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In the midst of concern over state budget cuts, layoffs and the future management of employee benefits, a new financial issue may be hovering nearby.
Although the state has newly acquired assets from the sale of pension bonds, the assets have yet to be invested because state representatives cannot agree on a strategy.
Illinois is currently obligated to make employer contributions to five different pension systems. These systems cover state universities, state employees, judges, the General Assembly and downstate teachers.
Since Illinois had only funded approximately 54 percent of its total pension obligations, Gov. Rod Blagojevich's spring proposal to issue additional general pension bonds was viewed by many economic analysts as a good idea. It was a way to take a stab at alleviating pressure from Illinois' financial woes, school funding issues and fiscal system shortcomings.
With the passing of House Bill 2660, Illinois sold $10 billion in pension obligation bonds bearing 6-percent interest. Approximately $2.1 billion of the bond proceeds funded the state's unpaid pension obligations for this year and 2004. In addition to this, $7.3 billion went to the state's pension funds for investing.
James Hacking, executive director of the State Universities Retirement Systems of Illinois, said SURS supported the bill.
"The sale of those pension bonds was done with our blessing," Hacking said.
He said other initiatives that threatened to upset control over participants' assets had been avoided, but there is still cause for concern.
Representatives from SURS, the Teachers Retirement System and the Illinois State Board of Investment, do not see eye to eye on how the proceeds should be invested.
"Since the end of the legislative session, there have been many meetings to discuss the distribution of the proceeds from the bond offerings," Hacking said.
At a meeting on June 3, John Filan, director of the Office of Management and Budget of the State of Illinois, said that the pension funds should be responsive to the needs of the state while staying obligated to participants and beneficiaries.
Representatives from SURS and TRS have said that to manage the funds in any interest other than the participants would be imprudent.
On June 9, Lawrence Morris, a representative from Chicago-based Mesirow Financial Services, the financial consultants to the State, presented an investment option that does not sit well with SURS representatives. Morris said that, while the state is interested in protecting the principal, the state is very interested in "cash-like volatility with equity-like returns."
"He suggested that the proceeds be invested in hedge funds, but the numbers don't justify such a risky investment with $7.3 billion," Hacking said. "When he said it, the initial reaction from the room was stunned silence."
A hedge fund is an investment that seeks attractive, absolute return. In pursuit of this, hedge funds use a wide and often risky variety of investment strategies and tools. The manager of the fund usually receives a percentage of the profits earned.
"[Filan] has not presented information that warrants such an aggressive strategy with these assets," Hacking said. "Our participants have every reason to be worried."
Additional meetings are planned for early July that will include all three Boards of Trustees.
