Illinois Gov.: Pension Reform Vote Is a 'Date with Destiny'

The state's General Assembly has gathered for a special session to deal with the State Retirement System of Illinois' $83 billion in unfunded liabilities.

(August 15, 2012) — Governor Pat Quinn has set a vote for August 17 on a bill for dealing with the state’s pension, which is the worst funded in the nation.

“This is a date with destiny for our state,” Quinn said. “We have to deal with this. We can’t just shuffle it under the rug and pretend it doesn’t exist. It’s an $83 billion [unfunded] liability for Illinois.” (This is the official figure. The Illinois Policy Institute, an economic think tank, estimated the total state and local retirement debt to be $203 billion.) “I’ve tried to make it very clear that our state is now spending more on pensions than on education,” Quinn said.

Friday’s vote will be on pending reform legislation that is currently before the House of Representatives. The bill in question would overhaul the benefit structure and funding mechanism for state workers’ pensions, but not teachers or university employees. Under the current system, the state will have $32 billion of unfunded liability by 2045. The proposal would require all active and retired state government workers to choose between two options: accept a cut to the yearly cost of living adjustment and retain access to state-supported health insurance, or maintain the current 3% cost of living adjustment, compounded annually, but lose some access to state-supported health insurance.

Both Republican and Democratic leaders agree on reducing liabilities by boosting the retirement age and limiting the cost of living adjustments, according to ABC reports. Republicans, however, oppose shifting the cost of suburban and downstate teacher pensions from the state to local school districts, fear property tax increases.

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“To put it in perspective,” Quinn said, “someone who retired from state employment in 1992 with a $60,000 pension, today under the current rules is getting $120,000.”

Capital-rich investors are prime targets for companies whose usual lenders are hamstrung by regulation, but there are a couple of hurdles to overcome first.

(August 15, 2012) — Intuitional investors are becoming more tempted to loan directly to companies as bank lending continues to dry up, but mis-matched expectations between borrowers and lenders are holding up progress.

Restrictions on bank lending brought about by incoming regulation around the world has meant areas of business that used to rely on the same financial partners are having to look elsewhere, a report by Standard & Poor’s (S&P) Credit Matters team highlighted this month.

Taron Wade, associate director at the ratings agency and research firm, said a dearth in bonds being issued in the high yield and mid-markets paved the way for capital-rich and return hungry investors – something several market participants have been advocating since the credit crunch hit.

“Even though the loan market will return, there is a lot of interest from pension funds and insurance companies to come into the market and replace the structured demand – the collateralised loan obligations (CLOs) that are coming out of their reinvestment period for example,” Wade said.

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In the first half of this year, debt capital market volumes slumped from an already poor state in 2011, according to Thomson Reuters. Data from the firm showed a 7% drop in fixed-income issuance in the first six months overall. High yield bond issuance in the second three months of 2012 was down 50% on the first quarter, the data monitor said.

Wade said it would take time to develop a functioning market between investors and companies, so the high yield market would have to struggle on in the immediate short-term.

“Despite difficulties, there is innovation,” said Wade, highlighting moves by exchanges to create retail bond platforms and the Association of Corporate Treasurers mooting a private placement market in Europe, like the one established in the United States.

However, mis-matched expectations over pricing are also stopping flow between borrower and lender.

Wade said: “The rate of return is lower than what investors want and companies are not prepared to pay much higher [rates]. This is exacerbated by little leverage in the system, meaning investors are not getting leveraged returns.”

Wade was reporting from a conference on credit markets, the panels of which were populated by banks, credit analysts and institutional investors. For the full account, click here.