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* The Center for Tax and Budget Accountability has released a new pension payment plan…
Under CTBA’s model:
o the funded ratio target for 2045 moves from its current level of 90 percent under the Pension Ramp to a target of 80 percent funded, which is the GAO standard for a public pension system to be healthy;
o a total of $6.7 billion in pension obligations bonds are issued over the FY 2023 through FY 2030 sequence, with all the bond proceeds being used to front-load payments to the pension systems and retire existing unfunded liability debt;
o the contributions to the pension systems are moved from the last day of the fiscal year to the first day, thereby generating an additional year of investment returns on said contributions, which has a positive, compounding effect over time; and
o the repayment of outstanding unfunded liabilities is re-amortized on a level-dollar basis, eliminating the fiscal strain created by the back-loading of payments under the existing Pension Ramp.
The CTBA claims doing this would save the state $62.8 billion. From a press release…
Based on the re-amortization approach modeled out in the report, the state can save 19 percent of the total debt service remaining under the Pension Ramp, which would reduce taxpayer costs by $62.8 billion between now and 2045, the final year of the Pension Ramp payment schedule.
Another benefit of the re-amortization of the debt owed to the pension system outlined in the Report is that it would get the state’s five pension systems healthier faster than the current Pension Ramp.
According to Sarah Wasik, CTBA’s Senior Research and Policy Analyst: “Any business that could refinance debt and save billions of dollars would do so. It makes sense for the state of Illinois to do the same and take the opportunity to refinance its pension debt, so it can save billions of taxpayer dollars.”
Click here for lots more details.
Considering that the NY rating agencies have been complaining for years that Illinois has a 90 percent funding model by 2045 instead of a 100 percent model, I’m not sure how this would go over with them.
Your thoughts?
…Adding… I always pay attention to what Yvette Shields at the Bond Buyer says…
upfronting payments would be viewed favorably by rating agencies and investors, using POBs to do it perhaps a neutral credit impact, but moving to an 80% funded ratio goal is invitation to a downgrade….. https://t.co/hSSv71LTk2
— yvette.shields@arizent.com (@Yvette_BB) July 11, 2023
posted by Rich Miller
Tuesday, Jul 11, 23 @ 2:40 pm
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I have supported this idea in the past. I have repeatedly said it was the most rational financial thing to do. However, that was when interest rates were very, very low.
Have I changed my mind now that interest rates have risen. Yes, because I believe (do not know) that interest rates will fall in the next two years. If the present Fed Funds rate falls from 5% back to 3% that would be a good time to move on this proposal.
Comment by unafraid Tuesday, Jul 11, 23 @ 3:03 pm
Some of their ideas are OK. That would allow the state to revert back to Tier1 toadress the teacher shortage.
Comment by DuPage Tuesday, Jul 11, 23 @ 3:16 pm
Totally bad timing. Interest rates are at 20 year highs- no one with any sense borrows at todays rates for the purpose of investing and hopefully earning the actuarial hurdles of 7 percent. Redoing the ramps to 80 percent is fine as it was unlikely the State would achieve the 90 anyway and it allows the State to continue the scam and underfunding the plans. As long as the State covers the current payrolls and allows the funds to avoid selling investments to meet current obligations- what someone should really focus on is imposing better oversight on the investment policies so the State can get back to the top quartile as they achieved in the past.
Comment by Sue Tuesday, Jul 11, 23 @ 3:20 pm
I like this conceptually but not practically. For example, moving from the last day to the first day in order to get an extra year of payments will require one year to make double payments. So that’s an extra 11-12 billion out of the budget. How is that possibly going to work? And yea, while I might agree on the 80%, the rating agencies will lose their minds.
Comment by New Day Tuesday, Jul 11, 23 @ 3:26 pm
When all else fails, lower your standards.
Comment by Michelle Flaherty Tuesday, Jul 11, 23 @ 3:26 pm
D-. Moving the pension contributions to earlier in the fiscal year makes sense. Otherwise, the rest is extremely poor accounting practices.
First, for 80% funding to work by proper accounting standards, it would require the pension systems to adjust their assumptions for discount rates and investment returns, something that they have been unwilling to do. The result would be a larger liability, so the net “savings” might be negligible, if any.
POB’s are a bad gamble. Re-amortization merely pushes the cost further from those who incurred them in the first place. Any stretching of the payments also signals room to make enhancements to Tier 2 pensions, which will get us right back to where we started.
Comment by City Zen Tuesday, Jul 11, 23 @ 3:27 pm
By lowering the funded ratio goal from 90% to 80%, payments beyond 2045 are going to be higher than current law. So while the plan claims to save money through 2045, those out years are going to cost the state more money than current law (and they don’t count these costs).
Under their proposal, pension payments would increase up until 2030 or so. Looking at their chart, the payment in FY2024 would be at least $1 billion more than current law. Putting more money into the pension fund isn’t a bad idea if we have extra money, but an extra $1 billion or so required by law might be tough with all the other spending priorities.
Also, I don’t agree that a 90% funding goal is a “purely made-up goal not predicated on any actuarial based standard.”
