By: Ted Dabrowski and John Klingner
A new proposal to pay down Illinois’ pension debt by borrowing more than $100 billion from Wall Street should be called out for what it is: reckless.
State Rep. Robert Martwick (D-Chicago) wants the state – meaning taxpayers – to borrow $107 billion so that those proceeds can be given to the state’s pension plans. Proponents of the plan say that the pension bonds would actually save the state $103 billion over the next 25 years.
Martwick’s plan also includes a voluntary COLA buyout which is also destined for failure. But it’s his borrowing plan that deserves the most attention.
Martwick’s bond deal is a non-starter for many reasons.
First, the plan does nothing to alleviate the stress that state debt is putting on the residents of Illinois. Martwick’s plan simply trades out one form of debt for another. That’s not reform by any means.
Instead, his plan would curse Illinois with a junk rating. Today, the state already has more than $31 billion in state-supported debt.
Another $107 billion in borrowing would quadruple that bond debt to $138 billion.
With so much hard debt in place, Illinois’ credit rating would suffer and its financial flexibility would be gone.
Today, investors who hold Illinois $31 billion in bonds don’t lose too much sleep over whether they’ll get repaid in the future. Sure the state’s a mess – which is why investors get such a high interest rate – but those investors know they’ll always get repaid before the pension funds do. Bondholders have a legal priority over pensioners when it comes to getting repaid by the state.
But all that would change if Illinois borrows more than $100 billion to fund its pension system. In one fell swoop, any risk of not getting paid would be shifted away from the pension systems entirely – and placed in the lap of every Illinois bondholder instead.
That means if anyone is going to get stiffed by the state going forward, its bondholders. Expect Moody’s to react to that increased risk for bondholders by punishing the state’s ratings.
And all it would take is a one-notch downgrade from Moody’s to make Illinois the first-ever junk rated state.
Second, the success of Martwick’s plan is predicated on chance. The $103 billion in interest savings the plan touts is predicated on the state borrowing at a low rate and the pension funds investing at a higher return for the next 25 years. That’s a gamble nobody can predict.
The idea of the state getting a decent interest rate on the bonds is particularly unlikely. Investors are not going to reward Illinois for its audacity.
In the end, Martwick’s plan could end up losing money for Illinois residents. (We spoke to lobbyist John Carr to get details on the plan as originally proposed by the SUAA, but he declined to share any details.)
It would be yet another example of letting politicians speculate with Illinoisans’ money, but this time with $100 billion. Illinois politicians haven’t balanced the budget in more than 15 years. They’ve brought Illinois to the brink of junk. And they created the state’s collective near-$400 billion pension crisis in the first place.
Illinoisans can’t trust their politicians to manage that money.
Third, borrowing more money does nothing to solve the state’s biggest fiscal problem: that pension costs are overwhelming the state’s ability to provide basic services.
Even taking into account the diminished benefits that Tier 2 member in Illinois receive, pension costs will continue to strangle the budget and Illinoisans wallets for another 25-plus years.
The state’s own number crunchers, COGFA, show that pensions as a percentage of the budget will continue to be above 25 percent through 2045. And that’s the rosy scenario.
That forecast assumes the pension funds can hit, on average, their 7 percent annual investment returns for the next 25 years.
It also assumes that retirees won’t keep living longer. There’s lots of assumptions that can go wrong and make things worse – which is how it’s been for the last three decades.
Martwick’s outlandish proposal signals there’s a new level of desperation coming out of Springfield. Perhaps lawmakers sense that fiscal reality is finally bearing down on them.
It’s not unlike the recent proposal by the State Board of Education to double state spending – a massive $7 billion increase – on education
These plans are unreasonable, impractical and not credible.
Illinois needs serious solutions to its crippling pension problem. And as we’ve already pointed out, 401ks going forward are key to ending the crisis, but by themselves are not enough.
Illinois has to change its constitution and work with the federal government to enact some form of bankruptcy protection. It’s the only way to both protect retirees and still allow the state to provide core services.