The editors of the Wall Street Journal are kvetching about Illinois again:
At the request of state retirees, a University of Illinois math professor performed a crack analysis showing how the state could use interest-rate arbitrage to shave its pension costs. Under the professor’s math, the state could sell 27-year, fixed-rate taxable bonds and invest the proceeds into its pension funds. This would supposedly stabilize the state’s pension payments at $8.5 billion annually, save taxpayers $103 billion over three decades and increase the state retirement system’s funding level to 90% from 40%. Can the mathemagician make House Speaker Michael Madigan disappear too?
The professor based his analysis on pension obligation bonds issued under former Gov. Rod Blagojevich in 2003 with a 5.05% coupon that have earned on average 7.62% in the pension system. But that period included two bull equity markets, and even the state pension funds project only a 7% long-term return.
Illinois’s borrowing costs have also increased as its credit rating has slipped to a notch above junk from double-A. Last year the state’s taxable bonds due in 2035 traded at yields up to 7.2%. Investors may demand even higher rates because of the substantial interest-rate and credit risk given rising rates and the length of the 27-year bonds.
These magic bonds wouldn’t carry the state’s “full faith and credit†protection, for whatever that’s worth nowadays in Springfield. In effect, public workers’ pensions would be the bond security.
You can’t say it’s not well-deserved. It’s the assumptions, stupid. Illinois’s pension plans are founded on bad assumptions. For example, they assume 7% returns and in the recent past have assumed as high as 8%. They also assume a state with a growing tax base instead of, well, what Illinois has become.
The editors are right. This is sleight of hand, intended to shift the risk incurred by Illinois’s politicians mishandling of public employee pensions from public workers and retirees not to mention politicians to taxpayers and investors. Will the investors bite?
[…] Will the investors bite?
Yes, and when they are inevitably not repaid, they will scream ‘bloody murder’. When that day arrives, I would confiscate everything any investor has and put them in the ‘poor house’.
The reason that Chicago, Chicago School System, Illinois, or any other irresponsible borrower can borrow is because these idiots keep lending them money.
They ran into some problems with that last round.
Were they able to sell them?
IIRC the last bond sale was in October, it was a tiny fraction of what they’re talking about selling, and they encountered some difficulty then. There are multiple predictions they will be unable to sell bonds in the volume they’re talking about.