To be sure, with increasing interest rates right now, POB deals will be few and far between, but I want to take a snapshot of why POBs are not ONE CLEVER TRICK for solving public pension plan problems. They’re more a way to make a bad situation worse.
]]>Of that 4%, 70% agreed to the issuance of $515 million in pension obligation bonds. This would be a new liability, on top of the liabilities they already have. Sure, they’d get a $515 million cash infusion, which they’d give to the pension plan… but I will get to that in due time.
WPRI: Providence voters OK $515 million pension bond
Providence voters OK $515 million pension bond
In a low-turnout special election, 70% of Providence voters approved the city’s massive bond proposal aimed at digging the capital city’s pension system out of “critical status.”
According to the unofficial results, 3,545 voters approved the $515 million bond, while 1,519 voters rejected it.
Only 4% of eligible voters participated.
….
As it stands, Providence has a $1.2 billion unfunded pension liability, a gaping hole between how much the city’s investments are projected to be worth and what it will owe its current and future retirees over time.But opponents of the bond warned it was too risky to invest so much cash and count on a return higher than the interest due, especially in a volatile market.
The voters are not the final decision-makers in whether to borrow the money. State lawmakers must authorize the bond, because it goes above the city’s allowed borrowing capacity. According to the proposed legislation, city leaders will only be able to float the bond if they can get an interest rate below 4.9%.
Another piece, from Boston Globe: Providence voters back $515m pension bond in low-turnout election
Fewer than 3,600 city voters on Tuesday backed Mayor Jorge Elorza’s proposal to borrow $515 million to shore up Providence’s ailing pension fund, according to unofficial results from the Board of Canvassers.
But even fewer voted against the bond.
…..
The bond was backed by Elorza, most of the Providence City Council, all three of the current candidates for mayor, and state Treasurer Seth Magaziner, but even supporters acknowledge that it comes with some risks.
….City leaders argued that the bond is necessary because Providence has few options when it comes to addressing its troubled pension system, and its annual taxpayer-funded contribution to the system – $96 million in the current fiscal year – is growing at 3.5 percent each year.
A Rhode Island Supreme Court decision in 2020 limits the city’s ability to reduce benefits for employees and retirees who are part of any previous settlement with the city. That includes anyone who agreed to pension changes under former Mayor Angel Taveras a decade ago.
So let’s look at the Providence pension plan and let’s think about the timing.
Via the best resource for public pension info, the Public Plans Database, here is a snapshot of the Providence ERS pension plan, and I’m going to grab a few salient graphs and explain them.
First, here are the contributions they’ve been making for the pension plan:
Yes, for over five years now, they’ve been contribution more than 50% of payroll to the pension plan as the full contribution to the pensions.
In the past, they mostly contributed the full requirement, though in some years they didn’t. The requirement used to be less than 50%, but when you short the fund, and when you underperform on investments (which we will see in a bit), that’s expected, right?
So let’s see how the funded ratio has been doing — for all these full payments, the funded ratio must be healthy, correct? [if you didn’t read my excerpts above]
The red line is what’s happening in the rest of the country, which isn’t great. It’s been stagnant at about 72% funded for about forever.
The blue bars is Providence ERS, which has had a declining funded ratio. So the contribution rate is sky-high and has been increasing. But the funded ratio has eroded.
This has been classic asset death spiral territory.
As noted in the news pieces, the vote was more or less pro forma. The politicians wanting the pension obligation bonds didn’t have to ask the voters for approval, and the power lies with the Rhode Island legislature anyway. They’ve asked for this before, at the tune of $700 million in bonds, and it was denied before. Now they’ve reduced their request to a mere $515 million.
I don’t think this is a strong electoral result — sure 70% approved, but that was only a 4% turnout. Not exactly a mandate.
Using the numbers from the news accounts, there is a $1.2 billion unfunded pension liability (at last measurement… but I’ll get back to that in a moment) and the pension is 23% funded. That means the full pension liability must be about $1.6 billion. If $515 million in cash comes in, the unfunded liability would drop to about $0.7 billion, and the pension’s funded ratio would now be 56%.
I mean, doubling the funded ratio sounds good, doesn’t it?
However. I’m arguing the state legislators should throw out this request as well.
