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Former Illinois investment chairman foresees 'grand bargain' bailout for public pensions

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Friday, December 6, 2019  |  Article  |  By Cole Lauterbach | The Center Square

Pensions (70)
Public pension debt has become such a crisis nationwide that the former chairman of the Illinois State Board of Investment expects the federal government will be forced to intervene. 

In a conversation with Barron’s, Marc Levine said public pensions were “inherently unstable” and that states and local units of government were devoting a considerable amount of their annual budgets to paying down the tabs. 

“They end up just sucking up so much taxpayer money,” he said. 

Appointed by former Republican governor Bruce Rauner, Levine made headlines during his tenure for moving Illinois’ assets under the board’s control away from equity funds that charged higher fees and toward passive investments. 

Levine said he expected the federal government to intervene sometime in the next decade, offering a sort of “grand bargain” to the funds. 

“I think, at some point, the federal government is going to have to do something about this because the potholes have to get fixed,” he said. “I think, ultimately, there’s going to be some sort of grand bargain with maybe freezing benefits for federal money.”

Host Caroline Woods pressed him to clarify if he was talking about a federal bailout of local pensions. 

“Yes, a bailout,” Levine said. “That’s not something I’m in favor of. This just what I think is going to happen.”

Public pension debt isn’t debt in the traditional sense, rather a calculation of expected future liabilities to be paid out to retirees who have vested in the funds. States vary on how well they maintain pension funds.

A federal bailout of public pensions has long been seen as unpopular in Washington because it would reward states for irresponsible spending. 

Florida’s pension funds in fiscal year 2017 were 79 percent funded, meaning the funds had that percentage of the expected debt accounted for via cash in accounts or expected investment returns. Louisiana’s pension liabilities, according to an analysis by the Tax Foundation, were at 65 percent in the same time period. Pennsylvania’s pension funds were among the worst-funded in the nation, having just over half of the assets needed to cover expected liabilities. 

Illinois’ pension funds, long-underfunded by state officials with pensioners employed before 2011 owed constitutionally-protected three percent raises annually, has $137 billion in unfunded debt. The statutorily-required payment surpassed $10 billion in fiscal year 2019, but still wasn't enough to cross the level that would actually lower the liability. In total, the state’s five funds have hovered around 40 percent funded since 2009.