Illinois Idiocy: Digesting the Presentation of the Mega Pension Obligation Bond Idea
by meep
I got a hold of a copy of the presentation given January 30, to present the idea of a $100+ billion in pension obligation bonds to get Illinois state pensions up to the dizzying height of 90% funded. And something something arbitrage.
The file is kind of large, as it was scanned into PDF, but you can see the whole thing here on my dropbox. It looks like John Bury has the same file, and I will quote his observations in a bit.
I was going to run some numbers, but I want to think about this a little bit, and I will run some numbers next week. Right now, I’ll be surveying the commentary. And making some very obvious remarks.
For those who do not know my opinions on pension obligation bonds in general, here are a few posts to get you up to speed:
- Why are Pension Obligation Bonds OF THE DEVIL? A Lesson from the Dollar Auction
- Pension Obligations Bonds ARE OF THE DEVIL (Don’t do it, Brownback!)
- Pension Obligation Bonds: Oregon and Alaska — DON’T DO IT
I am not a fan, if you didn’t get the idea.
A little twitter commentary to start out:
Ahem. Plenty of actuaries see POBs for the bullshit "arbitrage" that they are. But yes, actuaries who work for public pensions like discounting at high rates. It keeps their clients happy, and there's no oversight.
— Mary Pat Campbell (@meepbobeep) January 31, 2018
Bill Status of HB4371 100th General Assembly
Short Description: BONDS-PENSION OBLIGATION
House Sponsors
Rep. Robert MartwickLast Action
Date Chamber Action
1/30/2018 House Referred to Rules CommitteeStatutes Amended In Order of Appearance
30 ILCS 105/5.886 new
30 ILCS 330/2 from Ch. 127, par. 652
30 ILCS 330/2.5
30 ILCS 330/7.7 new
30 ILCS 330/9 from Ch. 127, par. 659
30 ILCS 330/11 from Ch. 127, par. 661
30 ILCS 330/12 from Ch. 127, par. 662
30 ILCS 330/13 from Ch. 127, par. 663
40 ILCS 15/1.10 newSynopsis As Introduced
Amends the General Obligation Bond Act. Authorizes the issuance of an additional $107,420,000,000 in State Serial Long Term Pension Obligation Bonds. Amends the State Pension Funds Continuing Appropriation Act to create a continuing appropriation for payments on those Bonds. Amends the State Finance Act to create the State Pension Serial Long Term Obligation Bond Fund. Effective immediately.Actions
Date Chamber Action
1/30/2018 House Filed with the Clerk by Rep. Robert Martwick
1/30/2018 House First Reading
1/30/2018 House Referred to Rules Committee
Please, Illinois legislature, just throw this out. It does not deserve any further look-see.
NEWS COVERAGE
Before I get into the commentary, let’s take a look at the straight news coverage of the presentation.
Illinois pension mega-bond sale idea gets legislative airing
CHICAGO, Jan 30 (Reuters) – Illinois lawmakers on Tuesday expressed interest and skepticism in an idea that the U.S. state should sell $107 billion of bonds to address its huge unfunded pension liability.
At a hearing before the Illinois House Personnel and Pensions Committee, Runhuan Feng, an associate professor of mathematics at the University of Illinois, laid out a plan for selling taxable 27-year, fixed-rate bonds to get the state’s five retirement systems to a 90-percent-funded level.
….
Committee Chairman Robert Martwick filed a bill for the bond sale, emphasizing that it was in early in the process and promising to bring in bond market and other experts to testify.In order to become law, the bill would need to pass both Democrat-controlled chambers and be signed into law by the state governor, currently a Republican.
…..
The state has already been a prolific issuer of taxable pension bonds, selling $3.7 billion in 2011, $3.5 billion in 2010, and $10 billion in 2003. The 2003 deal included $7.7 billion of bonds that will not mature until 2033 and $1.4 billion maturing in 2023.The U.S. and Canadian Government Finance Officers Association has advised its state and local government members not to issue pension bonds, citing several risks that could arise from investing bond proceeds and increasing debt burdens.
