Asset transfers to the state pension systems: Six questions to be answered
February 18, 2019
One idea that has been proposed by a number of observers to repay some of Illinois’ pension debt is an “asset transfer.” Under this proposal, the state (or the City of Chicago, which is also facing a large pension debt problem) would make a contribution to the pension systems in the form of a publicly owned property, such as a tollway or lottery, rather than in the form of cash.
Proponents point to a number of advantages from such a move. First, the value of the asset would be added to the pension systems’ balance sheets, immediately reducing the systems’ debt, or “unfunded liability.” Second, as in the case of a tollway or lottery, the asset might produce its own revenue stream, which would provide an ongoing source of funding for the pension systems into the future. Finally, because annual state contributions to the pension systems are driven largely by the need to repay pension debt, if the asset transfer significantly reduced the amount of that debt, it could also reduce the state’s annual contribution, freeing up revenue for other current services.
This Analysis briefly looks at two recent examples of large pension asset transfers in New Jersey and Queensland, Australia, representing two paradigms: A revenue-generating asset that creates a dedicated funding stream, versus a one-time windfall from privatization.
The Analysis then poses six important questions for any asset transfer in Illinios:
1. What assets can be transferred, and what restrictions woudl the state face in transferring them?
2. Will the asset include a revenue stream currently used for other purposes? If so, how will the state replace that revenue?
3. Will the transfer be an implicit promise to privatize the asset?
4. How will the asset transfer affect the state's overall pension contribution levels?
5. How would an asset transfer affect management of the asset itself?
6. How will the asset transfer affect the pension funds' anticipated investment returns, and how will that affect the size of current liabilities and the state's required contributions?
You can download this Analysis as a PDF below, or read it at the Budget Blog here.