Illinois budget mess spurs biggest pension fund withdrawal ever

Illinois's decision to delay payments to its pension fund because of a prolonged budget impasse is starting to have real consequences.

The State Employees' Retirement System on Wednesday asked the Illinois State Board of Investment for $100 million on Nov. 10, and another $125 million on Dec. 10 to pay for retiree benefits in the next two months, according to Tim Blair, the system's executive secretary. The request for cash from the investment board is the largest in the system's history.

The call comes one week after Comptroller Leslie Geissler Munger said Illinois's $560 million November payment to its retirement funds would be delayed, and its December payment could also be postponed as the budget stalemate approaches a fifth month. The move was the latest in a series of measures such as failing to appropriate funds to some social-service providers and agencies like the secretary of state's office that have worsened a financial crisis that is triggering credit downgrades to the state and local entities. Moody's Investors Service cut Illinois's general-obligation rating on Thursday.

"I'm disappointed by a lack of willingness to pass a budget," said Gary Pollack, who manages $12 billion, including some Illinois debt, as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. For the pensions, "given the level of underfunding, it would probably be more prudent to get more money into that fund sooner rather than later," he said.

The state's taxable general-obligation pension bonds due in June 2033, its most-traded security over the last month, traded Thursday for an average of 93 cents on the dollar. That's down from an average of $1.02 in January, data compiled by Bloomberg show.

Moody's cut the rating to Baa1 from A3, saying the downgrade reflects a weakening of the state's financial position and expectations that the budget stalemate will lead to further deterioration. Fitch Ratings downgraded the state on Oct. 19. Illinois is the worst-rated state with a Moody's ranking three steps above junk, and an A-, one level higher, from Standard & Poor's.

Funding Shortfall

Republican Governor Bruce Rauner and the Democrat- controlled legislature have failed to agree on a spending plan for the year that started July 1, leading to a cash shortage. Retiree benefits will continue to get paid, leaving the burden on the retirement systems to cover those bills without a deposit from the state in November and possibly December.

"Due to the uncertainty with the state budget, this drawdown will allow the November and December benefits to be paid, regardless of the status of the normal cash flow situation," according to a copy of the letter dated Oct. 21 from the State Employees' Retirement System to the investment board.

The pensions are already struggling with more than $100 billion shortfall after years of skipped contributions. Illinois had just 39.3 percent of assets needed to meet promises to retirees in 2014, the worst ratio among states, according to data compiled by Bloomberg. Funding those obligations has only gotten more difficult since the Illinois Supreme Court in May overturned a 2013 pension overhaul, saying benefits can't be diminished.

While the fund has requested transfers in the past, it has never had withdrawals of more than $100 million, said Blair, who is based in Springfield, the state capital.

Illinois Universities

William Atwood, executive director of the Illinois State Board of Investment, said transferring out $100 million isn't a problem for the $15.4 billion portfolio. The asset breakdown as of June 30 shows 94.5 percent of the funds are for the State Employees' Retirement System of Illinois, and 5 percent is for the Judges' Retirement System. Less than 1 percent goes toward the General Assembly Retirement System and the Illinois Power Agency Trust, according to Atwood.

"In terms of portfolio management, it's just not that big of a deal," Atwood said in a telephone interview. He said the fund has a "fair amount" of cash in the portfolio on a daily basis, and would be prepared to raise enough to meet the call.

Funded Base

The State Employees' Retirement system had 62,844 current employees and 66,609 beneficiaries, including retirees and those receiving survivor benefits, as of June 30, 2014, according to its comprehensive annual financial report. The fund was only about 35 percent funded based on actuarial values as of June 30, 2014, according to the report.

The benefits for the Illinois universities' pension fund are paid from a trust fund, which is owned and managed by the retirement system that is independent from the state, said Bryan Lewis, executive director of the State Universities Retirement System of Illinois. Its members will be paid on time, he said in an emailed statement.

The Teachers' Retirement System, which serves 395,000 members, gets about $312 million a month from the state. The fund will draw from its $46 billion trust fund to cover its monthly benefit payments of about $460 million, said Dave Urbanek, a spokesman for the system. Its members include teachers and administrators employed throughout Illinois, except for Chicago, which has its own pension system.

"It is yet another indicator of the pressure that Illinois's under as it seeks to live with reduced revenue and also shoulder these very onerous pension funding burdens," Ted Hampton, a Moody's analyst in New York, said in an interview three days before the rater downgraded the state. "There's a general sense that political paralysis is setting in."

• With assistance from Brian Chappatta in New York.