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Question of the day

Friday, Feb 8, 2019

* From the governor’s transition report…

Pensions and debt management

Illinois must take significant steps to make substantial progress in confronting its unfunded pension liabilities. Concentrating on one area will not be sufficient. Instead, a portfolio of initiatives across different levers will likely be required.

Increase funding to the pension system

Opportunities exist to find unique and new ways to increase funding. The state could apply a direct revenue stream to help pay down the pension debt. These revenue streams could have provisions to ensure they are only used for payment of pension debt and benefits. Asset transfers could also be used as a means to add value to pension systems. For example, if the state were to move an asset to a pension fund, it could be used to reduce the unfunded liabilities for the pension system and increase the funding ratio, leading to potentially reduced interest costs on pension debt.

Improve the investment engine

The returns that Illinois currently achieves on its pension funds could also be increased by improving the investment engine. To generate higher returns and with the added benefit of enhanced efficiency, Illinois could work with local constituencies to consolidate pension funds for similar systems within verticals (e.g., fire, public safety). This move would help smaller funds not only achieve higher returns but also reduce the cost of fund administration and give managers greater visibility into investment decisions and trade-offs.

Re-shape the pension payment curve

To put the pension funds on a more sustainable path, the committee discussed whether the state could consider re-shaping the pension payment curve. For instance, the state could create a sustainable amortization schedule combined with other changes to improve the system which could meet short term budget needs while improving the funded ratio in the long term. The goal here is to find a rational payment plan that increases the funded ratio each year while still meeting the cost of paying benefits to current and future retirees. Such action would need to be taken in conjunction with changes that increase funding, improve investments, and/or increase stability such that debt markets see that Illinois is serious about comprehensively solving the pension funding deficiency.

Modernize Bonded Debt Provisions

Illinois should also explore ways to improve its existing bonded indebtedness provisions to provide government officials with more flexibility in managing debt. The state should consider changes including but not limited to: maturity limitations, current statutory refunding and/or restructuring requirements within constitutional limitations, and available security. This could help the state create innovative financial vehicles to manage all of its debt including the pension debt while also strengthening Illinois’ creditworthiness.

* The Question: What do you think about the highlighted idea of moving state assets into the pension funds?

- Posted by Rich Miller        

36 Comments »
  1. - Dome Gnome - Friday, Feb 8, 19 @ 2:39 pm:

    I think that would depend on the asset.


  2. - 47th Ward - Friday, Feb 8, 19 @ 2:43 pm:

    I’m not sure I understand it. Is the thinking like, say the asset was a public university dorm that was transferred to the SURS fund, for example. That asset at some point would need to be converted into cash, wouldn’t it? Or, at a minimum, deleveraged with new infusions of cash over time such that, rather than an asset sale, it’s a temporary (20-30 years) asset on the books.

    If that’s what this is, it seems like an accounting trick rather than a solution. But if it lowers the interest owed to the funds, that is real money.

    Can’t wait for RNUG or some other experts to explain this to me.


  3. - JustThinking - Friday, Feb 8, 19 @ 2:44 pm:

    Looked at this before. It is possible and some local governments are doing this with their assets such as water and sewer. The problem is that even though the asset does offset the liability, we need a return on our assets of somewhere in the neighborhood of 7% depending on the system. The only assets that I can think of that even provide a return, are the Lottery and the Tollway and the Tollway is probably off limits do to the “lockbox” amendment.


  4. - Hoping for Rational Thought - Friday, Feb 8, 19 @ 2:45 pm:

    Does it mean the monies the Treasurer invests would be invested in pensions?


  5. - Flat Bed Ford - Friday, Feb 8, 19 @ 2:46 pm:

    Give all the pension funds an equal stake in the Thompson Center and call it a day. Pension problem solved!


  6. - KeyToTheCity - Friday, Feb 8, 19 @ 2:48 pm:

    If the Thompson Center Waterpark doesn’t have a squeezy the pension python-themed waterslide, I will be extremely disappointed


  7. - RNUG - Friday, Feb 8, 19 @ 2:49 pm:

    Did I just read the latest plan to unload the Thompson Center?

    Seriously, my second reaction is not much. I’d want to know more about what specific assets they have in mind. Would it be an unsellable albatross like the Thompson Center that would drain cash out of the pension funds just to maintain it? Would it be tangible real estate like State Parks … and would it be accompanied by new user fees that would at least make the parks revenue neutral? Or would they be selling off unused State owned buildings or property? Maybe I’m limiting my vision, but I don’t know of a State asset that could actually generate revenue / positive cash flow unless we were talking about toll roads.

