STUMP » Articles » Chicago Stupidity: Universal Basic Income, Pension Obligation Bonds, and Divestment » 19 August 2018, 19:36

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Chicago Stupidity: Universal Basic Income, Pension Obligation Bonds, and Divestment  


19 August 2018, 19:36

So the “usual” Chicago Stupidity we hear about is the type headlined on Hey Jackass!, my favorite site for Chicago shooting stats.

Well, the trend for murders in Chicago is not quite as bad as the prior two years…but there was a particularly bad weekend recently.

But I don’t want to deal with that stupidity now.


Even though they can’t pay for their pensions. But hey, another town trying out UBI, Stockton, California, can’t really pay for pensions, either. So nothing new.

So let’s check the arguments. First up, Dan Hemel, the tax law professor with the New York could disclose Trump’s tax returns! theory.

Why Chicago should test a ‘basic income’ program

Chicago will soon learn whether its bid for Amazon’s second headquarters has won over the e-commerce conglomerate. But while it waits, the city has a chance to take a step that could do more for many low-income families than the location of Amazon’s HQ2 here: Chicago could become the second city in the U.S.—and the first major metropolis—to host a “basic income” pilot program.

“HQ1” for basic income is Stockton, Calif., a struggling city 90 minutes east of San Francisco with roughly one-ninth Chicago’s population. Stockton’s dynamic 28-year-old mayor has teamed up with private donors to provide 100 Stockton residents with $500 a month—roughly equal to the Census Bureau’s threshold for “deep poverty” for a single individual. The program aims to launch early next year.

The mayor should move forward with the plan—for three reasons.

First, a pilot in Chicago could shed light on the potential effects of giving cash to low-income families with no strings attached. Evidence from elsewhere is encouraging. After the Eastern Cherokee tribe in North Carolina started to distribute roughly $4,000 per year in casino profits to tribal members in the mid-1990s, researchers observed an increase in school attendance and educational attainment as well as a drop in criminal arrests among children whose families received the payments. Adult tribal members were no less likely to work as a result of the additional money. A study of an earlier cash transfer program in a Canadian town found that dropout rates and hospitalization rates declined among cash recipients. A pilot here would show whether the results of these earlier studies can be replicated in a very different setting.

Second, the test need not cost the city government a cent. Stockton has committed to financing its demonstration project through private donations. Chicago’s program would be 10 times the size—and thus roughly 10 times the price—but Chicago is also home to a much larger and richer philanthropic community than Stockton is, and the high profile of a Chicago pilot would likely attract support from wealthy donors beyond the city who have expressed enthusiasm about basic income plans. The pilot would cost $6 million a year plus very modest overhead—a fraction of what some local nonprofits like the Art Institute of Chicago are able to raise. If the money doesn’t materialize, the project can be shelved. If it succeeds, then the city can evaluate the evidence and consider in the future whether to use taxpayer funds for a larger-scale permanent program.

Third, a basic income pilot in Chicago would bolster the city’s reputation as an innovation hub for social policy. Ever since Jane Addams and Ellen Gates Starr co-founded Hull House in 1889, Chicago has attracted activists, philanthropists and social scientists seeking solutions to the problem of poverty and its consequences. A pilot here could re-establish Chicago as a city to which others look for policies that work.

HA HA HA HA HA HA. Jeez. No.

Chicago’s track record on policy (as a city):
Public finance: failure
Funding pensions: failure
Homicide: failure
Education: failure

To be sure, there are some great universities in/around Chicago, but I’m talking about policy re: the city itself. I really don’t see anything that smells of success, other than they’ve not totally run away all their business. So yay for that.

More pieces on the ChicagoUBI idea:

By the way, Hemel says Chicago would be the second U.S. city to try this (and first major city in the U.S.) — and he has to qualify it that way because UBI has been tried elsewhere. It’s in the dang Wiki article, after all.

Let’s check on a few, eh?

Finland tried it. Here’s what happened:

Finland paid unemployed people a basic income of $685 every month. It didn’t work out – for now

Finland’s basic income program that drew international attention is coming to an end, the Finnish government announced Tuesday. [24 April 2018]

The pilot program that paid about 2,000 randomly-chosen unemployed Finnish people a monthly check of €560 ($685) will stop by the end of the year, the BBC reports.

As welfare programs mourned the end of the experiment, the Finnish government denied claims the program was unsuccessful, and social affairs official Miska Simanainen said it was actually “proceeding as planned,” The Independent reports.

