Pension Fund Rescue

Here is a development that is long overdue.  Illinois police and fire pension funds are typically investing about 60% of fund assets into US government bonds and Agency debt, with the balance in common equities.

Illinois public pension funds have an estimated $60 Billion in unfunded pension liabilities.  Pension payouts are outstripping the degree that employers and employees can try and fund the deficit.  Lawmakers are not taking  enough steps to cure this matter..”The Ticking Pension $60 Billion Time Bomb”  They recently set a new retirement age and benefit payout for “new hires”.  Yet, any favorable impact from that will not appear until 25 years from now.  The pension funds are estimated to run out of cash by 2017…7 years from now.

So, here comes Senator Chris Lauzen and Capital Management Associates (CMA) to the rescue.  Senator Lauzen, a financially astute lawmaker, requested CMA to offer a solution towards increasing public pension fund annual income returns to help “plug the hole” in pension fund asset resources from unmanageable growing payout trends.

CMA proposed to Senator Lauzen that the Ill Legislature adopt an Amendment to the Ill Pension Code: 40 ILCS 5/1-113.1, Which will allow pension funds to invest up to 30% of  ”net assets” into corporate debt obligations.  This is long overdue in that the typical fixed income investment allowed for these funds is the 5 year Treasury Bond or Agency security that is currently paying only 1.5 to 3%.  The Code Amendment will allow pension funds to use corporate debt of the same and longer durations and earn near 7% interest returns.

The Code Amendment that Senator Lauzen has proposed for a Spring 2011 vote has many constructive safeguards proposed by CMA to include: Investment Grade debt, no issuer holding that exceeds 3% of assets, no more that 15% of assets in the same industry sector, no deferrable interest debt obligations, no more than 25% callable, no permitted debt leverage, and a kick-out provision if any debt security is marked down to below “Investment Grade”.

This Code change is very constructive for ILL Pension Funds to head off more serious underfunding in later years.

If you would like to learn more about the Corporate Debt Code change, as proposed, please contact Bill Tasker at CMA at email Bill@CMAAdvisors.com.  Bill can also send you a portfolio illustration of a “compliant corporate debt portfolio” for your Board or Investment consultant to review.

I strongly recommend that if you are a Trustee, Pension Board President, or Village Manager…please contact your Illinois lawmaker and ask them to support the passage of this Bill.