STUMP » Articles » Pritzker's Plan for Illinois Pensions: "Clever" Tricks - POBs, Pay More Later, and Asset Transfer » 16 February 2019, 11:19

Where Stu & MP spout off about everything.

Pritzker's Plan for Illinois Pensions: "Clever" Tricks - POBs, Pay More Later, and Asset Transfer  


16 February 2019, 11:19


Well, if you’re going to go for the gold, you may as well throw in all the clever tricks.

I will grab from Wirepoints about the main “clever” ideas.

The administration will pursue three of the worst ideas available:

• First, the state will borrow to pay off pension debt by offering a $2 billion pension obligation bond. We and many others have already written very extensively on why pension obligation bonds are irresponsible. One credit card to another solves nothing and adds risk.

• Second, the state will kick the can on its ramp for taxpayer pension contributions out seven years. The new goal for reaching 90% funding (which is still inadequate) will be 2052. Your grandchildren will fully understand why pensions are called intergenerational theft.

• Third, the state will gift public assets to the pensions. The particular assets and their value remain to be identified, but speculation has centered on the Illinois Tollway, the Illinois Lottery and government office buildings. The concept goes by the name “asset transfer.” We explained why it’s a sham in an article just yesterday. A pension actuary writing in Forbes did the same.

So. Let’s take these in order. The first two perfunctorily, because I’ve written about those specific issues before. QUITE A BIT, even. I will mainly provide old links there.

But I haven’t written much about asset transfers, so I want to address that one in a more lengthy manner.


I have written extensively on pension obligation bonds. I will gather together my best posts on that in a moment, but I want to point out the sheer futility of the POB idea.

He wants to issue $2 billion in POBs.

Would you like to know the current unfunded liability for Illinois pensions?

Taking the most recent data from the Public Plans Database, and excluding all the Chicago plans and IMRF (which is fairly well-funded), here’s your number:

Now, you’ll see that two of the state plans are missing from my reckoning, because they are missing from the Public Plans Database – the judges and the legislative. They’re teeny. That’s why they’re not in the database yet. In any case, if I added them, the POB would make up a (slightly) smaller percentage of the total unfunded liability.

(Indeed, I checked Deputy Governor Hynes’s speech, and he references $134 in unfunded liabilities. My numbers are from FY2017, by the way.)

So. The POB wouldn’t fill the whole to any appreciable extent. What’s the point? Oh right, a fake contribution to the pension fund.

In any case, if the bond market should give the POB a price that the fake arbitrage involved in POBs wouldn’t do a damn thing, this particular bond issue might not happen.

Prior POB posts:

For that last item — there was a proposal out there to issue a $100 billion POB — that would substantially fill the hole (while adding a hell of a lot of debt to the state balance sheet).

I did some analysis of modeling that went along with the proposal, and here was my conclusion:

There are many practical problems with issuing $100 billion in POBs when you’re a state in such a hole like Illinois. If they even get closer to trying to do this, I’m sure many bond people will come out of the woodwork to explain what price they may actually get. I don’t feel like stressing that aspect.

But this is something I did very simple, just trying out the asset-side assumptions. I didn’t do anything fancy. The issue with this kind of move is that more leverage is injected into the system, meaning that while you may have improved survival rates, if it goes bad, it can make things much much worse.

The “extreme scenario” that Prof. Feng projected wasn’t extreme at all. It just used a short portion of Illinois’s actual experience with asset returns, and then kept returns level at something a little bit under expectations.

I just did something based on real-world-calibrated economic scenarios, and the result isn’t nearly so rosy. For something this big, you need to at least put a little more work into it to quantify the risks and rewards.

So instead of putting more work in, they put this half-assed (or 2%-assed) proposal out there.


I don’t even feel like finding … oh, I lie. Here are a couple relevant posts:

Here, have a Kick the Can video.

I always loved that bit in the Twilight Zone movie, even though I was a kid at the time. Have the original version:

But kicking the can on pensions is not so much fun… especially if the kids you’re kicking the can to… aren’t there.

Let me reference Elizabeth Bauer’s Forbes piece on this proposal:

And, fifth, kick the can down the road. Currently, state law mandates contributions be made at a pace to achieve 90% funding by 2045. Hynes/Prizker’s plan is to revise this schedule so that the 90% funding target is deferred for a further seven years.

Now, I understand that no one wants to spend one tax dollar in five solely on funding pensions, or, as Hynes said, we cannot tolerate a situation in which we “vacuum up more and more of our precious tax dollars into pensions.”

I also get that it seems like an arbitrary demand made by some bean-counting actuaries to demand that plans be funded, especially if it was prior generations which created the mess (though many of those same politicians remain in power today) and if its people in the here and now who aren’t having their social service agency bills paid, for example.