The program, which started January 2017, was the first of its kind in Europe. The government hoped the extra money would fuel the economy and innovation. The unemployment rate in Finland exceeds 8%. By comparison, the U.S. has an unemployment rate of 4.1%, according to the most recent data from the Bureau of Labor Statistics.

A study published in February by the think tank Organisation for Economic Co-operation and Development said the country’s income tax must increase by almost 30% to fund basic income, and instead suggested a universal credit system as a better solution.

Okay, it was tried in Ontario, Canada. Let’s see what happened there.

Ontario is canceling its basic income experiment

Aug 6, 2018

Ontario is canceling its basic income pilot program two years earlier than planned.

The Canadian province is a year into an experiment that gives 4,000 low-income participants an annual stipend, as part of an effort to determine whether a basic annual income is more effective than other social programs.

Under the pilot program, individuals received $13,000 per year and couples got $19,000.

If recipients worked while receiving the benefit, they agreed to give the government 50 cents for every dollar they earned. They were also required to opt out of some government social services.

Finland implemented its own two-year basic income experiment last year, though it has no plans to expand the program after 2018.

In California, the city of Stockton plans to launch a basic income program next year, in which low-income residents will receive $500 per month.

Silicon Valley is backing similar experiments in other California cities, and Hawaii last year passed a bill to start exploring what it would take to create a basic income program of its own.

In Ontario, the decision to end the basic income pilot came as part of a larger effort to reform the province’s social assistance programs.

The center-right Progressive Conservatives Party, led by Ontario Premier Doug Ford, took over the province’s government in June after 15 years of rule by the liberal party.

The government said in a statement announcing the change that instead of putting money into the experiment, which cost an estimated $115 million over three years, it would “focus resources on more proven approaches.” It did not say exactly when the program would end.

And here comes the spin: Conservatives end ‘basic income’ program in Ontario, afraid to be proved wrong

Christo Aivalis is a postdoctoral fellow in the history department at the University of Toronto. He is the author of “The Constant Liberal: Pierre Trudeau, Organized Labour, and the Canadian Social Democratic Left.”

The new Progressive Conservative government of Ontario decided to break an election promise to allow a “basic income” (BI) pilot instituted by the previous Liberal administration to run to conclusion. This will leave thousands of Ontarians enrolled in the pilot without an income source they were promised for nearly two additional years. For some, the BI was protecting them and their families from food insecurity and homelessness; for others, it was enabling them to obtain the education and job training needed to improve their lives.

Why, then, would the government break its promise and end the pilot? Social Services Minister Lisa MacLeod and other Conservatives argue that the very concept of a BI goes against their philosophy and that “the best social program is a job.” Giving poor people free money, they assert, will only perpetuate poverty and unemployment and waste taxpayer dollars (this despite the fact that nearly three quarters of BI pilot participants were already working).
In 1968, the Special Senate Committee on Poverty, chaired by Liberal Senator David Croll, was tasked with studying the nature of poverty in Canada. By 1971, the committee found that, as in the United States, many were still mired in severe intergenerational poverty. Croll’s main solution was to create a Guaranteed Annual Income. He argued that — despite the dogma that social assistance bred laziness and dependence — most people living in poverty either already worked, were involuntarily unemployed or were otherwise struggling through no fault of their own.
Many people have legitimate concerns about a BI program and its specific implementation, especially from the left, where some feel it would entrench existing patterns of inequality. But opposition in the form of hand-wringing about the “idle and shiftless poor” is ignorant at best, and disingenuous at worse.

I like how the only legit critiques of UBI come from the left.

Another take: Now that Ontario’s basic-income pilot has been cancelled, here’s what could happen next

Opinion: A basic-income program is not sustainable unless the federal and provincial governments collaborate in its development and funding

No policy of the newly elected provincial government in Ontario has sparked more controversy than the proposed cancellation of the basic-income pilot. Academics have criticized the government for wasting an opportunity to collect data on an important policy issue, and basic-income advocates have undertaken a massive lobbying effort to convince the government to reverse its decision.

The announcement raises serious ethical concerns around how participants relying on the basic income for the next two years will be treated during the pilot phase-out. This should be addressed by continuing payments to all participants until the original proposed end of the pilot.

We’re both supporters of a basic-income guarantee for evidence-based efficiency and equity reasons that are too numerous to outline, but, we’re also not supportive of basic-income pilot experiments for a number of reasons that we discuss here.