What you’re doing by issuing pension obligation bonds is injecting more leverage into the system. It’s actually adding a liability to the system, so rather than doing the math the way I did it, in just looking at numbers like this:
Pension before:
Assets : $0.4 billion
Total Liab: $1.6 billion
Net Liab : $1.2 billion
Pension after:
Assets : $0.9 billion
Total Liab: $1.6 billion
Net Liab : $0.7 billion
You should look at the system like this:
Providence, Rhode Island:
Before:
Pension Assets : $0.4 billion
Pension Total Liab: $1.6 billion
Pension Net Liab : $1.2 billion
Providence Net Liab: $1.2 billion
After:
Pension Assets : $0.9 billion
Pension Total Liab: $1.6 billion
Pension Net Liab : $0.7 billion
Pension Obligation Bond: $0.5 billion
Providence Net Liab: $1.2 billion
Basically, nothing has fundamentally changed, except, here is the biggest one: the valuation of those liabilities are not of the same nature.
The cash flows being promised for the pension obligation bond are sure. You’re sure of the timing and amount of the cash flows being promised in the POBs.
That is not true for the pension cash flows. That’s why actuaries get paid so much (theoretically).
From a legal standpoint, forget about the net liability — there is a total liability that Providence is responsible for. They have been told they’re legally responsible to pay for the Providence pension cash flows.
By adding on a POB, they have simply added to their total liability. Sure, they’ve added to their assets. This is called leverage. So why do this in the first place?
The big thing is that the interest paid on POBs are supposedly much lower than the rate of return on the assets they’re going to be investing for the pension.
Here is the relevant graph from the Public Plans Database:
The current assumed rate of return on assets for Providence ERS is 7%. This is higher than the 4.9% limit on the interest for the POBs (they won’t issue POBs higher than that under the proposal).
Before 2019, the rate had been 8%. You can see that the 10-year experience has been in line with this assumption, but the 5-year has not. This is not necessarily concerning, but from a valuation point of view, this is all beside the point.
Just look at the blue bars, which show the actual annual returns. The pensions are supposed to be supporting guaranteed cash flows to retirees, and they’re using a fairly volatile investment mix to do so.
If you look at their investment allocation, it looks pretty boring compared to most of the U.S. plans:
You may be thinking (as am I), “well, at least they don’t have much in alternative asset classes”, but they are very heavy on equities compared to fixed income for a pension fund.
They would be taking the POB proceeds and likely investing it in a similar allocation. Given the current state of the market, is that really wise?
They could be taking this cash, and then going from that theoretical 56% funded ratio down to a 40% ratio in no time at all… and then they’d still have the pension liability to pay, plus this new liability, the POB, on top of it. The situation has only been made worse.
I am not surprised that this sort of thing is coming from Rhode Island, and specifically Providence. They had some of the worst finances coming out of the Great Recession, and it took a lot of wrangling to try to get it in line, and it’s still not there.
With rising interest rates, many of the more desperate public finance players will be trying to get their ducks in a row. They had been sitting back in 2020 and 2021 as they got their federal funds bonanzas, and as money washed over individual taxpayers they got some of the largesse as well.
But now that money-pa-looza translated into inflation, which has led to the interest rate situation we see now. Maybe some of them remember the early 1980s:
So watch to see the usual suspects trotting out similar ploys.
Things in the market may move faster than the Rhode Island legislature can, and it can be that Illinois, Kentucky, Connecticut, California, and more and more will find they will not be able to execute on POBs. I hope not.
I understand the people who argue that these can be tools that help in public finance, which is a nice theory, but I’ve seen how these politicians actually behave.
I do not think this is a good time to add more debt to the system. You’ve got enough, thank you very much.
You can go to my Rhode Island post compilation to see some of the earlier posts reaching back to 2014, but most of the Rhode Island financial troubles had been worked through before I got STUMP set up.
]]>(But death and taxes do go so well together.)
With a little help from my meme brain trust (they know who they are), I have some items on various state and local governments trying to get ready for an increase in interest rates.
You may notice all these memes have a Valentine’s Day theme, and today is the day after V-Day…. well, I learned something from my mother:
It also works for memes.
Let’s take a look at that “temporary” inflation, shall we?
Using the non-seasonally adjusted CPI-U, here are the year-over-year percentage changes, going back to 1960. No reason to push it back farther.
Oh yay, I get to relive my childhood. Except this time, I know about money and debt.
Well, the Federal Reserve will likely have to raise interest rates. I would rather not see the trajectory of the late 1970s/early 1980s of double-digit inflation.
But it will likely take some time before this shakes out, which will have effects both for personal finance as well as public finance.
While there are different instruments and strategies at hand for dealing with increasing interest rates — for you as an individual versus states (I doubt you can tax people), there are some similar strategies that can be tried.
The Comptroller of Illinois has mentioned – hey, we’ve improved our situation with unpaid bills. Why not improve our credit rating?
