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Illinois Considers Borrowing Billions to Pay Pensions

By Prescott Carlson in News on May 6, 2010 9:00PM

Photo of the Illinois Capitol by Jeremy Farmer Photog.
It doesn't take a Harvard MBA to know that when you're in tremendous debt and struggling to pay bills, the best option isn't plunging yourself deeper in the hole by borrowing money. But that's exactly what the Illinois legislature is considering to help shore up the state's massive budget deficit, specifically a shortfall in the annual pension payment.

Lawmakers are looking into issuing $4 billion in bonds to fund the state's five public employee pension plans -- lawmakers who are gun shy about raising income taxes in an election year as an alternative. The main problem, however, is that the state pulled the same move last year:

“It’s déjà vu all over again. And we can’t do this much longer. At some point we’re going to have to straighten this out,” said state Sen. Dale Risinger, R-Peoria.

And it's not just Republicans voicing concerns. State Rep. Jack Franks (D-Woodstock) was quoted as saying:

"We cannot continue to underfund the pensions. We need to acknowledge our obligations and 'pay-as-you-go.' Furthermore, borrowing here will hurt the retirement system because there will be no principle paid in. This is a death spiral, folks."

The term "death spiral" may not be hyperbole -- a Pew Center for the States study cited says that Illinois had an unfunded pension liability of $80 billion, the worst in the nation. The overall bond picture for the state isn't much better. At the end of 1998, Illinois had just under $5.3 billion in outstanding general obligation bonds. A little over a decade later, that number has ballooned to $23 billion. And it shows no signs of going down -- besides the pension borrowing, over $2.6 billion in bonds are being issued for Gov. Quinn's $12.84 billion Multi-Year Highway Improvement Program.

Thanks to Illinois' fiscal woes, that borrowing doesn't come cheap. The second-lowest bond rated state after California, the state will possibly have to pay higher interest rates on that money as a "risk premium."

The bond issuance is one of a number of different budget proposals lawmakers are considering before a tentative summer recess on Friday.