Illinois Pensions Dwindle as Governor Candidates Skirt Budget Crisis

Illinois, which shares the worst state credit rating with California, is draining its pension funds as candidates for governor promote plans that would cover less than a quarter of a record budget gap.

Democratic incumbent Pat Quinn, challenger Bill Brady, who is a Republican state senator, and the rest of Illinois’s leaders haven’t aligned rising spending with revenue that plunged in the recession. Illinois government “has long been charac- terized by an unwillingness to enact the politically difficult fiscal measures needed to balance its budget and fund its pension plans,” said Moody’s Investors Service in September.

The Illinois State Board of Investments, which manages about one-fifth of pension funds, can’t wait, William R. Atwood, its executive director, said in an interview. The board is selling $80 million of assets a month to pay benefits, he said.

“We’re not planning on the election solving our problems,” said Atwood. “We have to prepare for the worst.”

Neither candidate’s campaign responded to a request from Bloomberg News to detail his ideas to resolve the $13 billion deficit, the state’s biggest ever and equivalent to about half its budget, or to fix its pension funds, whose liabilities will rise to $79.1 billion in fiscal 2011.

“It’s such a large problem that if one candidate got the cuts he wanted and the other one got the revenue increase he wanted, it still wouldn’t fill the hole,” said Tom Johnson, president of the Taxpayers Federation of Illinois, an advocate for fiscal responsibility.

Deeper Still

The deficit is widening, said Comptroller Daniel Hynes, who warned in an Oct. 4 report that the next governor may face a $15 billion gap when he prepares a budget in January.

The inaction has boosted Illinois’s borrowing costs by as much as $551 million a year, according to a Aug. 30 report from the Civic Federation, a Chicago-based government watchdog.

Quinn, 61, who took over in January 2009 for ousted and now convicted governor Rod Blagojevich, proposed a one-percentage- point income tax increase early in the year. The General Assembly didn’t include the increase when it passed the final budget. Quinn’s budget director predicted to Bloomberg News in July that the Legislature will approve a two-percentage-point increase after the election; the governor has said he won’t accept more than one percentage point. Each percentage point added to the existing 3 percent rate would generate $3 billion a year.

Brady, 49, has said he will balance the budget through spending cuts and not tax increases. Brady has proposed an across-the-board, 10 percent reduction in spending, affecting all programs. That would save about $2.6 billion.

‘Hard Medicine’

Neither candidate has a concrete solution, said Faraaz Kamran, 38, who works for Madison Capital Funding LLC in Chicago, helping private-equity firms finance buyouts in the health-care industry. He doesn’t expect the candidates to discuss cuts until after the election because of the political price.

“There is hard medicine to be had and no one wants to talk about giving it because it’s not palatable to voters,” said Kamran.

Quinn, on his campaign website, lists top issues as women’s rights, jobs and growth -- “a crucial component of Illinois’s economic recovery” -- along with veterans and military families, health care, ethics reform, the environment, education and services for gay, lesbian and transgender residents. Brady’s top issues include creating jobs and economic growth, protecting residents from higher taxes and ethics reform.

Pain Awaits

“They probably don’t want people to realize what’s ahead,” said Alan Schankel, director of fixed-income research for Janney Montgomery Scott LLC, a money management firm in Philadelphia. “It’s going to be painful for taxpayers.”

Beyond the budget gap lies the pension gorge. Illinois has the worst-funded state system, with just over half the assets needed to pay claims, according to data compiled by Bloomberg. It hasn’t funded obligations since fiscal 2011 began July 1. State lawmakers made no appropriations to pay for pensions and didn’t approve Quinn’s plan to sell $3.7 billion of bonds to fund contributions this year. With no new cash, the funds must sell assets to pay benefits, Atwood said.

Running Short

Illinois has $64 billion of assets to pay an estimated liability of $126.4 billion, enough to cover about half the benefits for 722,913 workers, according to bond documents. The unfunded liability will rise to $79.1 billion in fiscal 2011, according to a May report from the Illinois Commission on Government Forecasting and Accountability.

“If you have no money to balance your budget, where will the money come from for your pension contributions?” asked Thomas Metzold, who oversees $7 billion of tax-exempt investments as co-head of municipals at Boston-based Eaton Vance Corp., which has shunned Illinois debt.

Quinn said he wants to borrow $3.7 billion with bonds to pay what the state is obligated to contribute to the funds this fiscal year. He also wants to redesign Illinois’s five public employee retirement plans to cut costs. The state borrowed for its 2010 contribution.

Brady, who has criticized Quinn’s borrowing as irresponsible, said Oct. 5 that he would consider issuing $50 billion of bonds to cover the unfunded pension liability.

Illinois’s five state pension funds have started selling assets to make payments to retirees. “If you keep withdrawing money to pay retirees, you’re going to devalue the value of the fund,” said Metzold.

Who’s in Charge?

Two funds have cut projected returns in recent weeks because of the damaging effect of liquidating assets, Atwood said. Having fewer assets means the state’s unfunded liability will rise more quickly, he said.

The pension crisis figured in Moody’s Investors Service changing the state’s bond rating status to negative from stable Sept. 23, a sign of the potential for another rating cut, said Ted Hampton, a Moody’s analyst. Moody’s ranks the state A1, fifth-highest, an assessment it shares with California.

“Not knowing who will be at the controls makes the outlook more murky,” said Hampton. “Based on the statements of the Democratic incumbent and his opponent you can expect very different outcomes. It’s difficult to know where the process is headed.”

Brady held an eight-point lead over Quinn, according to a Rasmussen Reports poll released Oct. 21. The poll of 750 likely voters Oct. 20 had a margin of error of plus or minus 4 percentage points.

Governors in Trouble

No matter who wins, Illinois residents disgusted by corruption won’t be easily persuaded to support spending cuts, said David Yepsen, director of the Paul Simon Public Policy Institute at Southern Illinois University in Carbondale.

Blagojevich, convicted for lying to federal agents, is the fourth of the past nine governors to face charges. His predecessor, George Ryan, was convicted in 2006 of trading favors for trips and cash. Otto Kerner, in office from 1961 to 1968, was convicted on corruption charges after being appointed a federal judge. Dan Walker, governor from 1973 to 1977, was found guilty of crimes committed after he left office.

“No political leader has the capacity to lay out the Churchillian message that tells people what they don’t want to hear,” said Yepsen. “The public just doesn’t trust them.”

To contact the reporters on this story: Darrell Preston in Dallas at dpreston@bloomberg.net. Tim Jones in Chicago at tjones58@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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