Comment by Numbers Tuesday, Jul 11, 23 @ 3:27 pm
DuPage, I would like to see teachers move back to Tier 1, but that isn’t what is driving young teachers, or potential teachers, from the classroom.
Comment by Grimlock Tuesday, Jul 11, 23 @ 3:30 pm
First, the ratings are a racket. Any fiscal move solely and completely designed to appease those folks who refuse to acknowledge constitutional and fiscal truths in governing is folly and chasing “likes on Twitter” type of silly.
That said, any plan that can reasonably reduce what is owed but still meet’s reasonable parameters of budgeting cunning, I can get behind those type of movies… is that this…
Comment by Oswego Willy Tuesday, Jul 11, 23 @ 3:53 pm
Having read the entire proposal, I think the concept is good; however, current interest rates would appear to militate against issuing POBs.
Comment by Retired SURS Employee Tuesday, Jul 11, 23 @ 4:03 pm
If they had done this back when interest rates were much lower, it would have made more sense. It’s still not that bad, but might be better to wait until we have a clearer picture of where the Fed and future markets are going.
Comment by RNUG Tuesday, Jul 11, 23 @ 4:35 pm
“First, the ratings are a racket. Any fiscal move solely and completely designed to appease those folks who refuse to acknowledge constitutional and fiscal truths in governing is folly and chasing “likes on Twitter” type of silly.”
Except that not getting likes on Twitter doesn’t cost taxpayers millions and tens of millions in higher interest costs whereas the ratings agencies do. So while I would agree that the ratings agencies are at some level a racket, they are the racket that has a HUGE impact on our interest costs.
Comment by New Day Tuesday, Jul 11, 23 @ 4:40 pm
Parts of the proposal are pretty good. Would like to see more figures from the experts down the road. Using a small portion of those savings to eliminate Tier 2 for teachers is an outstanding idea. Tier 2 retirement is a huge issue with huge impact on current teacher shortages.
Comment by Stormsw7706 Tuesday, Jul 11, 23 @ 4:52 pm
===So while I would agree that the ratings agencies are at some level a racket, they are the racket that has a HUGE impact on our interest costs.===
If you agree with me, then you can’t say that appeasing them is the answer when they refuse to look at actual fiscal truth to debt, they only look at ridiculous word salad criteria that’s ever shifting to whims.
It is like “Twitter likes” or finding what makes a toddler smile, “depends on the day”
Illinois has some of the strongest restrictions on debt and payment, yet, you find me any report where that is cited as a positive.
Spoiler: it’s not in those reports.
Comment by Oswego Willy Tuesday, Jul 11, 23 @ 5:00 pm
===Except that not getting likes on Twitter doesn’t cost taxpayers millions and tens of millions in higher interest costs whereas the ratings agencies do. So while I would agree that the ratings agencies are at some level a racket, they are the racket that has a HUGE impact on our interest costs. ===
That’s exactly right. Rauner wanted the GA to ignore the ratings agencies and not raise taxes. Illinois cannot afford to get on their wrong side right now, mainly because of the previous three governors. Maybe if we ever get back to AAA.
Comment by Rich Miller Tuesday, Jul 11, 23 @ 5:03 pm
===That’s exactly right. Rauner wanted the GA to ignore the ratings agencies and not raise taxes. Illinois cannot afford to get on their wrong side right now===
The whims of the agencies that have wants that also ignore truths, Rauner was also wanting to crash the state, not just ignore the agencies.
Also why “working the agencies” like Pritzker has done is as critical as anything, apparently, because it has been cited about “outlook” but not about responsibility.
Comment by Oswego Willy Tuesday, Jul 11, 23 @ 5:08 pm
Had anyone, especially 60 and 30, listened to the CTBA in 2005 we would half of the problem (or less) that we have now and we would not have Tier 2.
Same detractors back then too. That tells me this is a good plan and we should do it.
BTW- interest rates are not even remotely close to historic highs, they are at about the 1950’s rates.
Comment by JS Mill Tuesday, Jul 11, 23 @ 6:06 pm
==Tier 2 retirement is a huge issue with huge impact on current teacher shortages.==
The numbers state otherwise. NPR reported there are more teachers employed today than pre-pandemic even though there are fewer students. Are there some shortages in districts with specific needs? Of course, but that has always been the case, Tier 1 or 2.
If Tier 2 is such a deterrent, there are 49 other states a teacher can work. There is no evidence of a mass exodus of Illinois teachers or graduates to other states due to less generous retirement benefits or a surplus of teaching talent in those states. In fact, the mass exodus of teachers due to Covid never came to fruition, despite all the fear mongering.
Comment by City Zen Tuesday, Jul 11, 23 @ 7:43 pm
===Are there some shortages in districts with specific needs? Of course, but that has always been the case, Tier 1 or 2.===
Cite please.
===If Tier 2 is such a deterrent, there are 49 other states a teacher can work. There is no evidence of a mass exodus of Illinois teachers or graduates to other states due to less generous retirement benefits or a surplus of teaching talent in those states. In fact, the mass exodus of teachers due to Covid never came to fruition, despite all the fear mongering.===
Cite this too.
Thanks.
Comment by Oswego Willy Tuesday, Jul 11, 23 @ 7:53 pm