Illinois Could Consider $107 Billion Pension Bond Gamble

SUAA proposal to be entertained Jan. 30.

Scrambling for a solution to shore up its pensions and eliminate its $129 billion pension debt, Illinois lawmakers will meet Tuesday to discuss a proposal that could see the largest municipal debt sale in history.

Reported by Bloomberg, who corresponded with Rep. Robert Martwick, the State Universities Annuitants Association’s (SUAA) proposal wants Illinois to issue $107 billion in bonds in order to fully fund its flailing retirement system. This debt sale, of course, would assume that the pension system’s investments would produce more yield than its interest payments.

“We’re in a situation in Illinois where our pension debt is just crushing,” Martwick, who chairs the SUAA, told Bloomberg. “When you have the largest pension debt in the world, you probably ought to be thinking big.”

While selling bonds for pensions is nothing new—especially for the Prairie State, which had previously sold $10 billion worth of pensions for bonds in 2003—it has never been done on this grand a scale. In addition, the strategy does not have the greatest track record; Bloomberg reports that when New Jersey, also very underfunded, and Detroit had given this concept a shot, their pensions continued to shortfall—with the Motor City’s 2005 and 2006 trials experiencing engine failure in the form of bankruptcy in recent years.

Because Illinois’s current pension debt grows at the same rate that the retirement system expects to earn on its investments, the SUAA’s plan is expected to save Illinois an estimated $103 billion by 2045.

Although the S&P 500 Index had done well recently, increasing 19% last year while still climbing strong today, it’s all about timing the market, and with economists predicting increasingly higher chances of a 2018 market correction, it may not be the best time for a plan as risky as this one to be pushed forward, experts say.

“Those types of deals are not typically positively received by the rating agencies or investors,” Eric Friedland, Lord Abbett’s director of municipal research, told Bloomberg. “That type of issuance could definitely be a credit negative.”

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