Illinois Comptroller Susana Mendoza is asking the credit ratings agencies to upgrade Illinois’ worst-in-the-nation status.
S&P Global has Illinois at BBB. Moody’s has the state at Baa2. That’s after upgrades from the agencies last year. Fitch has Illinois at BBB-.
“My office is doing everything possible to manage the current backlog of bills and address Illinois’ finances head-on,” Mendoza said in a letter to the agencies that her office announced Monday. “The Illinois Office of Comptroller urges you to consider these positive factors and progress made in strengthening Illinois’ financial position when evaluating Illinois’ creditworthiness.”
Mendoza said in the letter she has paid back recent borrowing from a federal program. Illinois was the only state to borrow from the Federal Reserve’s Municipal Liquidity Fund for a total of $2.6 billion.
I want to jump back for a moment and talk about Susana Mendoza. I have written about her several times, especially with respect to the unpaid vendors program. I just happened to have gotten a little derailed by the pandemic, as did everybody else.
The last time I wrote about her in any detail was three years ago. Mendoza herself wasn’t involved in the lawsuit, and if the unpaid bills are no longer sitting in limbo, then the 12% guaranteed interest being paid through these unpaid vendors programs are moot, as these vendors don’t have to sit around being unpaid.
But this isn’t really about Mendoza. It’s about Illinois’s creditworthiness, and that a shower of federal funds got them to clear their short-term bills. So they’re saying “Hey! Our credit score, uh, I mean, credit rating should improve!”
The governor in his budget address last week proposed spending nearly $4 billion more than the current fiscal year. He did not address the $4.5 billion in unemployment trust fund debt.
After the governor’s address Wednesday, Mendoza heralded the work she’s done to pay down the state’s bills that peaked at nearly $17 billion by borrowing $6 billion.
“By leveraging these federal matches, I was able to turn that $6 billion into $9 billion and then shave that off the $16.7 billion backlog,” Mendoza told The Center Square.
That is all short-term debt.
I have written about the unpaid bills of Illinois, and no, I’m not talking about the pension debt — this is more mundane stuff, like goods and services for current year activities of the state of Illinois. I have been writing about this reaching back about a decade:
April 2013: Illinois Vendors and Other Operating Expenses to Go On Credit Card
After last month’s posts, Illinois Vendors, Ask for Cash on the Barrelhead and No, Really, Illinois Vendors — Require Cash, we see there may be good news for vendors currently owed money from the state of Illinois.
They’re going to put it on the credit card:
….
Having to issue long-term bonds to pay operating expenses is a REALLY BAD SIGN.Long-term, general obligation bonds, from principles of sound finance, should be issued only for capital expenditures. Chances are pretty good that this backlog does not represent capital expenditures.
Now, issuing debt for operating expenses is not necessarily bad — if it’s short-term debt and it’s just a timing of cash flow problem. For example, I have a very lumpy cashflow stream in and out. I will have cash inflows twice the usual some months, and outflows (such as this month) much greater than usual. The fluctuations in the inflows and outflows do not match, so sometimes the credit card bills for groceries do not get paid off for a month or two.
But I’m not trying to refinance my current grocery bills with a 30-year loan.
That the Comptroller of the state of Illinois was finally able to flush out a lot of these sorts of bills due to federal largesse during a pandemic… is not really the sign of a state with responsible financial practices.
This tip may be a little too late for you as well, but maybe you will actually be able to eke out a tax return this filing season (boy, do I have some bad news for some people), and I highly recommend shoring up one’s debt situation to make the credit score look better before borrowing more money.
Mendoza at least has the right idea.
The difference, of course, is credit rating agencies, when rating states, only have 50 states to look at, and they can look very closely at those states. They know the distinction between a state that has decades’ worth of misbehavior and a temporary righting of accounts.
Credit scoring outfits have millions (if not billions) of individual borrowers to evaluate, so said individuals have a better chance of gaming the system, actually.
It’s worth a shot.
This is one everybody tries to time, and sometimes the timing just sucks.
In this case, the refinancing is of pension debt, via pension obligation bonds (POBs).
So there are some recent stories on POBs via Actuarial News:
Bonds are the key to reining in runaway municipal pension plans
In what is the product of the sustained low-rate environment, many municipalities are considering addressing their pension position through bonds. This should be encouraged by policymakers and explored by pension systems.
Bond markets are offering municipalities the opportunity to exchange discount rates of 6, 7 and sometimes even 8 percent for bonds with yields below 3 percent. The spread between the discount rate and the bond yield is the root of the appeal of pension obligation bonds.