We’d rather see implementation than experimentation. Those who are supportive of the implementation of a universally accessible basic-income guarantee, and/or the removal of work disincentives for those on social assistance, and/or greater income security for working-age Canadians, should focus their efforts toward developing options for the phased but permanent implementation of such programs, rather than critiquing the pilot cancellation.

An adequate basic income is not financially sustainable unless the federal and provincial governments collaborate in its development and share the funding burden. While there are ways the framework could be designed so that not all provinces and First Nations would have to sign on (see a two-stage proposal for a federal-provincial basic income here), individual and household arbitrage between provinces that choose to implement a basic income or not (and also on and off-reserve) may lead to greater income inequality between the provinces and on and off-reserve First Nations peoples, which would ultimately threaten the program’s viability.

Federalism remains the greatest political barrier to the implementation and sustainability of income security for all Canadians. Overcoming this barrier requires a substantial amount of political will and co-operation, and the support of Canadians from all walks of life and communities. The implementation of a basic-income guarantee is something the entire country must decide to do, together.

Good luck with that.

Here is a modest proposal: Chicago, you need to make sure that you fulfill the obligations you’ve already made. Not make new ones.

Speaking of which…


We know Chicago has not been funding its pensions adequately, and more than that, it really can’t do it going forward, either.

So now onto the refuge of public pension scoundrels: pension obligation bonds!

POB greatest hits:

An interlude:

So, let me let the pro side talk:

Don’t dismiss the city’s pension bond idea out of hand

Recently, the city of Chicago’s budget office indicated it was considering borrowing $10 billion in bonds to cover some of the $28 billion in underfunded contributions it owes to its pension systems for firefighters, police, and other public employees. While this generated some controversy in the media, the concept deserves thoughtful evaluation. If properly structured, these pension obligation bonds (or “POBs”) could play a positive role in shoring up Chicago’s fiscal condition. If not, however, Chicago may find itself in an even worse hole a few years down the line.

Determining whether a POB makes sense requires some understanding of how these transactions work.

First, it’s important to understand that POBs don’t increase the city’s total debt. Rather, they would allow Chicago to trade one kind of constitutionally-protected debt—that owed for past-due pension payments—for another kind of debt, that owed to bondholders.

Another kind of debt that’s a hell of a lot easier to default on!

Also, muni bond interest rates are based on market rates…. and public pension “rates” are completely artificial, based on a choice by the sponsoring body. There is nothing stopping Chicago from valuing their pensions at exactly the same rate as their General Obligation bonds… and I would argue that is the ceiling they should use for valuation. Especially when there’s a POB involved.

That’s key, because frequently bond debt is a better deal for taxpayers than pension debt for one simple reason: Bonds generally carry lower effective interest rates than pension debt, making them cheaper over the long run and saving taxpayers money. The Center for Retirement Research at Boston College, which remains skeptical of POBs, nevertheless found that on average, pension bonds earned a 1.5 percent return for the governments that issued them between 1992 and 2014.

Second, while some say that a city in Chicago’s position should just increase its pension debt payments entirely from general revenue, the reality is that each additional tax dollar that goes to pension debt is a dollar not available to pay for schools, public safety, or transportation.



So if Chicago can issue POBs at a lower interest cost than what’s required for pension debt, and uses all the proceeds from those POBs to pay down pension debt, the funded ratio of its pension systems would immediately increase, and the interest rate differential would save taxpayers money.

It’s crucial, however, that every dollar of POB proceeds be used to cover unfunded pension liabilities—and not the city’s current costs. Why?

Look no farther than the $10 billion in the state of Illinois issued in 2003 under Gov. Rod Blagojevich. Rather than use all of the proceeds to pay down pension debt, the Blagojevich administration used $2.7 billion to pay the state’s regular annual pension contribution, essentially plugging an operating hole with bond debt. That diversion forced Blagojevich to leave in place a breathtakingly irresponsible pension debt repayment plan that continued the practice of intentionally underfunding annual contributions. As a result, between 2003 and 2017, Illinois ‘pension debt roughly tripled to $129 billion, dwarfing any cost savings from the POBs.

Okay, I’m going to stop it here. At least the pro-POB side is a bit realistic.

There is absolutely no reason to believe that Chicago is going to be better-behaved than the state of Illinois re: public finance. Hell, the official funded ratios for the state plans are better than the Chicago plans. So, if Illinois as a state could just mess around, do you really think that Chicago will finally behave well in its finances? With the Democrats still running everything?

