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Illinois seeks to borrow $3.7 billion to shore up pension shortfall

By Peter Whoriskey
Washington Post Staff Writer
Tuesday, February 22, 2011; 6:57 PM

Having fallen behind in funding its state pensions, Illinois is seeking to raise $3.7 billion through a bond issue this week, as the debate over government budget shortfalls roils state capitols.

The Illinois bond sale is viewed as a sign of how investors see the fiscal troubles in some overburdened states, where budget controversies have led to unrest and protests in places such as Wisconsin. If investors shy away from the bonds, other states, too, may have to pay higher rates when borrowing, making it harder for them to raise money.

The bond sale comes as several states are suffering fiscal shortfalls precipitated by the economic crisis. Moves by governors and Republican legislators to cut spending have drawn protesters to state capitals in Wisconsin and Indiana - where Democratic lawmakers have staged walkouts - and Ohio. In New Jersey on Tuesday, Gov. Chris Christie (R) unveiled a budget plan that would give property-tax credits to homeowners if government workers pay more than triple what they do now for health insurance. Christie is also urging legislators to enact his proposal to reduce state employee pension benefits.

Pensions for government workers are one of the prime targets in the budget debates, at least in part because most private-sector workers no longer receive them, and as the record in Illinois shows, because those obligations can grow quickly.

Illinois' pension system is one of the most poorly funded in the nation, with less than 40 percent of its $139 billion in liabilities funded, according to state figures.

Pension costs account for nearly 13 percent of the state's general fund budget. Illinois' combined pension and debt burden translates to $6,692 per person, the fifth-highest in the country, according to a Moody's report.

But borrowing to pay off pension obligations is a strategy that has flopped before in Illinois, and critics question using it again.

Under former governor Rod Blagojevich, the state sold $10 billion in bonds, hoping to make 8.5 percent interest by investing it while paying only about 5 percent interest on the bonds.

But the pension investments have earned only about 3 percent so far, making the issue a loser.

"I could walk into my local bank and borrow $10,000 and use the money to invest in the stock market, too" said Jeffrey R. Brown, a finance professor at the University of Illinois at Urbana-Champaign. "Maybe I will make money. But I am also on the hook to repay the bank and undertaking a lot of market risk."

This time, Illinois budget officials said, the intent is not to make money by borrowing and investing at higher rates, but just to make required payments to the pension fund. It similarly issued $3.5 billion in bonds to finance its pension contributions in 2010.

The money from this week's bond sale is slated to fund pensions for Illinois teachers, university workers, judges and other state employees.

But the $3.7 billion is a small patch for a very large hole. The teachers pension alone is underfunded by nearly $40 billion. It will receive slightly more than $2 billion from the bond proceeds.

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