A natural question is “How do pension systems become underfunded?” The answer is a combination of issues. The two largest are underperforming investments and insufficient employee contributions.
Are you kidding me.
Employee contributions?!
Given that all pension benefits, all the municipal employee payments, etc. come from the employers… it seems to me all the contributions come from the employers, ultimately.
Who is this person writing this piece?
Eric J. Mason is the Chief Financial Officer for the City of Quincy, Massachusetts. Quincy recently issued $475 million in bonds to address its unfunded pension liability.
Ah. I see.
Next piece on POBs:
USVI to refinance bonds to save public pension system
The governor of the U.S. Virgin Islands signed a bill Wednesday to refinance more than $800 million worth of bonds following numerous attempts to save a public pension system that officials say faces collapse.
Gov. Albert Bryan Jr. said the savings from improved interest rates would help stabilize the pension system for at least 30 years. Nearly 9,000 government retirees and 8,000 active workers rely on the public pension system, which officials warned could run out of funds by 2024 or sooner without a fix.
The signing marks Bryan’s fourth and final attempt to save the pension system, which has nearly $6 billion in unfunded liabilities. If the refinancing is successful, it is expected to generate some $4 billion total for the system.
I want you to pay attention to these numbers. So $800 million in bonds. This is covering benefits for 9K retirees and 8K active workers… and they were going to run out of assets by 2024. When public pension funds talk about running out of funds, they mean completely running dry, unlike with private systems or insurance companies talking about insolvency.
But this is only covering less than 1/6 of the unfunded liability.
So they’re expecting to cover the rest of the unfunded liabilities by future contributions, I assume….
Here is one more — a report that was recently released related to Providence, Rhode Island. I kept an eye on Rhode Island and Providence, specifically, before I was blogging on STUMP.
The report recommends the following:
Providence should request state legislative and city voter authorization to
issue a pension obligation bond sized to deposit $500 million into the ERS if
advantageous borrowing conditions and terms are met.After much review, discussion, and deliberation, the Working Group supports the City
being granted the ability to issue a pension obligation bond (POB) that results in the
addition of $500 million to the ERS….
POBs are fundamentally a funding opportunity that can, in the right market conditions
provide benefit, but which are not without risk. The concept is that a government issues
POBs and deposits the proceeds in its pension fund to increase the available assets.
The retirement system invests the pension fund assets which are projected to earn a
given rate of return – in Providence’s case 7.0 percent annually. This rate of return, if
higher than the interest due on the bond principal, results in potentially lower annual
costs. For example, if a government-issued a POB and earned, on average over the life
of the bond repayment schedule, a 7.0 percent rate of return and paid interest on the
bond at an annual average rate of 4.0 percent during the repayment period, it would
have generated an annual 3.0 percent positive benefit, on average. However, as the
City’s internal and external financial team notes – and good fiscal practice dictates –
taking on a fixed-debt service like a POB to invest in variable pension system assets
should never be considered a zero-risk approach because there are market and other
risks to weigh
This pension fund has been under 40% funded since 2002, and the contribution rate is over 50% of payroll as of FY2019.
This is not a sustainable situation.
I don’t think a POB is actually going to make it more sustainable.
Long-time readers know I am very negative about POBs (yeah, you know me!)
The nutshell version of how POBs “work”:
Basically, the sponsor is borrowing money to fund the pension.
Why would this be a good idea?
Let’s try out three explanations.
Explanation 1. The pension liability is often valued at a relatively high discount rate, such as 7%, whereas the sponsor can borrow at a lower rate, such as 5%. This makes for a valuation arbitrage. Automatic savings. It’s bullshit arbitrage on paper. It’s just accounting.
Explanation 2. One can “guarantee” earning a return on assets for the investment at a higher rate than what you’re borrowing at… a real arbitrage. Which you can’t actually do. This is bullshit. Do not be a fool. This is how it used to be sold to trustees.
Explanation 3. By issuing a POB to cover the entire unfunded liability, the sponsor gets locked into more responsible behavior in paying the coupons of the POB, which are predictable. And then the sponsor will also be completely responsible from now on and cover the normal costs of the pension plan going forward.
That last reason is the only legit reason to do a POB. But that’s generally not what actually happens.
Usually, it’s the bad actors who do the POBs, because they built up very large unfunded liabilities due to their bad actions, and they use it as an opportunity to do even worse things.
Some old POB-related posts: [in no particular order]
You’ll notice most of my examples are from Illinois, but most of those are failed attempts at POBs.
That said, Illinois did manage to issue some POBs.
