Finding A Way To Fund Pension Liabilities: Illinois

The Governor's Plan

Today's Bond Buyer, a trade publication, had an interesting article about the plans the governor of the State of Illinois has to fund it's $41 billion pension liability. This is his creative solution to this problem.

First, the State would sell it's state run Lottery for $10 billion by doing a Public Private Partnership (P3). This would probably be done with a long-term lease arrangement. Last year, the State of Indiana sold the Indiana Toll Road for $3.5 billion to a group of foreign investors using a 99 year lease.

Second, the State would issue $16 billion of taxable Municipal Bonds. These munis would be considered taxable because the proceeds of the bond issue would be invested in equities (a higher returning asset class). This creates an arbitrage situation which does not allow the munis to qualify for tax exemption. Illinois did what is still the largest taxable muni deal in 2003 ($10 billion) at an interest cost of 5.05%, and the pension funds have earned returns of over 14% from 2003 until now. Can they do the same with another $16 billion?

Finally, the State would raise taxes on corporations. This tax increase is expected to generate $6 billion a year beginning in 2009. The State will also enact a payroll fee on businesses that do not provide health care. This is expected to raise $1 billion a year. There are no plans to raise taxes on individuals in the Gov's plan.

Conclusion

The combination of these 3 actions is projected to get the State's pensions up to 83% funded from the current 60% funded level. Of course, this is just a trial balloon that is being floated by the governor of Illinois, Rod Blagojevich. But, in an era of unfunded pension and healthcare liabilities across the nation, it shows the general willingness to sell public assets and issue debt as a way of keeping tax increases down to as low as possible. Welcome to Public Funding 101 in America today.