Why Illinois could be a cautionary tale for state pensions across U.S.

By Sun-Times staff

It’s no secret that Illinois has the worst-funded pension system and the worst state credit rating in the nation.

But Governor Bruce Rauner’s ongoing battle with Democratic lawmakers and unions over how to tackle the state’s pension crisis could be mirrored across the nation in the event of a stock market downturn, according to ProPublica and the Washington Post.

Wall Street has been earning “fat fees” by pushing state and municipal governments across the U.S. to cover their pension obligations with debt by issuing pension bonds, reporters Cezary Podkul and Allan Sloan report. Borrowing to bet is a highly risky move — if the return on the stock market falls below the interest rate on the bond, governments will fall even further behind on their obligations, leaving taxpayers on the hook.

Despite that, the trend is for more risk, not less, Podkul and Sloan report:

Plenty of takers are bellying up to the borrowing bar. Governments sold $670 million worth of pension bonds through the first half of this year, more than double the $300 million raised for all of last year, according to deal-trackers at Thomson Reuters.

The trend has been encouraged by a recent accounting rule change that allows governments to report far smaller pension obligation shortfalls if they borrow from the bond market.

And events in Illinois serve as a warning to the rest of the nation:

The biggest pension bond in history — Illinois’ $10 billion issue in 2003 — shows how pension funds can deteriorate even when the markets are with you. Illinois has earned more by investing bond proceeds than it has paid out in interest. But after that issue, the state cut back regular contributions and delayed reforms. It later doubled down by selling another $7.1 billion in pension bonds to pay for its annual contributions. It’s no accident that Illinois now has the worst state credit rating in the nation. Its pension funds are more than $100 billion underwater, putting huge pressure on its budget.

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