Not that it has done much for their unfunded liabilities, ultimately. You can barely see the effect of their old POBs as I roll forward in my old graphs.
So, as an individual, I bet you’d have more success in improving your credit score by reducing your short-term debt (via tax returns and stimulus payments) and improving your leverage via refinancing than do states via trying similar tricks before the interest rates start increasing.
And, just in case you missed getting your SO an impressive gift yesterday….
Best wishes!
]]>But it’s rolling on.
So let’s see what is being said.
TWITTER INTERLUDE
Eat more and lose weight using this one weird trick! https://t.co/zrDJoBB45m
— Andrew G. Biggs (@biggsag) August 23, 2018
A simple (pension economics) literacy test. If you read this and laugh hysterically you pass. If your reaction is: "I don't get it" you fail. pic.twitter.com/k5KCMMSTLF
— Moshe A. Milevsky (@RetirementQuant) August 24, 2018
“Chicago has a serious pension problem that needs a dramatic, innovative solution,” Citi’s research team writes. “We believe that there is a philosophical justification to pursue the POB mode of financing and maybe even a practical justification.” https://t.co/95LvjmomTM
— yvette shields (@Yvette_BB) August 23, 2018
positve comments have conditions like successful interest rate arbitrage and no GO downgrade. and "positive sentiment contingent upon the POB deal being a part of a comprehensive solution” along with tax increases and a renegotiation of collective bargaining agreements.
— yvette shields (@Yvette_BB) August 23, 2018
RESPONSE TO THAT ANALYSIS
“successful interest rate arbitrage”?
It gets sold or talked up as an arbitrage, but people who know what arbitrage truly means realize this is bullshit.
“We’re replacing 8% debt with 5% debt!”
Not exactly. You’re pretending the proceeds from the bonds will accrue 8% per year – your supposed arbitrage. You can’t get a guaranteed 8%, especially as you’ve got cash flows leaving to benefits along the way.
I find the “no GO downgrade” language laughable as well…that Chicago will not get a credit rating downgrade on their general obligation bonds (though I think these may be considered special revenue because they’d attach sales tax receipts).
I know when I take out the largest loan ever to refinance my largest credit card bill (to finance old operational costs, not capital costs), I expect my credit score to get whacked hard.
Then there’s the tax increases…
Basically, there are so many conditions that are unrealistic to make this “workable”. It won’t work, because it’s Chicago. They’ve not shown fiscal discipline in a very long time, and I really doubt they’ve got that discipline in place now.
Okay, that’s enough from me. Let’s switch to what other people have to say, because, since I posted on the 19th, there’s a lot more out there.
NEW COVERAGE OF THIS GRAND IDEA
From Heather Gillers at the Wall Street Journal:
Chicago’s New Idea to Fix Its Pension Deficit: Take On More Debt
Proposed $10 billion bond would be biggest pension obligation bond ever issued by a U.S. city
Chicago tried to lower its pension deficit with budget cuts, benefit reductions and tax increases. Now the third-largest U.S. city is considering a controversial new fix: more debt.
Finance Chief Carole Brown said she would decide in the next week whether to endorse a $10 billion taxable bond offering that would be used to help close Chicago’s $28 billion pension funding gap. If the proposal is accepted by Mayor Rahm Emanuel and approved by the City Council, it would become the biggest pension obligation bond ever issued by a U.S. city.
The bet is that Chicago can earn more investing the proceeds than it paid to issue the new debt, setting an example for other large governments wrestling with sizable pension deficits. Many cities and states around the country don’t have enough assets to afford all future benefits owed to retirees. The soaring costs are squeezing budgets across the U.S.
But if Chicago’s gamble doesn’t pay off, it could end up with more debt that it can’t afford to pay. Pension obligation bonds have backfired on other cities, contributing to the chapter 9 bankruptcies of Detroit, Stockton, Calif., and San Bernardino, Calif.
….
More than 400 governments have issued pension obligation bonds over the past 30 years. The volume was highest in 2003, the year the state of Illinois issued a $10 billion bond—still the largest ever by any U.S. city or state government.
But that deal didn’t solve Illinois’s problems . Fifteen years later its state employee pension fund has just 35% of what it needs to afford all future benefits owed its workers. In fact, the shortfall prompted discussion this year of a new $107 billion pension obligation bond deal. That proposal hasn’t gained momentum.
…No U.S. city is in a deeper pension mess than Chicago, where four pension funds have a combined shortfall of $28 billion, according to city financial records. It is in this position because of some of the same problems that tripped up other governments: decades of low government contributions, overly optimistic assumptions and overpromises on benefits. Two recessions added additional losses.
