Illinois plans to issue $3.46 billion in tax-exempt bonds to finance its contribution for 2010 to five state retirement systems. The amount is more than three times the total in bonds issued this year to fund pension obligations by public pension plan sponsors across the country.
The next largest pension bond sales were $402.8 million by the city of Houston and $400 million by Milwaukee County.
The Illinois General Assembly authorized the issuance of the bonds in the state budget that both legislative chambers passed July 15 and Gov. Pat Quinn signed. For the year, the Illinois plans to contribute a total of $3.59 billion, made up of the bond proceeds and $129 million in state appropriations. Of the state plans:
•the $27.2 Illinois Teachers' Retirement System, Springfield, will receive $2.08 billion;
•the $11 billion Illinois State Universities Retirement System, Champaign, $702.5 million; and
•the $9.2 billion Illinois State Board of Investment, Chicago, $812.9 million. The ISBI oversees the investments of the Illinois State Employees' Retirement System, the Illinois Judges' Retirement System and the Illinois General Assembly Retirement System, which will receive, respectively, $723.7 million, $10.4 million and $78.8 million.
William R. Atwood, executive director of the ISBI, said the board could invest some $600 million of the contribution, using the rest to pay benefits. The board could look at its entire fund to see if any change in allocation is appropriate with the new funding, Mr. Atwood said.
It's possible the board would allocate the new funding temporarily to index funds to replicate its total fund and then gradually redeploy the assets in more permanent allocations, an approach the board took in 2003 upon receiving its share of the proceeds of the state's then $10 billion sale of pension obligation bonds, Mr. Atwood said.
Eva Goltermann, director of public information at the Illinois teachers' fund, said, “The portion TRS will invest and (use) to pay benefits is still to be determined.”
Daniel L. Allen, chief investment officer at Illinois SURS, couldn't be reached for comment.
The contributions to each of the systems meet their certified actuarial contribution for 2010, said Timothy B. Blair, acting executive secretary of the State Employees' Retirement System, Springfield, and confirmed by Mr. Atwood and Ms. Goltermann.
Illinois officials are looking at issuing tax-exempt bonds under Internal Revenue Service working-cash rules, said Phil Culpepper, state debt manager, Illinois Office of Management and Budget, who is overseeing the sale of the bonds.
“Close to the sale day, our lawyers will decide if the bonds qualify as tax-exempt general obligation bonds,” said Elizabeth Austin, spokeswoman, in the Office of Management and Budget.
Mr. Culpepper expects the bonds to be sold in September or October, with the timing dependent on market conditions. The bonds will have a five-year maturity.
Moody's Investors Service July 15 placed its A1 bond rating for Illinois under watch for possible downgrade in part because of the “sizable funding requirements for pensions,” a Moody's statement said. Standard & Poor's and Fitch Inc. each rate Illinois AA-, according to the companies latest reports in April, spokeswomen for the firms said. Neither S&P nor Fitch has put its rating on watch.
Public pension sponsors generally issue taxable bonds to fund pension obligations. In 2003, Illinois issued $10 billion in taxable pension obligation bonds. “The bonds (in 2003) were issued primarily to provide additional cash contributions to improve funding levels (of the state retirement systems), so the bonds didn't qualify for IRS working-cash rules,” Ms. Austin said.