    I will concede that the pension funds, in the past, got into some REITS like investing in White Oaks Mall, but they also got out in a timely manner.

    So, right now, I’m not impressed by it.


  8. - RNUG - Friday, Feb 8, 19 @ 2:53 pm:

    Having read the other comments so far, I missed the Lottery. That and local slots have not been well managed in terms of generating maximum tax revenue, so maybe that would be a possibility. But how goes resolve that with the stated function of school funding from Lottety revenue?


  9. - Sue - Friday, Feb 8, 19 @ 2:55 pm:

    RNUG- actually TRS owned Whiteoaks mall and exchanged it for REIT units in SPG when Simon went public. TRS was able to extract a premium in exchange for approving the transfer of other properties management agreements TRS had with Simon into the public company.


  10. - RNUG - Friday, Feb 8, 19 @ 2:55 pm:

    The one thing that might make sense is changing the way the State does bonds. I’m not an expert there, do I will defer to -wordslingers- analysis on that.


  11. - RNUG - Friday, Feb 8, 19 @ 2:57 pm:

    -Sue-, thanks. Didn’t remember the exact details on that. Just knew they did okay on it.


  12. - City Zen - Friday, Feb 8, 19 @ 3:00 pm:

    “consider re-shaping the pension payment curve.”

    The Pritzker Generational Plunder Proclamation


  13. - PublicServant - Friday, Feb 8, 19 @ 3:03 pm:

    Newsflash: CZ hates debt. Hates re-amortization even more. Shocker.


  14. - wordslinger - Friday, Feb 8, 19 @ 3:09 pm:

    Sounds like tollway to me.

    Other than that, I’ll wait to see the plan.


  15. - City Zen - Friday, Feb 8, 19 @ 3:12 pm:

    PublicServant, no love for the full circle reference?

    Should I instead love debt and the practice of pushing debt onto future generations? Is there an Option C?


  16. - 47th Ward - Friday, Feb 8, 19 @ 3:16 pm:

    The Tollway is big enough, sure. But why not just go full parking meter and get the cash upfront?

    Had the great Richard M put the parking meter cash into his own underfunded pension funds, Chicago would be in a much better place fiscally. The Skyway too.

    Now Chicago has two fewer assets and already spent the money, but we’re still on the hook for the maintenance. What a disaster that was.


  17. - bear3 - Friday, Feb 8, 19 @ 3:20 pm:

    Logical as rents and fees could pay the debt vs. a third party


  18. - Chicagonk - Friday, Feb 8, 19 @ 3:21 pm:

    Wouldn’t moving a tollway to a pension fund violate that transportation lockbox amendment to the constitution that was passed?


  19. - DougChicago - Friday, Feb 8, 19 @ 3:26 pm:

    What asset does this crummy state have that wouldn’t cost the pension funds money?


  20. - Etown60120 - Friday, Feb 8, 19 @ 3:27 pm:

    I think we need to cautious on what assets we use. If we start giving away assets/ownerships rights it will become a parking meter disaster (like Chicago). It needs to be done right!! with the state of Illinois best interest in mind and not someone trying to benefit.


  21. - Frank Manzo IV - Friday, Feb 8, 19 @ 3:31 pm:

    FWIW:

    Michael Belsky, former mayor of Highland Park, IL and current executive director at the Center for Municipal Finance at the University of Chicago’s Harris School of Public Policy has written an article about this as it pertains to the City of Chicago.

    “As an alternative the city should consider an asset transfer, a common practice in the private sector. This entails depositing an income-producing asset owned by the government into a pension fund. An asset transfer does not require going into debt; rather, the city would be using an existing publicly owned asset that previously was valued at cost. The transfer enables the asset to be accounted using its higher market value to boost funding ratios.”

    Possible examples include Midway Airport and the water and sewage system.

    https://www.chicagobusiness.com/opinion/city-hall-looking-wrong-side-balance-sheet-solve-pension-problems


  22. - Swampy Corn - Friday, Feb 8, 19 @ 3:35 pm:

    Even if the tollway was available, the state doesn’t have enough/the right assets. Local governments are better able to do this but you’d need scale for that to work on top of who knows what else legislatively.


  23. - Anyone Remember - Friday, Feb 8, 19 @ 3:37 pm:

    Once a baseline is established, legal marijuana and sports betting revenue. A precedent used by Build Illinois bonds.