(Though this comes from some of my most common offenders of the 80% funding myth, they didn’t mention it at all here. Bravissimi!)
During a fact-gathering hearing of the House Personnel and Pensions Committee, state Rep. Rob Martwick, D-Chicago, said he’s not sure if the idea is viable or not, but it’s worth investigating.
“I’m not smart enough to know that,” Martwick said. “These matters are far beyond my expertise.”
Okay, I think I made my point. Seriously, he said that?
“Think about that,” state Rep. Grant Wehrli, R-Naperville, told Illinois News Network Monday. “Illinois, that can’t pay its bills now, is going to put up more debt on our credit card in hopes of solving our pension crisis. I’m open to ideas, but simply bonding out $107 billion is massively irresponsible.”
Martwick said at Tuesday’s hearing that the state is going to have to pay pensioners one way or another. How that’s going to happen is the question.
No, that’s actually not true. But that’s for another time. Read the whole thing, it’s full of details.
A few more (not quoting):
- $107 Billion Borrowing Plan Could Save State Pensions
- Republican state lawmaker says idea to bond out pension debt is ‘massively irresponsible’
- Illinois Lawmakers Entertain Bold Bond Sale Plan
- Lawmakers look to see if UI professor’s pension fix adds up
- A $107 billion pension bond proposal greets Illinois skeptics
COMMENTARY
Here’s what other people have to say:
My first impressions:
No repayment of principal until 2035 (26 million) and then $20 billion in years 2036, 2038, 2039, 2041, and 2042 with no indication of who will be paying that as the state payment is supposed to be capped at $8.5 billion through 2045.
The estimated Normal Cost of $3,621 as of 2018 is supposed to rise to only $3,952 in 2045 (9.1% over 27 years)?
7% return on investments for the years 2024 through to 2045 is considered an “adverse scenario”?
That last one… yeah, I agree with that. I’m going to do something a wee bit fancier to develop some “realistic” adverse scenarios.
Max Marchitello at TeacherPensions.org:
Illinois Considers Perilous Path to Fund Pensions
…..
There are a number of reasons that selling a pension obligation bond (POB), particularly one of this size, is a perilous path for Illinois.1. It’s a gamble that state investments earn large returns.
…..
2. Timing matters. The moment when a stressed pension plan needs to acquire additional funds to meet its obligations is not necessarily the best time to invest in the market. The $10 billion POB Illinois issued in 2003 performed well until the market crashed in 2008. Without a significant return, a pension obligation bond can end up actually increasing debt obligations. With the stock market currently at or near all-time highs, now may not be the best time to make this sort of gamble.3. Beggars can’t be choosers. Illinois’s finances are in shambles. The state is in desperate need of resources to meet its pension obligations and it is constitutionally prohibited from saving money by slashing benefits. The state also has a record of political turmoil and financial strife. Investors know this. It is likely, then, that potential investors will demand a sizeable premium to purchase the state’s bonds.
4. A debt swap still leaves debt. Issuing a $107 billion POB doesn’t really change Illinois’ financial woes; it simply moves it around.
……
5.The pension system will continue to accrue debt. Perhaps the most significant failing of this strategy is that it will do nothing to slow down the rapid pace at which Illinois is adding to its pension debts. Taking out a loan to pay down current obligations – even if successful – won’t stop new debts from piling up. This strategy, indeed any approach to help Illinois deal with its burgeoning pension debts should be paired with broader retirement reforms.
Yup, all these are true.
And even worse — that $107 billion probably won’t get the fundedness to a true 90% – that is, if they had to value the pensions using a more realistic discount rate (not to mention other valuation assumptions… again, for another time).
Bill Bergman of Truth in Accounting comments:
llinois’ huge pension obligation bond proposal – 3 good things and 3 bad things
January 31, 2018The Illinois State Universities Annuitants Association (SUAA) recently developed a proposal for a $107 billion (with a b) bond offering designed to secure the funding of state government employee pension funds.
