Report finds Illinois holds 30% of pension obligation bond debt in nation

[September 17, 2021]  By Andrew Hensel

(The Center Square) – A new report shows Illinois holds 30% of the nation's pension obligation bond debt.

A pension obligation bond is a form of debt that some states use to make payments to state-run pension funds. A pension obligation bond gets paid out by a third party and the state then pays back that loan with interest. Financial experts often advise against the use of pension obligation bonds, said Adam Schuster of the Illinois Policy Institute.

"The Government Finance Officers Association and credit rating agencies have recommended that governments stay away from pension bonds due to the large interest they bring," Schuster said.

The interest on the pension obligation bonds continues to climb and is leaving Illinois in a worse spot than it was previously in. The state has borrowed a total of $17.2 billion since 2003, but repayment cost is now $31 billion. Pension obligation bonds can save taxpayers money if the interest rates on the bonds is lower than the rate of return on the pension investments. If the rate of return drops below the interest rate on the bonds, then taxpayers are on the hook for the difference. This is a strategy that Schuster said is the same as gambling with the state's money.

"This is simply swapping out one debt for another debt," Schuster said. "They are essentially gambling that the interest rate will cause you to win on that bet."

Illinois currently has the worst credit rating in the country, which results in high interest rates on these pension obligation bonds, Schuster said.

"Because our finances are so bad already, we end up paying very high-interest rates when we issue those bonds," Schuster said. "We have the worst credit rating in the nation, just two points above junk status."
 

Illinois finally received its first credit upgrade in 20 years due largely to one-time federal stimulus funds from the pandemic. The use of the pension bonds puts Illinois at risk to slip back toward junk status by using a tool that has historically been shown to be unsuccessful.