Lawmakers discuss proposal to borrow $107B to pay down pension debt

By Dan McCaleb & Greg Bishop 
Illinois News Network

An Illinois House committee Tuesday afternoon began exploring the idea of borrowing more than $100 billion to both invest and to help pay down the state’s $130 billion unfunded pension liability.

Under questioning, the proposal’s author admitted there is risk to taxpayers.

During a fact-gathering hearing of the House Personnel and Pensions Committee, state Rep. Rob Martwick, D-Chicago, said he’s not sure if the idea is viable or not, but it’s worth investigating.

“I’m not smart enough to know that,” Martwick said. “These matters are far beyond my expertise.”

Martwick has proposed issuing $107 billion in bonds to help pay down the state’s $130 billion unfunded pension liability, which he said could save the state billions of dollars in the long run through investments.

But some Republicans already have criticized the idea, saying it would be the largest bond issuance in world history.

“Think about that,” state Rep. Grant Wehrli, R-Naperville, told Illinois News Network Monday. “Illinois, that can’t pay its bills now, is going to put up more debt on our credit card in hopes of solving our pension crisis. I’m open to ideas, but simply bonding out $107 billion is massively irresponsible.”

Martwick said at Tuesday’s hearing that the state is going to have to pay pensioners one way or another. How that’s going to happen is the question.

“How do we manage that cost? At what cost do we repay that debt?” he asked.

Professor Runhuan Feng with the Department of Mathematics at the University of Illinois said under the proposal, the state would issue 27-year, fixed rate serial bonds to pay down the pension debt. Feng, who wrote the proposal, said his goal was to save the state billions of dollars but also have the state’s five pension systems funded at 90 percent.

“The proposoal is to distribute all the bond proceeds to the five retirement systems in order for them to meet 90 percent funding ratio immediately in 2018,” he said.

But 35.8 percent of those allocations would be deposited in a special investment fund for each system until 2045, Feng said. The state would pay down the bonding debt in annual payments of $8.5 billion until 2045.

Because of the investments, Feng said, the state would save $103 billion off its current obligation by 2045. The state’s current obligation is $345 billion through 2045. Under his plan, it is $238 billion.

But state Rep. Jeanne Ives, R-Wheaton, read a series of headlines criticizing Illinois for its past borrowing practices to pay off debt.

“Why are those headlines wrong?” said Ives, who’s running against Gov. Bruce Rauner in the Republican primary for governor. “These are very qualified, like, we’re talking bond buyers, zero hedge, … chief investment officer, Trib. These are qualified entities that understand the bond market.”

Feng said he thought the past criticism was directed at borrowing money to pay down debt, not to invest as his plan would do.

Ives then asked Feng if he’d checked with any of the credit ratings agencies to see what borrowing more than $100 billion would to the state’s rating, which is just one notch above junk status. Martwick interrupted and said further hearings would explore that topic.

Feng, who is in the state university pension system, said there would be risk to taxpayers if the rate of return on the investments doesn’t meet his expectations. Ives responded by saying taxpayers would be the ones left with the responsibility of covering the costs if the plan doesn’t pan out.

Rep. Scott Drury, D-Highwood, pointed out that state actuaries have overestimated investment return rates in the past.

“One of the issues we’ve had with our pension systems is that the actuaries have assumed these returns on the pensions that have turned out to not be correct,” Drury said. “That puts us way more into debt.”

While the state says its pension systems are underfunded by $130 billion, private actuaries say it could be more than $200 billion because of the inflated return rates the state uses.

Drury and other lawmakers also worried the General Assembly could waste an entire year talking about what could amount to just a theory without focusing on real solutions to tackle the 3 percent compounded annual interest retirees get.

Rep. Grant Wehrli, R-Naperville, asked that if taxpayers were asked to take a risk, should pensioners not give something too? Martwick said he’d be willing to discuss options in the future.

Rep. Steven Reick, R-Woodstock, said even if Weng’s plan works to pay down current debt, it doesn’t fix the fundamental problems with the overly generous pensions systems,

“We’re still accruing a 3 percent annual COLA (cost of living adjustment). We’re still doing the kinds of things that are putting us behind the eight ball now,” Reick said. “We’re stopping at a point in time but we’re starting back up again doing the same things that got us here in the first place.”

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