Tag: Aneesh Bafna

5 THINGS WRONG WITH ILLINOIS HOLDING 30% OF U.S. PENSION BOND DEBT

Mary Pat Campbell

Link: https://www.illinoispolicy.org/5-things-wrong-with-illinois-holding-30-of-u-s-pension-bond-debt/

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Excerpt:

Pension obligation bonds, like payday loans, are a sign of mismanaged finances. Illinois not only leads the nation for using that risky debt, it owes the bulk of it.

It is bad Illinois has the nation’s worst pension crisis, but state politicians have made it worse by using risky debt to delay the day of reckoning, and done so to the point that Illinois now owes 30% of the nation’s pension obligation bonds.

….

In 2013, Illinois took a significant step towards addressing the pension crisis by passing Public Act 98-0599. This bill protected any benefits that had already been earned by employees while it amended future benefits. The bill increased the retirement age, replaced 3% compounding annual raises with cost-of-living adjustments tied to inflation and capped maximum pensionable salaries. While not a solution, this bill provided a responsible roadmap addressing the financial issues in the pension system while preserving already earned benefits.

Unfortunately, the bill was declared unconstitutional by the Illinois Supreme Court in 2015 because it was interpreted as changing promised future benefits for pension recipients, even though this could potentially result in financial ruin for Illinois. As a result, a constitutional amendment is needed to allow changes to future pension benefits.

Author(s): Aneesh Bafna

Publication Date: 10 Sept 2021

Publication Site: Illinois Policy Institute

5 THINGS WRONG WITH ILLINOIS HOLDING 30% OF U.S. PENSION BOND DEBT

Mary Pat Campbell

Graphic:

Excerpt:

It is bad Illinois has the nation’s worst pension crisis, but state politicians have made it worse by using risky debt to delay the day of reckoning, and done so to the point that Illinois now owes 30% of the nation’s pension obligation bonds.

Pension obligation bonds are a form of debt used by state or local governments to fund their pension deficits. Illinois holds $21.6 billion of the nation’s $72 billion pension obligation bond debt.

The theory behind the bonds is that if a pension system can borrow money at a lower rate by selling bonds and earn a higher percentage from investing those funds, then it has realized a net gain using them. The issue is the gamble rarely works out that way, as the Government Finance Officers’ Association points out. Pension obligation bonds place taxpayer money at risk and often leave governments saddled with more debt rather than less. They often do not achieve a high enough return to justify their use.

Illinois’ five statewide retirement systems hold $144 billion in debt, according to official state reporting based on optimistic investment estimates. But Moody’s Investors Service says the true debt is $317 billion, which it calculates using more accurate methods common in the private sector.

Author(s): Adam Schuster, Aneesh Bafna

Publication Date: 10 Sept 2021

Publication Site: Illinois Policy Institute