Illinois may seek federal guarantee of pension bonds

Illinois, which plans to sell $3.7 billion of pension bonds next week, may seek a federal guarantee on retirement-system debts if its unfunded liabilities can't be eliminated, according to budget documents.

Illinois's pension plans have an unfunded liability estimated at over 60 percent, the documents show. Governor Pat Quinn disclosed the potential need for a federal guarantee of pension debt in his $35.3 billion general-fund budget on Feb. 16, without going into specifics.

“Significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt,” the document said. Or the state may raise its annual contributions, it said.

Kelly Kraft, a spokeswoman for Quinn, didn't immediately respond to an e-mail seeking comment. Colleen Murray, a spokeswoman for the Treasury Department, didn't immediately respond to a call seeking comment.

The documents underline Republicans' concern in Washington that U.S. taxpayers may be forced to bail out public-employee pensions that have failed to set aside enough money to pay for the promised benefits. Asset values of state pension plans fell to about 76 percent of obligations in 2009 from 82 percent in fiscal 2008, according to data compiled by Bloomberg.

Republicans, who control the U.S. House of Representatives, are backing a bill that would require state and local pensions to use more conservative assumptions than they do now to report the size of their liabilities to the federal government. The measure has drawn fire from organized labor and public officials, who say it is a way to attack unions by making their retirement benefits look unsustainable.

The estimates of the size of the shortfalls in public pension plans vary because of different methods used for calculating the costs of future benefits. The Pew Center on the States estimated last year that state pensions had $1 trillion less than needed to cover promised payments by the end of their 2008 budget years.

A study released in October by Joshua Rauh and Robert Novy- Marx, who teach finance at Northwestern University and the University of Rochester, respectively, said state and local pensions have unfunded liabilities of about $3.6 trillion, if their returns on assets were projected using Treasury discount rates to adjust for risk.

The Federal Reserve told a congressional committee in May 2009 that it was reluctant to extend guarantees to California and other municipal-market borrowers. That was one of several proposals then under consideration to help states cope with financial pressures caused by declining tax revenue.

Illinois's pension bond sale, which had been scheduled for earlier this week, was postponed two days before Quinn released his budget proposal so investors could study the spending plan. The budget, which has a $10 billion deficit, relies on an $8.75 billion bond authorization for the current fiscal year to pay off accumulated bills.

The New York Times reported earlier that the state may seek a federal guarantee.