Illinois Funds Make Good Investing Call on Pension Bond Proceeds

January 15, 2004 ( - The Illinois State Universities Retirement System and the other state pension contributory systems apparently made a wise move in defying Governor Rod Blagojevich about investing the proceeds of a $10-billion pension bond sale.

End-of-year financial reports show the pension systems earned dramatically higher returns than if had they had agreed to the administration’s request to make only conservative fixed-rate investments such as bonds or Treasury bills, according to a News Gazette news report.

“In the first six months, we have earned $507 million, which is an 11.7% return,” said Jon Bauman, executive director of Teachers’ Retirement System. “If it had been all in short-term bonds over the six months, that would have returned about 1.2%.” That’s a difference of about $450 million, he said. “We’re obviously very gratified with these results,” Bauman told the newspaper.

The State Universities Retirement System did even better: 13.1%, net of fees, compared with the 0.2% return the bond market would have provided or the 0.5% from treasury bills. “If we had sat on the sidelines with the money in T-bills we would have missed out on this 13.1% rate of return,” said James Hacking, executive director of State Universities Retirement System.

The early success is good news for the governor’s complicated pension bond scheme (See  Illinois Legislature Okays $10 Billion Pension Bond Issue ), which is predicated on earning solid investment returns over the next three decades. The state sold $10 billion in pension bonds back in June for an extraordinarily low interest rate of 5.05%.

The state used about $2.7 billion from the bond sale to cover pension contributions for the year ending June 30, 2003, and the current budget year, which ends June 30, 2004. The move also freed up an equal amount of state funds for other uses in this year’s budget. Blagojevich is counting on the investment proceeds from the other $7.3 billion to pay back the full $10 billion plus interest when it comes due in 30 years.