Bloomberg News

Volcker-Ravitch Study Says Illinois Pensions Face Insolvency

October 24, 2012

Illinois’s pensions, the worst funded in the U.S., are “destined for insolvency” unless the state overcomes its politicized budget process, according to a report from a group headed by Paul Volcker and Richard Ravitch.

The fifth-most-populous state may also have a jobless rate at 6 percent or more through at least 2019, according to a study from the State Budget Crisis Task Force, a group that includes policy analysts and politicians that was formed in 2011 to examine threats to fiscal sustainability. Volcker, a former Federal Reserve chairman, and Ravitch, a former lieutenant governor of New York, are co-chairmen of its advisory board.

“Illinois is unquestionably in more serious shape than any other single state, because of all the years of issuing pension bonds and the deficits they dealt with by borrowing money,” Ravitch, 79, said in a telephone interview before the report was released.

State and local governments nationwide face as much as $3 trillion in unfunded public-employee retirement costs after the 18-month recession that ended in 2009, according to the report. By fiscal 2015, pension costs could take up one-fourth of Illinois’s resources, the study shows.

State lawmakers failed to advance any measures in a special session Aug. 17 aimed at addressing $83 billion of unfunded pension liabilities. Citing retiree obligations, Standard & Poor’s in August cut the state’s credit one level to A, sixth- highest, and Moody’s Investors Service downgraded Illinois in January to A2, its lowest rating for a state.

Gimmick Culture

Illinois’s retirement system has only 43.4 percent of assets needed to cover promised obligations, the lowest among U.S. states, according to data compiled by Bloomberg. It has borrowed $7.2 billion since 2010 to plug the gap, pushing the state’s obligation to fund the systems out to 2019 rather than making the contributions out of current funds.

“Without some type of reform that reduces costs going forward, the systems appear destined for insolvency,” the task force wrote in the report. “The culture of budget gimmickry and short-sightedness pushes costs off to the future, but eventually that will be impossible -- retirees may lose their pensions as funds dwindle.”

Illinois faces fiscal strains beyond its retirement liabilities. Though Democratic Governor Pat Quinn helped push for increases in personal and corporate income taxes in 2011, the state carried a backlog of about $8 billion in unpaid bills. Medicaid enrollment and expenditures doubled from 2000 to 2011, and costs will continue to increase, according to the report.

National Tour

Still, the shakiness of the state’s finances have made its debt a popular investment.

Investors seeking riskier assets for greater return amid the lowest interest rates in a generation have pushed down borrowing costs for Illinois and its municipalities. The extra yield demanded for 10-year debt from issuers in the state compared with AAA bonds narrowed to 1.43 percentage points yesterday, the lowest since February 2011, data compiled by Bloomberg show.

The Illinois study is the group’s second on an individual state, following last month’s report on California. The task force released a report in July analyzing California, Illinois, New Jersey, New York, Texas and Virginia.

“I never thought that our state would get into this much trouble,” Jerry Stermer, budget director for Quinn, said today at a panel discussion in Chicago presenting the study. The pension underfunding reflects “seven decades of neglect.”

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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