Python Presses Illinois for Worst-State Pension Fix: Muni Credit
Three months after the Illinois legislature failed to solve its pension crisis and prompted a credit-rating cut, Governor Pat Quinn is turning to an orange cartoon snake for help.
A video featuring “Squeezy the Pension Python,” which threatens to strangle the capitol building in Springfield, is the backdrop to today’s return of both chambers. Lawmakers will make another attempt to restructure the nation’s worst-funded state retirement system, which is saddled with $97 billion in unpaid obligations and faces financial collapse if costs aren’t brought under control.
While Quinn’s animated campaign is the latest effort to right the state’s finances, the figure that looms largest in the search for a solution is 35: That’s the number of lawmakers ending legislative stints in January, putting them in position to cast unpopular votes without concern for voter retribution.
“It certainly gives the lame ducks some latitude they didn’t have when they were seeking re-election,” said James Nowlan, a former legislator and now a member of the Illinois Executive Ethics Commission.
The retirement hole has deepened, according to the Civic Federation, a Chicago-based nonprofit research group. The combined funded ratio of the state’s five pensions fell to 39 percent as of June 30, from 43.3 percent at the end of fiscal 2011. No other state’s ratio was below 50 percent in that year, data compiled by Bloomberg show. Illinois also has about $8 billion in unpaid bills.
A group headed by Paul Volcker, the former Federal Reserve chairman, and Richard Ravitch, the former New York lieutenant governor, said in October that Illinois’s pensions are “destined for insolvency” and may absorb a quarter of the state’s budget in 2015.
Three months ago, Standard & Poor’s cut the state’s credit one level to A, sixth-highest, citing retiree costs, and gave it a negative outlook. Only California, ranked A-, has a weaker rating among U.S. states.
Yet investors searching for extra income with yields at four-decade lows have made Illinois bonds the most expensive relative to top-rated debt since 2011. Ten-year benchmark muni yields fell to 1.43 percent yesterday, the lowest since a Bloomberg Valuation index began in January 2009.
The yield penalty on Illinois pension debt maturing in 2023 over Treasuries has fallen about 15 percent since Aug. 17, when lawmakers failed to take action on a cost-cutting overhaul.
The taxable general obligations traded at an average yield of about 4.2 percent in the past week, reaching the lowest in more than a month. It’s still more than double the interest rate on 10-year Treasuries.
The spread on an index of Illinois state and local tax- exempts relative to AAA bonds narrowed last month to 1.43 percentage points, the smallest since February 2011, Bloomberg data show.
“It is just so hard to get at the root of what the motivations are and what it will require to get to a solution,” said Chris Mier, chief muni strategist at Loop Capital Markets in Chicago. Still, when investors consider a purchase, “all risks can be compensated through reward.”
Quinn, a 63-year-old Democrat, will meet individually with legislative leaders to “try to reach common ground” on the issue, said Brooke Anderson, his press secretary.
“Some people think it’s very creative, and some people think it’s silly,” she said of the python. “But the bottom line is that people are talking about the pension squeeze; Squeezy is the talk of Illinois.”
There’s precedent for legislators advancing controversial laws in lame-duck sessions. The session two years ago concluded with lawmakers approving a 67 percent increase in the personal- income tax, a death penalty ban and legalization of civil unions.
While history has shown the number of exiting lawmakers -- about a fifth of the legislature this year -- improves the prospects of passing controversial legislation, pension changes that affect hundreds of thousands of government workers and retirees have proved to be politically explosive.
“We all know the ingredients that are needed,” said Senator Jeff Schoenberg, a suburban Chicago Democrat who is leaving the statehouse after a 22-year career. “It’s primarily a question of getting it done politically,”
As state pension liabilities mounted after the 18-month recession that started in December 2007, business executives have bankrolled television ads warning that children will pay for retirement liabilities.
In the face of opposition from public-employee unions and school districts and threats of lawsuits, lawmakers have balked at resolving the crisis.
“What will happen is you get to a meltdown -- you’ll have fewer services and less and less ability to address it,” said James Spiotto, a partner and bankruptcy specialist at the Chicago law firm of Chapman & Cutler LLP. “This is the death spiral,” he said in an interview.
A pension restructuring vote -- if one occurs -- may come in January, said Senate President John Cullerton. The session must end by Jan. 9, when the new legislature is sworn in.
“Everybody assumes it’s easier to pass bills in a lame- duck session and the track record seems to show that,” Nowlan said. “But these folks have to go home and live in their communities and deal with state employees and teachers affected by pensions.
“Don’t automatically assume this is an easy vote,” Nowlan said.
Following are pending municipal-bond sales:
COOK COUNTY, ILLINOIS, plans to issue $330 million of general-obligation debt as soon as this week to refinance debt, data compiled by Bloomberg show. (Added Nov. 26)
NORTH CAROLINA MUNICIPAL POWER AGENCY NUMBER 1 is set to sell about $616 million of debt as soon as this week, data compiled by Bloomberg show. Proceeds will refund debt and finance improvements to a nuclear power plant, according to bond documents. (Updated Nov. 27)
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