But Hynes said we will need to make sacrifices, and I see no sacrifices anywhere in that plan: make the rich pay while the middle class get tax cuts, borrow more, keep plans unfunded longer. And in the meantime, the state’s pension plans are just at risk of further funding drops as the city of Chicago experienced, in the event of a market crash or ongoing inability to reach their investment return targets. Refusing to put any sort of pension benefit reform on the table — refusing to even put an enabling amendment on the table while insisting that a graduated income tax amendment is our unalterable future — is not the sound financial management he claims to be bringing to the state.

The big problem with the “pay more later” idea — which is “we can’t pay much more right now, but because of growth/inflation/whatever, we’ll be able to pay more later” in longer form — is that it doesn’t necessarily become easier to pay more in the future.

Ask Detroit and Puerto Rico, which saw substantial population drops in small periods of time, in a vicious cycle that lead to more-and-more unaffordable debt payments.

In Detroit’s case, it was able to blow away some of its debt, because it had recourse to federal bankruptcy.

Puerto Rico is still limping along, because it’s not being allowed any sort of normal federal bankruptcy process.

Illinois is more like Puerto Rico than Detroit in that matter. There is no federal bankruptcy process for a state. A state can default, though.

So the POB and the “move the ramp out farther” ideas barely make a dent in anything.

Let’s look at that last idea.


The asset transfer idea is the least developed, because the devil is in the details.

Deputy Governor Hynes offers details on options for pension plans

Hynes was less specific about the possibility of selling off state assets, a move he said could be worth “tens of billions of dollars.”

Pritzker announced Monday that he was forming a task force to study the possibility of transferring state assets to the pension system, but Hynes’ speech Thursday offered a more detailed glimpse into what the administration is, and isn’t, considering.

When asked by an audience member what kinds of assets they were considering to sell, Hynes jokingly said, “Don’t say tollway; don’t say tollway; don’t say tollway.”

“I joke about the tollway, but like that’s what everyone’s going to think,” Hynes said, according to a video of the event that was posted online. “And you have the Lottery. Any kind of cash-generating asset is a logical place to think of. But it’s not that simple. Those are actually complex because there are bonds attached to it. There are stakeholders.”

More likely, he said, the administration would look at some of its office buildings and other real estate.

“The state of Illinois in 2000 had 80,000 employees. Today, we have 60,000 employees,” Hynes said. “So not only does that contribute to the whole unfunded problem because we have fewer people paying into the pension system, but from a capacity and utilization of our properties standpoint, it begs the question: What are we doing with this excess space? Has it been looked at? Have we consolidated office space? Have we sold buildings of the state that we don’t need? And that’s what we’re going to be looking at.”

So, there are all sorts of problems here.

I’ve looked at the problem of simply designating lottery proceeds to the pension plans: cash is fungible, and they’re already using lottery proceeds for something, and, as well, lottery revenues are not necessarily dependable. Heck, Illinois’s lottery proceeds grew only 0.7% in 23 years (and that’s nominal!)

It’s one of the lowest-growing proceeds sources they have!

Then, you want to be careful about car-related “assets” — what if technology makes those assets worth less? (if not worthless) Though their new idea of taxing by the mile driven is super-special. [that’s going in next Taxing Tuesday]

But the specific item mentioned is office space. So are they going to sell the buildings to commercial concerns and just give the pension funds the proceeds? (what I would recommend, if they’re really going to do it.)

Are they going to transfer the ownership to the pension funds and then have the pensions charge the state rent? (do I have to tell you what an idiotic idea this is)

There’s all sorts of issues with commercial real estate, which any state-owned office buildings would be. Remember this morning’s post on the failed Amazon deal? There was one story about the hit New York real estate is taking in that particular corner of Queens.

Already, the euphoria is evaporating. The real-estate investment firm Savanna had a commitment from Amazon to lease the majority of a 1.4 million-square-foot office tower in Long Island City. With the building’s main tenant, Citigroup Inc., likely to leave in 2020, Savanna now faces a one-million-square-foot hole in the building that it now needs to fill.

What do you think the value of that office building is to Savanna right now?

So, say the office buildings are transferred to the pensions… and then the state greatly contracts its workforce, and the pension plans now have to scramble for new tenants.

I haven’t even begun to talk about the balance sheet shenanigans that could occur — I’m just talking about operational difficulties in managing these assets, if it’s truly being transferred to the pension fund control, as opposed to the state just taking cash flows from one revenue source and shoveling it into the pensions… when it’s all one big money pot to begin with.

The balance sheet shenanigans involve the difficult valuation of many of the assets they’re talking about, even for private entities. It’s easier when it’s liquid market securities. Just go find the market price.

But items such as private equity holdings, outright ownership of commercial real estate, and rights to collect tolls – you don’t know the value until you actually realize it.

