Governor’s proposal could reduce deficit by nearly $2 billion
Refinancing pension obligation could generate long-term savings of more than 10 percent
SPRINGFIELD -- Continuing to press for innovative solutions to address the state’s fiscal challenges, Gov. Rod R. Blagojevich today proposed that Illinois take advantage of an unusually favorable climate for low-interest rates by refinancing a portion of the state’s outstanding $35 billion pension obligation.
If Blagojevich’s proposal is enacted, the state could experience budget relief of close to $2 billion over the course of this fiscal year and the next, thereby helping to close a large portion of the state’s deficit.
“This is a creative, yet commonsense, approach,” Blagojevich said Wednesday. “It represents a new -- and a better -- way of doing business.”
The governor said that he would urge lawmakers to enact legislation calling for an increase in General Obligation bond authority and for permission to use those proceeds to fund pension obligations of the five state retirement systems.
Blagojevich emphasized that pension refinancing presents an opportunity to significantly slash the state’s current budget deficit by approximately $300 million during the remainder of fiscal year 2003, and another $1.6 billion during upcoming fiscal year 2004.
Normally, state contributions to the pension funds are paid primarily through the General Revenue Fund (GRF). Under this proposal, however, contributions for the remainder of FY 03 and all of FY 04 would be covered, instead, by the newly-offered bonds.
Under the governor’s proposal, proceeds from the bonds -- rather than funds taken out of GRF -- will be used to make payments owed for the current and next fiscal year, resulting in $1.9 billion of deficit relief.
“By taking this step today, we can address our state’s current fiscal crisis,” he said.
In addition, the proposal offers long-term possibilities for savings to the state, by effectively lowering the interest on the state’s current 42-year $35 billion obligation, which stands at 8 - 8.5 percent. Through the use of new pension obligation bonds financed at current market rates, however, the state can effectively reduce those interest costs on a portion of the obligation to around 6 percent.
As a result, the state could enjoy long-term savings of around 10 percent or more over the life of the bonds. Annual savings would depend on the structure and terms of the bonds.
Blagojevich said that the proposal demonstrates that his administration “is committed to responsible spending— and, to fulfilling our sworn responsibility to the people who have worked hard to serve the people of Illinois.”
The governor and his budget director, John Filan, unveiled the proposal at press conferences in Chicago and Springfield and were joined by business and civic leaders supporting the plan.
If no changes are made, Illinois’ annual pension burdens will increase by as much as a billion dollars per year by 2007.
Blagojevich said that the concept should sound familiar to many homeowners who take advantage of opportunities to refinance their mortgages. After the bonds are issued, a certain portion of pension obligation will likely remain at the original interest rates of 8-8.5 percent. However, another portion of the obligation (representing the amount offered in bonds) will be set at the rate of approximately 6 percent, allowing taxpayers-- like homeowners who have refinanced a mortgage-- to benefit from the reduced financial burden.
While the proceeds from the proposal could help erase a large share of the state’s nearly $5 billion deficit, Blagojevich stressed that refinancing the pension obligation would be appropriate regardless of the state’s fiscal challenges.
“I would just as strongly promote this idea if I had inherited a surplus, or a balanced budget —rather than the largest deficit in state history,” he said.
Several independent groups offered their support for the plan. In Springfield, the governor was to be joined by representatives from the Illinois Retail Merchants Association, the Taxpayers’ Federation of Illinois, the Illinois Manufacturers Association and the Governor’s Council of Economic Advisers.
Scheduled to appear with Blagojevich in Chicago were representatives of the Illinois Retail Merchants Association, the Illinois Manufacturers Association, the Chicagoland Chamber of Commerce, the Chicago Civic Federation, the Illinois Chamber of Commerce and the Illinois Hispanic Chamber of Commerce.