  24. - wordslinger - Friday, Feb 8, 19 @ 3:43 pm:

    –Even if the tollway was available, the state doesn’t have enough/the right assets.–

    What do you mean? The toll highway authority is a creation of the state. Its form and existence is determined by state statute.


  25. - Skeptic - Friday, Feb 8, 19 @ 3:49 pm:

    Could “assets” include money that would have otherwise been in other accounts? For example instead of keeping the money for the Snipe and Prairie Chicken Preservation Fund in the “bank”, keep it in the Pension fund (but still earmarked for Snipe and Prairie Chicken Preservation.) That way the interest/dividends/captial growth it throws off goes to the pension debt.


  26. - JS Mill - Friday, Feb 8, 19 @ 3:50 pm:

    =Give all the pension funds an equal stake in the Thompson Center and call it a day. Pension problem solved!=

    Didn’t Rauner get that sold? It was right there in his budget.

    =Should I instead love debt and the practice of pushing debt onto future generations? =

    You mean the Trump plan?


  27. - illinifan - Friday, Feb 8, 19 @ 3:51 pm:

    Interesting idea and one used between PBGC and Sears so it is a proven practice. Agree with RNUG it would need to be an asset that adds value and is not a drain.


  28. - Generic Drone - Friday, Feb 8, 19 @ 3:56 pm:

    Municipalities could do this. Then the Superman statue in Metropolis can be the pension.net man.


  29. - wordslinger - Friday, Feb 8, 19 @ 4:02 pm:

    –The Tollway is big enough, sure. But why not just go full parking meter and get the cash upfront?–

    If I’m understanding the little bit that’s put out, the value of the asset transferred to the pension fund would be equal to what you would get if you cashed it out and sold it.

    Like the equity in your house counts as an asset. It turns into money if you cash out.


  30. - PublicServant - Friday, Feb 8, 19 @ 4:10 pm:

    ===Should I instead love debt and the practice of pushing debt onto future generations? Is there an Option C?===

    No one loves debt CZ. The debt exists. The existing “pension ramp” is not a reasonable method of repaying the money owed, while still maintaining the state’s ability to meet its other obligations. JB is looking to implement a much more reasonable repayment schedule. Just as the current and previous generations of taxpayers had debt to repay, so do upcoming generations. I know you’d like the unsustainable ramp to stay in place, so it continues to be a problem for Illinois, and so you can continue to flail at your pension windmill, but JB is actually trying to manage the debt problem. What’s your plan C?


  31. - 47th Ward - Friday, Feb 8, 19 @ 4:12 pm:

    Equity isn’t liquid and most retirees want to be paid in cash, not shares in an illiquid asset. You only cash out on your home’s equity when you sell.

    A 30 year lease of the tollway would get some upfront cash plus the guarantee of the return of the asset at the end of the lease.

    Daley wasn’t wrong to lease the parking meters and the Skyway. His unforgivable mistake was spending all of the cash to balance his operating budget.


  32. - City Zen - Friday, Feb 8, 19 @ 4:12 pm:

    ==“As an alternative the city should consider an asset transfer…Possible examples include Midway Airport and the water and sewage system.

    Sewage sounds about right

    ==You mean the Trump plan?==

    “But Johnny did it,” Melissa explained to the school administrator when she was caught vandalizing the school’s front doors.


  33. - City Zen - Friday, Feb 8, 19 @ 4:19 pm:

    == The existing “pension ramp” is not a reasonable method of repaying the money owed==

    2045 is the plan. If the state wants to flatten the payment plan to pay more now and less later, I’m fine with that. But adding one day to the plan is not acceptable. Unless I’m getting something, like a tax cut or a statewide long-term pay freeze. What are you offering?


  34. - Not a Billionaire - Friday, Feb 8, 19 @ 4:29 pm:

    I have been suggesting the tollway for years. Ontario teachers fund owns the Skyway valued at 2 billion what is the tollway worth 25 to 59.


  35. - wordslinger - Friday, Feb 8, 19 @ 4:33 pm:

    –Equity isn’t liquid and most retirees want to be paid in cash, not shares in an illiquid asset. –

    The value of the asset reduces the unfunded liability.


  36. - Anonymous - Friday, Feb 8, 19 @ 4:34 pm:

    If the tollway is the asset, that would mean northern Illinois residents would again be the bailing agent, just as the RTA did for the CTA.


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