Retirees from Illinois state jobs could get IOUs

Saturday, May 1, 2010

SPRINGFIELD, Ill. — Stuck with a huge deficit and no easy answers, Democratic legislators are considering a long list of budget maneuvers and quick fixes — including a form of official IOU to government pension systems.
The state doesn't have the $3.7 billion it owes to retirement systems in the upcoming fiscal year, so top Democrats are discussing a plan to make good by giving the systems bonds that pay off over eight years, documents and interviews show.
The idea has been considered in the past and rejected over concerns that it would weaken the troubled retirement funds, perhaps even endangering their tax-exempt status.
But Democrats are willing to take a second look at the idea because they have few other options.
"There's no cash, so we have to figure something out," said Kelly Kraft, spokeswoman for Gov. Pat Quinn's budget office.
The Senate has approved an income tax increase, but the idea has little support in the House. Rank-and-file legislators are balking at deep budget cuts to education and social services. Cuts to other areas wouldn't save enough money to make a dent in the $13 billion deficit.
That leaves maneuvers such as handing IOUs to the pension systems and selling off future revenues from settling a tobacco lawsuit. Also on the table: an amnesty for tax deadbeats, raising cigarette taxes and taking money, again, from special funds.
"I don't think it's anything we can be proud of," said Sen. Donne Trotter, a key budget negotiator for Senate Democrats. "No one can be proud of not paying our vendors. No one can be proud that we're talking about cutting services to some of our most vulnerable."
Democrats are also looking at giving Quinn sweeping power to decide where to cut spending. Essentially, they'd be dumping the hardest decisions on Quinn's desk.
Initially, Quinn proposed making the $3.7 billion pension payment by borrowing money for the retirement systems. This has been done in the past.
Now he is raising the possibility of borrowing half the money and giving the systems bonds for the other half. The state would be promising to pay off the bonds, with a small amount of interest, over eight years.
That would put the retirement systems in an awkward position, said William Atwood, executive director of the Illinois State Board of Investment, which manages retirement assets for state employees.
The bonds would not pay as much as the retirement systems usually get from the market, he said, and they would leave the systems with a large chunk of their assets tied up in one investment.
Both those points would argue for selling the bonds, Atwood said, but there's little chance the pension systems would get face value. They would end up with less money than the state owes. There's a good chance the IRS would object, he said.
"This has never been done before, nowhere in the country," Atwood said. "If the IRS were to revoke our tax-exempt status it would cost us hundreds of millions of dollars a year."
Democrats control the House, the Senate and the governor's office. They can make most budget decisions without including Republicans at all.
But most budget scenarios include some amount of borrowing, which requires a legislative supermajority to approve.
That means Republican votes, and Republicans feel they've been excluded from budget talks and ignored on a host of legislative issues. That could complicate Democratic efforts to wrap up May 7.
"The way we've been shut out of the process, I don't see any votes," said Rep. Mark Beaubien, a budget negotiator for House Republicans. "I don't see any end in sight."