Friday, June 19, 2009

Note a possible pension plan

By Bethany Jaeger
Watch for a new pension proposal that could help buy some time for the state to recover from the economic slump and free up about $2 billion during the next cash-strapped year.

Gov. Pat Quinn’s administration could propose issuing pension obligation notes, which differ from pension obligation bonds. A note is a form of short-term borrowing that would have to be repaid within five years. The state does short-term borrowing all the time. The notes could carry a lower interest rate than pension obligation bonds, which are repaid over much longer periods of time.

The idea was talked about at a recent meeting of a new pension reform task force. Rep. Roger Eddy, a Hutsonville Republican, serves on that panel of legislators, labor organizations, unions and business groups. “This has some hope,” he said.

The idea could come up this week, when the governor called legislators back to Springfield for a special legislative session.

The legislature is scheduled to return Tuesday, seven days before Illinois’ new fiscal year starts. Quinn’s special session proclamation says he urges the legislature to consider measures, particularly an income tax increase, that would result in a balanced budget, as well as measures needed to implement a major construction program and a constitutional amendment to allow voters to recall elected officials. Quinn and Senate President John Cullerton specifically mentioned House Bill 174, the education-funding bill formerly known as a “tax swap,” as a potential solution for the state to generate revenue and knock down some of the deficit and to provide some property tax relief.

House Democrats didn’t have enough votes needed at the end of May, which means it could be even harder to acquire an extra majority of votes needed now that the legislative session has stretched into June. An extra majority would require at least some Republicans. GOP leaders, however, have strongly opposed the idea of a tax increase until they see progress on government reforms, including cheaper models of Medicaid health insurance programs and ways to reduce the state’s long-term pension debt.

One of the largest pressure points on the state budget for the next fiscal year is the contribution to the public employee pension system. Illinois is supposed to pay about $4 billion. Quinn proposed skipping next year’s payment to free up about $2 billion to help fill what his office estimates will be an $11.6 billion deficit. The legislature rejected the idea of skipping the payment; however, the Democratic-approved budget only authorized $1.5 billion for the state’s contribution into the pension system. If enacted, money would have to be skimmed from other state programs to cover the full $4 billion payment, which is required by law.

The idea to issue pension notes could take some pressure off to find the extra money needed to make the full payment, according to Eddy.

With the $1.5 billion already approved, one idea would be to issue about $2.2 billion in pension notes. That would get the state to about $3.7 billion, leaving only about $300 million that the state needed to find to get all the way up to $4 billion.

Eddy added that once the economy recovered and revenue started flowing into the state again, the state would be better able to cope with the annual contributions.

Any money freed up by the pension notes could help ease some pressure to cut human services, as well as buy some more time for the pension reform task force and a separate Medicaid reform task force to recommend ways to save money. The pension panel is supposed to issue a report to the General Assembly November 1, which is just before the regularly scheduled fall veto session. The panel is scheduled to meet once a month through October, and all meetings are public and subject to the Open Meetings Act and the Freedom of Information Act, which Eddy said prevents a 200-page report being dropped on legislators’ desks 15 minutes before they’re supposed to vote on it.

“This is not how we approached the problem before,” which is a good thing, he said, adding, “Any hint that we’re going to become serious about pension modernization, Medicaid reform, looking at job creation, all those are good signs that we’re really moving off the dime.”

The strategy of issuing pension notes differs from when former Gov. Rod Blagojevich’s administration issued an unprecedented $10 billion in pension obligation bonds in 2003. He and the legislature skipped that year’s payment and planned to use the interest earned on the investments to repay the debt. The strategy backfired when the economy tanked last fall. Pension notes, on the other hand, would be obligated directly to the state pension fund rather than to an investment bank.


Anonymous said...

I have heard that early retirement may also be offered to some state employees- do you have any details on this? I didn't see it mentioned in house bill 174.

Bethany said...

I don't have any details right now, but you'll know as soon as I do if legislators talk about it this week.

Anonymous said...

I have bookmarked this site so I can check in regularly. This is the first place I have seen reference made to early retirement. Had Rod not screwed up-many of us would be retired now. It would make sense to find a creative way to scrape all the high earners off the top--it would likely be taken even with some tweaks to out the door perks.