….The presentation listed a 5.25% interest rate for a $10 billion bond. The debt would be taxable since the federal government typically doesn’t allow cities and states borrowing for pensions to take advantage of the tax exemption usually afforded to municipal bonds.
….
But even if the city were able to raise $10 billion, Ms. Brown said, that wouldn’t be enough to solve all its problems. Chicago would still have to find more money to cover all of its annual pension costs.“If we do this we’ll still have to find additional new revenue, we would just have to find less,” Ms. Brown said.
From Sunny Oh at MarketWatch – Chicago mulls $10 billion debt sale to fill pension funding hole — here’s why it’s a bad idea
Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California’s San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.
….
Last Tuesday, the city’s Chief Financial Officer Carole Brown, citing low-but-rising interest rates, said she would make a decision yet this month on whether to recommend issuing POBs, drawing criticism from municipal finance analysts and academics.Taking advantage of historically low interest rates, the proponents of pension obligation bonds say local and state governments can borrow at a rate less than the expected returns of their pension funds. This difference can be used to top up the unfunded pension liabilities without having to raise taxes.
But investment returns are fickle, and historically overstated. According to the National Association of State Retirement Administrators, the average public plan said it would deliver 7.56% annually as of February but the realized annual returns from 2001 to 2016 have been closer to 5.5%. Linked to the ups and downs of financial markets, public pension returns are rarely high enough on a regular basis for municipal governments to consistently exploit the difference between expected returns and borrowing costs.
….
And if pension funds fail to hit their return targets, the city will be saddled with both the unfunded pension liabilities and the costs of financing the new pension bond debt.Chicago mayoral candidate Paul Vallas, who, among others, is challenging sitting mayor Rahm Emanuel in a 2019 race, said issuing pension bonds resembled “mortgaging your home and future paychecks to pay off your credit cards.” He has called for public hearings.
…..
Sales of pension obligation debt is on the decline.Aside from questions over their viability, a sale of pension obligation bonds could hurt the city’s fiscal flexibility. To service a looming bond payment, it could mean the city would have to cut down on social programs. With only unfunded pension liabilities on the books, the city can currently shift the timing of its regular pension contributions to avoid that dilemma.
About that… they were able to “shift the timing” for decades. They’ve already pissed away financial flexibility due to that.
Elizabeth Bauer at Forbes: Why Chicago’s Pension Obligation Bond Plan Is Even Worse Than It Seems:
Since the city’s bond ratings are below investment grade (Ba1 at Moody’s, that is, one notch below investment grade), Chicago is now resorting to an alternate method of issuing bonds, in order to avoid the very high rates they’d otherwise have to pay: this is the use of future sales tax revenue as collateral.
….This means that, not only is the city mortgaging its future to try to cope with overpromised and underfunded benefits, it’s doing so in a way that traps residents far more deeply.
Chicago is not the first city to issue such bonds; again, the WSJ notes that Detroit, Stockton, and San Bernardino did so likewise, and subsequently declared bankruptcy. But pledging future sales tax revenue, in a manner that’s inescapable even in bankruptcy, in a city that’s already sold off (sorry, 100/75-year-leased) future Skyway toll road revenues and future parking meter revenues, to plug municipal budget holes — that makes the proposal far more worrisome than even the market risk of a conventional pension obligation bond.
From ALEC: Chicago Pension Obligation Bonds, a Strategy or Gamble? – American Legislative Exchange Council
Chicago Mayor Rahm Emanuel’s administration is exploring the possibility of issuing billions of dollars of pension obligation bonds and investing the proceeds in order to reduce the city’s $28 billion in official net public pension liabilities. If the investment returns exceed the borrowing costs, the annual pension funding cost to Chicago taxpayers will be reduced, diminishing the need for tax hikes to resolve the problem. However, if the return on the invested bond proceeds falls below the interest rate on the pension obligation bond series, the existing pension liabilities will grow even larger, leaving Chicago taxpayers worse off. With interest rates on the rise and equities markets that have already realized long-term gains, the latter outcome of this arbitrage gamble appears increasingly likely.
The success or failure of a pension obligation bond is largely dependent on timing. Ideally, a pension obligation bond is issued during the intersection of historically low interest rates and the recovery period after a recession. The time between these windows of opportunity can span a decade or more whereas political considerations rarely extend beyond the next election. For politicians, a pension obligation bond may provide a solution to a cash flow problem; but these bonds are rarely suited to be part of a comprehensive liability management strategy. Indeed, most pension obligation bonds have been issued out of desperation.
