$107 Billion Borrowing Plan Could Save State Pensions

It’s being called a “moon shot” proposal to solve the state’s worst-in-the-nation pension crisis.

One state advocacy group is asking lawmakers to borrow massive amounts of money, on top of the debt the state already has. Why do they think it’s the best way to go?

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The idea is to go to the bond market, borrow a whopping $107 billion and put it all into the state’s pension funds to get them healthy in one fell swoop. Right now they are short $130 billion of where they need to be, which is helping drive the state’s junk bond rating. The proposal is being pushed by the State University Annuitant’s Association and developed by University of Illinois professor Runhuan Feng, who presented the plan to skeptical lawmakers at a hearing Tuesday in Springfield.

Feng says the state can borrow that money at an interest rate of 5 percent. If historical trends hold up, it can invest that money in the pension funds and get a return of 7 percent, generating a 2-percent profit and saving taxpayers $100 billion over the next 27 years. Feng acknowledges that a lot of chips would have to fall the right way for this plan to work.

“I do realize there’s risk, that’s why we ran a relatively conservative scenario to argue that there is an interest rate arbitrage you can take advantage of,” he said. “And studies show that historically there has been a 2-percent rate based on the tax authorities.”

The testimony was met with a lot of skepticism from lawmakers who wonder what might happen in the case of an economic downturn, and if annual 7-percent returns fail to materialize. Also, would lenders even pony up $100 billion, especially with the state right now not being the most popular of investments? The Civic Federation’s Laurence Msall says no state has even attempted half this amount of borrowing, but because the crisis is so severe, the plan deserves a look.

“No other state in the United States has ever attempted to borrow over $100 billion, no states borrow half that amount, not even California or New York,” Msall said. “And when they borrow that amount, they don’t use it for pensions, they use it to make investments that are going to last longer than the length of the bonds. So, this is an extraordinary idea, it’s one that is only beginning to be vetted, and the burden’s on the promoters to tell us how this could actually be done.”

Gov. Bruce Rauner’s office seemed ho-hum on the idea, through a spokesperson saying: “Pension reform has to save taxpayers money. We ought to start with a constitutional proposal to reform current pensions, like something similar to the so-called ‘consideration model’ first proposed by Senate President Cullerton.”

Other ideas thrown around at Tuesday’s hearing included borrowing this money to pay buyouts to retirees in lieu of receiving yearly pensions. Remember, the Illinois Supreme Court ruled three years ago the state can’t cut or trim benefits.

Follow Paris Schutz on Twitter: @paschutz

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