Illinois state pension funds’ asset sales underscore crisis

Monday, August 30, 2010

Illinois' pension crisis entered a dangerous new phase last week when the large state employee retirement funds said they would have to sell off big chunks of their investment portfolios to raise cash for payments to retirees.

As first reported by Crain's sister publication Pensions & Investments, the Illinois Teachers' Retirement System is selling $3 billion of investments, the State University Retirement System is selling $1.2 billion, and the board that administers three other funds is unloading nearly $1 billion. For each, the liquidations represent about 10% of assets, an unusually large amount and a sure sign of deep trouble.

Ordinarily, pension funds use the income generated by their investments to pay benefits to retirees. For the same reason farmers conserve seed corn, they tap principal only in small amounts, and in ways that fit with their longer-term investment strategies.

But the asset sales announced last week deviate from prudent pension management principles. Managers at the funds acknowledge the liquidations will wreak havoc on their investment strategies.

Pension managers try to diversify their investments among a range of assets to create a portfolio that will generate sufficient current income to pay benefits while producing long-term returns adequate to fund future obligations.

That's no longer an option for the Illinois funds. State lawmakers skipped the required contribution to the badly underfunded plans this year, leaving fund managers no choice but to sell off assets.

These are the same legislators who gave state employees (including themselves, of course) ever-more generous pensions over the years. They also allowed former Gov. Rod Blagojevich to effectively raid the pension funds for money to cover state operating expenditures, putting pressure on fund managers to generate higher investment returns to cover retiree payments.

Now the result is clear. Irresponsible government has forced pension funds to liquidate assets, hastening the day when the funds will run out of money to pay retirees.