Illinois Governor Seeks Federal Guarantees of State Debt

Illinois sold $3.7 billion in bonds Wednesday to fund its state pension payment this year. But if the Illinois governor has his way, future pension bond sales could come with a U.S. taxpayer guarantee.

Gov. Pat Quinn included the backstop proposal in the 2012 state budget he released last week. Critics said it would amount to a federal bailout of underfunded state pension programs and pronounced it dead on arrival in Washington. “Hell no--not happenin',” a House Republican aide said.

But one expert said policymakers could consider the idea in the future, as states lobby Congress and the White House for help in tackling their growing pension obligations. A federal guarantee would allow Illinois and other states with fiscal problems to sell pension bonds at lower interest rates.

“I indeed think that Quinn was testing the waters,” said Bukola Bello, director of the Illinois Retirement Security Initiative at the Center for Tax and Budget Accountability in Chicago. “We should definitely evaluate all options.”

According to one study, states are on the hook for about $1 trillion in unfunded retirement liabilities for their public employees, including pension and health care benefits. So far, Quinn, a Democrat, is the only governor to suggest a federal backstop to help states meet their pension promises.

Illinois faces an $80 billion pension shortfall. Quinn’s proposed budget said "significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt, or increasing the required state contributions." Quinn claims previous state pension reforms will save Illinois taxpayers billions of dollars.

Test or not, Quinn’s administration quickly distanced itself from the proposal amid the storm of criticism--though it appeared to leave the door open to pushing it in the future.

“Notwithstanding any media reports to the contrary, the State of Illinois has no current plans to request a federal guarantee on any of its bonds or pension debt,” said Quinn spokesperson Kelly Kraft. “To date, we have not requested any guarantee.”

But in an interview in 2009 with Crain’s Chicago Business, Quinn's budget director, David Vaught, said the governor had “recently” discussed the idea with Treasury Secretary Timothy Geithner and other Obama Administration officials and “that he got a good enough reception that ‘he intends to extend’ his efforts”  to promote it. President Obama is from Illinois.

Vaught told the magazine that a federal backstop of Illinois pension bonds could reduce the interest rate the state paid on them to 3% to 4%, from the 5% to 6% it was paying at that time. He described the risk in any such program to U.S. taxpayers as “low.”

A U.S. Treasury official said the department was not in discussions with Illinois about Quinn’s proposal. A spokesperson for the department declined to comment.  A spokesperson for the White House did not respond to requests for comment.

Illinois Republicans commented loudly.

“I don't think it has a chance at all,” said state Sen. Dan Duffy (R-Barrington), a member of the state senate’s Pension and Investments Committee. “I think the Governor is just looking for a magic bullet…The governor is looking for bailouts at a time he should actually be cutting expenses and cutting back.”

State and local requests for federal loan guarantees are not unprecedented. In 2009, California Gov. Arnold Schwarzenegger, a Republican, unsuccessfully lobbied the Administration for a backstop on $7 billion in short-term borrowings. In 1978, Democratic President Jimmy Carter signed legislation giving loan guarantees to New York City when it suffered from a financial crisis.

Quinn’s proposal joins another one getting a cool reception in the nation’s capital—allowing states to file for bankruptcy to escape their public worker retirement obligations. House Republican leaders, among others, oppose the plan, saying states should deal with them by negotiating concessions with state employees.