(Bloomberg) — 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.