There’s a reason a bunch of different people keep hitting on the same points.
It’s never the places that have handled their finances well that issue POBs.
I know Alicia Munnell et. al. have said that theoretically POBs can be good, but it is contingent on a bunch of behaviors that most POB issuers have not been following for decades. It’s like saying subprime mortgages have great features for prime borrowers.
Isn’t that a great catch, that Catch-22?
Here are some other (mainly negative) remarks:
So in the above, only one link has people being positive about the POB idea… with a hell of a lot of caveats.
CHICAGO POLITICIANS AMBIVALENT
Chicago Mayor Rahm Emanuel’s financial team will soon decide whether to recommend the city borrow billions to shore up its ailing public pension funds — a move some experts call risky but that Emanuel allies maintain could save taxpayers money and ease the pain from future pension-related tax increases.
City Chief Financial Officer Carole Brown said she could give Emanuel her recommendation by the end of the month or early September. The city might end up borrowing more than $10 billion, depending on the details, she said.
But Brown countered criticism from some, including mayoral challenger Paul Vallas, that the plan is being fast-tracked toward approval, saying she has not yet decided on the plan.
….
Brown’s PowerPoint presentation said the bonds would “provide significant reduction in cost of pension debt,” “materially improve the funded status of the pension funds” and “decrease the total amount of additional revenue required to fund pensions, saving billions for Chicago taxpayers.”The plan “will not” add “additional reinvestment risk,” the PowerPoint said.
But that isn’t entirely true, as there’s risk that with another major economic downturn, the pension funds could lose a substantial amount of their invested money. Then the city could end up on the hook for both bigger contributions to the city’s four pension funds and the interest on the pension bond debt.
Interesting. This is supposed to be a “straight” news article. And it’s pointed out that a Powerpoint deck is lying! (In weasel words: “isn’t entirely true” means “lying”)
Now, I’m gonna take the Powerpoint presentation’s point of view, and agree — there will be no additional reinvestment risk.
There is an additional liabilitiy – you’ve got the pensions (as before) and a bond debt (new liability). So two debts in place of one.
But the risk is not reinvestment risk, you see. It’s “not having enough money” risk.
Sorry if I got too actuarial on you.
But let’s see what the alderpeople say:
Ald. Scott Waguespack, 32nd, a frequent Emanuel critic, said Brown did little to convince him Thursday that the mayor’s administration would adequately address aldermen’s lingering concerns that the bond plan would put the city at risk before asking them to vote on it.
“We were trying to press her on different scenarios, like what would happen if the market fell, or the housing market took a big hit, and she said she could play around with a few different things but she didn’t have anything specific for us (at the briefing),” Waguespack said.
“So we said to her, ‘Well, when are you looking to move forward?’ and she said ‘late August,’ ” Waguespack said. “And we said, ‘It is late August.’ She then said, ‘Oh, I mean early September,’ and we said, ‘What?’ ”
Longtime Ald. Joe Moore, 49th, a reliable Emanuel ally, said city officials “understand that they are working under a microscope and they’re going to have to justify” any recommendation. He said any proposed plan needs to be “done right and thoughtfully.”
“We have to do it with the point of view of not kicking the can down the road and making the situation worse for future generations,” he said. “This has to be something that is a calculated and well-thought-out measure and not a risky scheme.”
Ald. Daniel Solis, 25th, another veteran alderman and mayoral ally, said he needs more specifics before deciding whether he supports the idea. But facing the likelihood of post-election tax hikes to cover additional pension debt, Solis said the bond proposal is one way to potentially ease that pain for residents still smarting from Emanuel’s recent spate of massive tax and fee increases.
“If anybody comes up with another idea — like some of the aldermen (in the briefing) were having a lot of questions, I wouldn’t say criticizing it, they had a lot of questions. I said, ‘But does anybody have any other ideas right now?’ ” Solis said. “(The answer) was no.”
Retiring Ald. Ricardo Munoz, 22nd, who is an occasional Emanuel critic, said he supports the borrowing plan.
“Anything to shore up the pensions is a good idea,” Munoz said.
I will get back to the “shore up the pensions” in the next subsection.
But here is another piece with the same message of skepticism: Aldermen ‘lukewarm’ as they are briefed that pension borrowing could top $10B | Chicago Sun-Times
WHY DO A PENSION OBLIGATION BOND? TO MAKE THE PENSION LOOK SMALLER
There’s a big ball of bad ideas with the POB. First, it’s only $10 billion out of a $28 billion putative shortfall.
