Harvard Business School Case: Tough Choices for the Illinois Pension System

1) What factors contributed to the underfunding of the Illinois pension system?

2) How big a hole does Illinois face according to the state, under applicable accounting rules, and is this estimate realistic?

3) What are the financial implications of each of the options available to the state in responding to the 2009 pension crisis?

4) What are the pros and cons of actually implementing each of these options?

5) To resolve the 2009 Pension crisis, the state eventually sold a "small" amount of pension bonds in 2010 ($3.75 billion) and 2011 ($3.75 billion). How do pension bonds work? What is the theory behind them?

6) In addition to issuing pension bonds, the state of Illinois also left the asset allocation unchanged for the pension system, raised taxes in January 2011, did not ask employees to increase their contributions, and kept employees on a defined benefit plan rather than have them switch to a direct contribution plan. Do you believe these were the correct decisions to ensure the long-term health of Illinois' pension system? If not, what would you have liked to have seen Illinois do differently?