It is to laugh. Come back in ten years with an actual record of fiscal responsibility (and not at the top of a market), and maybe the POB idea.

Here is other commentary/news:

So let’s put aside how POBs are not a good idea for Chicago.

I mainly want to know: who the hell does Chicago think will buy these bonds? And what will happen when Chicago has to default on these bonds because they’re overextended on their credit everywhere?

Seeing the stories about the Puerto Rican bonds, and digging into that ownership info, made for really ugly reading — too many retired people had a piece of that disaster because they were desperate for yield… and government doesn’t go out of business…. right? right? Then they get pennies on the dollar from the vulture hedge funds who can afford to sit around and try to wangle a bigger settlement in court, whereas the retired investor really needs that cash flow that they thought was guaranteed. When it wasn’t.

That’s an extremely ugly dynamic.

Even though interest rates have been going up, the rates are still very low and there are many bond-heavy entities desperate for yield. Also, it looks like a calm-before-the-perfect-storm for these POB deals: try to lock in the lower rates before rates go up… and dump all that $$$ in equities and other volatile assets after years of positive returns. And after years of no credit slump…. We won’t get something worse than 2008 again, right?

I just want to know who they think will buy, and who would actually buy if this horrid idea gets off the ground. That’s the first thing I would ask.

The second thing I would ask: so, what’s your CTE 95 on these? Or VaR 99.9? Or what’s the percentage probability these would produce loss instead of gain? I’d be fine with an answer to any of these, and then ask how they assessed that. I’m assuming they’re not assessing the downside risk, fwiw, and if you don’t understand any bit of this second thing, that’s okay. You’re not the people who would be issuing these bonds, after all.

But it’s not okay if the people who want to issue these bonds don’t know the answer to any of them. Or even what the questions mean. If you don’t know, you have no business trying to do “clever” finance.


Chicago Teachers to Ban Pension’s Private Prison Investments

The Chicago Teachers’ Pension Fund added immigration detention centers to its list of prohibited investments Aug. 16.

Companies such as GEO Group Inc., CoreCivic Inc., and General Dynamics Corp. are among those that own or operate the private prisons that have come under fire lately amid allegations of abuse of immigrant detainees.

A spokeswoman told Bloomberg Law that pension trustees want investment managers to also “prudently liquidate public market holdings in private prison companies as soon as reasonably practical and in accordance with the managers’ fiduciary duties.”

Right, so they’ll acknowledge fiduciary duty enough that they don’t want to take a (big) loss on liquidation, but the reason they’re divesting has nothing to do with the actual returns on investment.

The decision by the fund’s trustees comes a week after the American Federation of Teachers released a report urging pensions to divest from any company that operates or owns prisons.

The fund, which is the only school system in the state with its own pension fund, has 63,356 members as of last year, according to a Public Plans Data.

I will link to the report in ma later post, because I have various divestment stories to catch up with. I also think that there’s an excellent point in that report, but I extend their conclusions to something they may not like. But that’s for another day.

Here’s one big piece of info that was not included in this short piece: how well-funded the Chicago Teachers Fund is.

Now, you can say, “but the page says 50.1%! It’s a skosh over half!!! That’s good!”


The funded ratio has been going down and the contributions have been skyrocketing. Fiscal year 2017 was the closest they came to making full contributions… and those aren’t real full contributions if the funded ratio goes down. It means the unfunded liability was being negatively amortized.

In short, they are messing around with trivia. Don’t give me a HOW DARE YOU THIS IS IMPORTANT!


I would like to know what %age of the Chicago Teachers portfolio was exposed to private prisons. That would also have been a useful piece of information.

Also, they have a list of prohibited investments — I want to see this list.

I looked at their investment policy, and other policies, and they all looked pretty standard. I couldn’t find the list of prohibited investments, but I did find this recent press release re: “yeah, we’re still divested from guns”.

That’s one of the problems with divestment from a political point of view: you can really only do it once. It has the impact of a wet noodle if some big issue comes around and you divested from that evil industry 5 years ago. You can try to crow “Look! We were pure before everybody else!” But some nasty person might ask how well that sector of assets did in the period you were divested.

Anyway, if anybody reading this knows where the complete list of prohibited investments is for the CTPF, please email me:

And a tweet:


These are obviously mainly finance-related, because that’s what I care about.

And something intriguing:


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