SUAA asserted the proposal could lead to a 90% funding ratio for the plans in 2018, up from what Truth in Accounting calculates at roughly 36% as of fiscal 2016.
Poof, problem solved? No. There’s no such thing as a free lunch.
Here are three good things and three bad things about the SUAA proposal:
GOOD THINGS
1) This is ONLY A PROPOSAL. This proposal has friends in the Illinois General Assembly, but it is far from certain at this point.
2) If the proposal becomes reality, it could improve the financial position of the hundreds of thousands of members in these plans.
3) If the proposal is enacted, it would be a big payday for financial, law and credit rating firms.
BAD THINGS
1) Good things for government pension plan members and financiers aren’t necessarily good for taxpayers.
2) Experience indicates any short-term improvement in reported funding ratios would reduce discipline in Illinois government to reform and adequately fund the plans in the future.
3) The proposal would effectively double down on the forced participation of Illinois taxpayers and citizens in risky financial markets.
That’s the nutshell version. There’s more at the post.
More commentary (not quoting):
- Robert Reed at Chicago Tribune: Proposed $107 billion bond isn’t the cure for Illinois’ public pension crisis
- Greg Hinz at Crain’s Chicago: Latest magic pension plan has some problems
- Leo Kolivatkis at Pension Pulse: America’s Pension Shithole?
- Illinois Policy Institute: LAWMAKERS CONSIDER BORROWING $107B TO POUR INTO ILLINOIS PENSIONS
- Godfather of Blago’s pension bond plan warns against replay
MY TAKE WITHOUT NUMBERS
Or rather, I’m not projecting anything yet. I’ll re-use some other people’s numbers & figures for today’s post.
Looking at the presentation, I actually agree with a lot of it.
It starts out talking about the Edgar ramp and the Statutory Funding Plan, enacted in 1994.
Here’s the Edgar Ramp:
From the presentation: first problem — 15 years of deliberate underfunding of the Illinois pensions.
That was a choice. The real message of that underfunding wasn’t that pension promises would be fulfilled. It was that they deliberately chose to weaken that promise, and that they really didn’t intend to pay the pensions.
Problem #2 has to do with valuation assumptions — yes, they can’t be static in reality. The slides unhelpfully did not make a graph with the info on slide #8. I will do so below:
Yes, I know, I didn’t start the vertical axis as 0.
But here’s the deal – the ultimate percentage from the 2011 projection was 31.5%. For the 2016 projection, it was 44.5%. That’s a 13-percentage-point increase, which is an increase in expected payments of over 40%.
Only five years between the two projections, with a 40% increase in cost. Think on that.
Oh, and I didn’t mention problem #3: they didn’t even keep up with the Edgar ramp.
The presentation then discusses the various POBs Illinois has already issued – $10 billion in 2003, and an unnamed amount in 2010 & 2011. It then gets into all the assumptions for the projections, which I will address in a post next week.
But I totally agree: the state cannot reasonably follow the Statutory Funding Plan. The reason? It’s too expensive. It’s too expensive because the pension liabilities are too big, and past behavior has made for a hole that Illinois can’t fill.
A POB will not fix the inherent problem Illinois has: it cannot credibly pay off the promises it has made.
What a POB will do is cram a bunch of cash into the pensions, that would be impossible for the state or bondholders to claw back. There’s a fake arbitrage to give it the veneer of “savings”, but the whole plan is to shove money into pensions.
Who cares what happens to the bondholders? The bondholders can look out for themselves, right?
I assume no bond insurer will come within a mile of such an offering.
CAUTIONARY TALE AND HISTORY
A reader sent me this video — actually, it’s the first of a series of 6 videos (the first 5 are the history, and the last is a discussion video). It’s about the South Sea Bubble, which I knew a little about, but not all the political intrigues (and definitely not the party politics).
The story has it all — fraud, intrigue, and the most destructive item: leverage well beyond reasonable limits.
Why do I mention too much leverage?
Oooooh, no reason.
I hope to have some numbers for y’all next time.
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