The two United States Reps. from McHenry County have lobbed a letter about Federal pension funding guarantees into Democratic Party Governor Pat Quinn’s lap.

With Republicans controlling the House of Representatives, the following statement on Quinn’s suggestion that “Illinois may ask at some-point for a federal guarantee of its underfunded pension liabilities” has more than a little significance:

“Let us assure you now, that this is neither a viable nor realistic option under any circumstances.”

Here is what Don Manzullo and Joe Walsh sent on Congressional stationery:

March 31, 2011

Dear Governor Quinn,

We are writing to urge you to address Illinois’ drastically underfunded pension liabilities. The state of Illinois has the largest unfunded pension program in the entire country; topping almost $85 billion dollars. 35 cents out every dollar goes into these pension programs, but they are still underfunded by 55%. We are concerned that if this issue is not addressed immediately, Illinois will face increasingly difficult decisions.

The State of Illinois is struggling to pay current pension pay-outs and has begun to issue pension obligations bonds and notes to fund these current payments. In January 2010, Illinois issued $3.5 billion in these pension obligation bonds.

Then, in February 2011, Illinois issued another $3.7 billion of the same type of bonds to fund current pension payments. Despite the short time between issuances, the credit spread on these bonds more than doubled in just one year.

This highlights an enormous jump in credit risk and continues to demonstrate why Illinois has the worst credit rating in the country.

Indications are that Illinois would be subject to even higher interest rates but for the lack of competing municipal issuances. It is safe to assume that competing issuances by other states with better credit would likely have driven rates higher, increasing costs further for Illinois.

In your recent 472-page budget proposal, you implied that Illinois may ask at some-point for a federal guarantee of its underfunded pension liabilities.

Let us assure you now, that this is neither a viable nor realistic option under any circumstances.

In repeated hearings, the Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs has shown that there is no precedent for any such action by the federal government. Experts testified that this is specifically a state issue; any bailout of a state is not feasible, and will undermine the authority of your own state government.

Once again we must stress that your office must address the underfunded pension programs.

As the governor of the State of Illinois, we urge you to take a leadership role moving forward with pension reform.

Recent actions taken by the state legislature to raise the retirement age of new employees hired in the 2010 fiscal year is a step in the right direction, but it still fails to address the real problem.

We urge you to continue searching for real and effective solutions to ensure the future stability of the State and Municipal bond market, and put Illinois on the path to a better functioning pension system.

Please provide a response to the questions below detailing your plan to reform Illinois’ critically underfunded pension program that considers the risks and concerns described above.

• If Illinois continues to borrow with taxable bonds to fund its pension program, how will this affect its overall cost of borrowing? Will this further harm Illinois’ credit?
• Given the gravity of the situation, are reforms that affect only newly-hired employees enough? In the private sector, employers must honor benefits that have already been earned, but can alter pension arrangements going forward – say, by freezing their Defined Benefit plan or changing their matching contributions to Defined Contribution pensions.
• Why can we not do this for public employees in Illinois? If there are legal hurdles to doing so, would you support changing the law to make it easier to alter the pension formula for current employees?
• Did Illinois properly consider the risk associated with borrowing at such a high interest rate? What plans do you have in place if your forecasted returns are less than what you expected?

Sincerely,