And, frankly, the Illinois pension funds hold quite enough “alternative” assets as it is. Sticking with the Illinois Teachers Fund, we see that traditional fixed income and equities make up about 60% of the asset allocation — the rest being real estate, private equity, hedge funds, and other alternative asset classes.

If you compare that against comparable public pension funds… well:

I think the Illinois pensions have plenty of illquid, hard-to-value assets as it is, thank you very much. If you want to shove more cash in to the pension funds… you could be doing that already.

So…. this is bullshit.


Other items on the asset transfer idea (and some others):

And here is something from Wirepoints last year: Latest Bad Pension Idea: Transfer Midway Airport And Other Chicago Assets To Its Pensions.


So, the really sad thing is that these are all tricks. And no, there’s nothing particularly clever about it.

These tricks don’t fix the inherent problems in the unfunded liabilities – and absent a state constitutional amendment, they really can’t deal with those unfunded liabilities in any meaningful way except try to pay until the money runs out.

This is what Hynes said in his speech:

Let’s start with this critical point: These are pensions that workers earned — workers who served as teachers, as janitorial staff, as laborers, as nurses. These are pensions that were promised to them and these workers have planned around and relied upon them for their retirement.

But these pensions were never supposed to eat up 20 percent of our budget.

And perhaps it would not have, if they actually kept the promises modest (such as no automatic COLAs, etc.) and if they had actually paid the costs as they came.

The year was 1994, and our government leaders realized there was a problem. The state’s pension systems were headed on a financial collision course with actuarial and mathematical reality. Experts were convened plans devised — and it was decided: The State would embark on a 50 year plan to pension solvency.

This plan was well-intentioned, no doubt. And at first, it seemed to work— the systems were 70 percent funded in 1997.

But there were hidden flaws, and unanticipated hiccups.

The flaws only became evident when markets got shaky and we realized that people were going to be living longer.

First, the payments were backloaded. They would steadily increase, but the real pain was left for the out-years.

Then, system assets dropped by 10% during the crash and by 31% during the Great Recession. Only then did the systems realize that their projected rates of return were unreasonably high.

That people were living longer should not have been a surprise.

That markets can drop should not have been a surprise…if you didn’t want asset values to drop, you should have been in less risky investments.

The backloaded payments (which they’re STILL PROPOSING) – i.e., “pay more later” – are inherently risky, and that is not a surprise.

None of this was a surprise.

They just thought that the “later” reckoning would come after they were comfortably out of office. Later is now here. And they’re still thinking later can be pushed 50 years from now.

Some of these plans are going to be causing trouble in terms of asset death spirals well before then.

Remember, we were 70% funded in 1997. Yet, for all the taxpayer dollars we poured into state pension funds over the last 20 years, we’re now only 40 percent funded. That’s 30 percentage points LOWER than just after this ramp began.

It is truly like the Greek myth of Sisyphus pushing that pension boulder uphill, only to have it slip back down each time he makes progress.

Actually, it’s nothing like Sisyphus.

Let me explain.

Ignoring why Sisyphus had his particular Hadean punishment, it involved pushing a stone up a hill, and each time he got near the top, the stone would slip from his grasp, and the stone would roll to the bottom.

So. Let’s check how well Illinois has been pushing that stone up the hill, shall we?

I will pick the two largest Illinois pension funds — first, Illinois Teachers.

Let’s look at that funded ratio:

Hmm, there’s one bump up in 2004, but I don’t see a hell of a lot of pushing up that hill.

Let’s check the contribution pattern:

Huh, how did that funded ratio bump up in FY2004, given the ARC was so low… and Illinois didn’t even pay it? Ever?

(Pension obligation bond, of course)

Let’s check the largest statewide fund, IMRF.

Here’s the funded ratio:

And here’s the contribution pattern.

Somebody notice a difference between the two patterns?


IMRF might be likened to Sisyphus, but it seems the load isn’t too bad there. The reason is that the municipalities are forced by the state to pay the full contributions (which does cause problems for places like Harvey), so, unlike the state-run plans where they never paid full contributions, they can absorb some losses without hurting too much.

Illinois Teachers could be likened to Sisyphus if Sisyphus mainly let the stone roll down as he leaned up against it (not pushing it up), at one point bribed a flying monkey to lift the stone part way up the hill and he leaned up against it while it pushed him down the hill because it was so heavy… and he’s not pushing it at all.

Illinois has never paid “full” contributions to the Teachers fund. And now we’re hearing they’re still not going to.


This surprises no one.

No, they’re not going to fix the pension problem. They just hope that they can keep kicking the can, and that they’ll be out of the office before the money runs out.

Just like Edgar, back in 1995.

Just like Blago, in 2003.

Well, Edgar is 72 years old and Blago is still in federal prison, but he should be getting out around the time a few of the Chicago pension funds will run out of money. Won’t that be fun.


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