipal-bond fund manager for Wells Fargo Asset Management, which oversees $39 billion of state and local debt, including some issued by Illinois.

"Investors would hope for some kind of resolution to minimize future drains on the state’s finances," he said. “It’s obviously encouraging to see that they are moving forward with this."

Long Time

Illinois’s $134 billion of pension-fund debt built up over years as the state, like many others, failed to set aside enough money to cover all the benefits that have been promised. Using more conservative investment return assumptions, Illinois pension shortfall is $250 billion.

With a court ruling that benefit cuts are barred by the state constitution, Illinois has no choice but to raise more revenue. New Jersey’s lottery transfer promised an additional $1 billion annually for its retirement system. Connecticut has fielded offers from private equity firms for as much as $2 billion for office buildings, health-care facilities and transit related properties. California’s ill-fated real estate sale would have raised $2.3 billion.

Pritzker’s task force may consider similar steps, said Michael Belsky, executive director of the Center for Municipal Finance at the University of Chicago. The state, for example, owns the James R. Thompson Center -- a 16-story glass building located in the middle of downtown Chicago. “That is a prime piece of real estate,” he said.

A call to the governor’s office wasn’t immediately returned.

But such measures would be no panacea, and privatization efforts have frequently generated a political backlash, including in Chicago, where residents were riled by the impact from a sell off its parking meters.

All of Illinois’s capital assets -- like land, buildings, and infrastructure -- were worth about $23 billion in 2017, according to its financial statements. And the state lottery fund’s revenue that year was far short of its annual pension bills.
 
"This needs to be coordinated with other efforts like revenue generation or it will have a marginal impact," Belsky said.

To contact the reporters on this story: Danielle Moran in New York at dmoran21@bloomberg.net;Claire Ballentine in New York at cballentine@bloomberg.net;Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, William Selway, Michael B. Marois

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