AG settlement to put $200M back into Illinois pension systems

[August 22, 2014]  BY BRADY CREMEENS | Special to Watchdog.org
 
 CHICAGO — Illinois Attorney General Lisa Madigan announced Thursday that her office has reached a settlement agreement with Bank of America that will provide $200 million in relief for Illinois’ pension systems. This settlement, however, will have little impact on Illinois’ overall unfunded pension liabilities.

“Bank of America’s misrepresentations cost large government investors such as Illinois’ pension systems to suffer significant losses,” she said during a press conference. “Of the $300 million I have secured in Illinois’ settlement, $200 million will fully cover the losses Illinois’ pension systems incurred for investing in Bank of America’s residential mortgage-backed securities.”

Madigan sued Bank of America after an investigation revealed that between 2006 and 2008 the bank participated in marketing misconduct and the sale of risky residential mortgage-backed securities.

This month, her office reached the settlement agreement, which totaled $300 million. Of the $300 million, $200 million will be put back into Illinois’ pension systems and $100 million will be dedicated to consumer relief in the form of assistance for homeowners and funding for blight reduction — areas of deteriorated or inadequate land use.

The Illinois Teachers Retirement System will receive $154.2 million, State Universities Retirement System will receive $2.6 million and the Illinois State Board of Investment, which oversees the State Employee’s Retirement System, General Assembly Retirement System and Judges’ Retirement system, will receive $43.2 million.

“Illinois pension systems invest in mortgage backed securities,” Madigan said. “And the assets of those securities were the risky mortgages that people were put into during the housing bubble. But when that bubble exploded, those investments lost a tremendous amount of value.”

The Illinois pension systems lost investments will be recovered as a result of this agreement. Regarding the state’s overall unfunded pension liabilities, the impact of this settlement will be minimal and won’t fix the underlying problems the pension system faces.

“It will have a very small impact, but it obviously helps the cause,” she said.

Joe Luppino-Esposito is editor and counsel at the Illinois chapter of State Budget Solutions, a budget research and analysis organization that aims a large amount of focus on Illinois’ pension crisis.

“A deal like this certainly helps because every little bit helps,” Luppino-Esposito said. “But the state has quite a lot of ground to make up. We aren’t just talking about a few bad investments, but the entire way the pension system is handled in the first place.”

Luppino-Esposito said for too long the state has been basing its pension expectations on an unrealistic rate-of-return and making benefit promises it cannot fulfill. He said the solution is to begin moving away from a state-based pension investment program.

“We need to start shifting to defined contribution plans instead of defined benefits plans,” he said. “This would allow people to have more control over their own money. It’s more stable. This doesn’t mean they’d be immune to stock market ups and downs, but they’re certainly more predictable at the individual level.”

INN’s Lesley Nickus contributed to this report.

Brady Cremeens is a reporter with the Watchdog affiliate, Illinois News Network.

[This article courtesy of Watchdog.]