I like to use fancy words, so let me point out the definition of putative:
Generally regarded as such; supposed
So, why is it supposed that the pension fund shortfall is $28 billion, and no more, no less?
Because of official accounting standards. Where the funds get to dictate what interest rate things are discounted at… except that changed a bit relatively recently.
Someone reminded me recently about the new public pension accounting standards, where that assumed discount rate gets tuned down to something lower… if projections showing the assets running out. At which point, future cash flows are assumed to be discounted at municipal borrowing rates… which are a lot lower than the 7%-8%. (indeed, that’s the idea behind POB “arbitrage”)
The way most do this is not to actually discount the cash flows at two different interest rates, but use a single “blended” rate. So it’s a kind of weighted average of the assumed return on assets and the muni bond rate.
Check out this post from John Bury on the state of the Chicago pensions:
Two years ago we did a study of the Chicago plans based on data from actuarial reports. Updating we find benefits and liabilities increasing, funded ratios declining, while deposits and asset values remaining constant and therein lies the reason for this Pension Obligation Bond (POB).
With negative cash flow of $1.3 billion it has been outsized investment returns that have kept the plans from total collapse. The question is whether those investment gains were bought at the price of illiquidity that now requires an influx of very liquid bond money to keep making those $3.5 billion (and rising) payouts?
Another question is that, from the charts below, it looks like the Teachers plan and possibly the Laborers’ with their 49% funded ratios may not get any POB money as the headline underfunded amount being thrown out there is $28 billion which is the total for those other three plans with funded ratios in the 25% neighborhood.
And I took a quick look at the reports linked by Bury.
Here are the blended discount rates, by fiscal year:
Laborers: 7.07% (2017)
Municipal: 7.0% (2017), 3.9% (2016)
Teachers: 7.07% (2017), 7.75%(2016)
Police: 7.00% (2017), 7.07% (2016)
Fire: 7.23% (2017), 7.30% (2016)
I didn’t have the 2016 number for the Laborers’ plan. But I want to point out a huge change:
MEABF went from 3.9% rate in 2016 (as it was running out of money rapidly) to 7.0% in 2017. What happened?
Here’s the official language: (page 47)
For December 31, 2017, the discount rate used to measure the total pension liability was 7.0%. The projection of cash flows used to determine the discount rate assumed plan member contributions will be made according to the contribution rate applicable for each member’s tier and that employer contributions will be made as specified by Public Act 100-0023. For this purpose, only employer contributions that are intended to fund benefits of current plan members and their beneficiaries are included. Projected employer contributions and contributions from future plan members that are intended to fund the service cost of future plan members and their beneficiaries are not included. Based on those assumptions, the pension plan’s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine total pension liability.
For December 31, 2016 the discount rate used to measure the total pension liability was 3.9%. The projection of cash flows used to determine the discount rate assumed plan member contributions would be made at the current contribution rate and that employer contributions would be made at the 1.25 multiple of member contributions from two years prior. For this purpose, only employer contributions that are intended to fund benefits of current plan members and their beneficiaries are included. Projected employer contributions and contributions from future plan members that are intended to fund the service cost of future plan members and their beneficiaries are not included Based on those assumptions, the pension plan’s fiduciary net position was not projected to be available to make all projected future benefit payments of current plan members. The projected benefit payments through 2023 were discounted at the expected long term rate return. Starting in 2024 the projected benefit payments were discounted at the municipal bond rate. Therefore, a single equivalent, blended discount rate of 3.9% was calculated using the longterm expected rate of return and the municipal bond index.
Here’s the simple language: they had an assumed rate of return on assets of 7%.
For fiscal year 2016, the assumption of future contributions was such that the assets ran out in 2023, and thus the overall liability cash flow was weighted at almost exactly the muni borrowing rate.
For fiscal year 2017, a deal had been done, and they could pretend that all future contributions would be sufficient such that the assets wouldn’t run out… so they got to use the assumed rate of return on assets of 7%
The difference ended up being a $7 billion reduction in the pension liability between 2016 and 2017.
So you see why a POB might be extremely important right now? It’s only $10 billion being floated because the largest POB in the past was from the state of Illinois, and that was $10 billion.
But if the POB doesn’t go through, those blended valuation rates are likely to keep going down, with a rising liability valuation.
This is accounting-driven, because it sure as hell doesn’t reduce the risk in the system.
MESSAGE FROM MEEP
Short note: my blogging is not regular – the blog is a hobby, and it’s not my highest priority. I do have themes I like to hit on particular days, but that’s just because I like alliteration.
You can always read my livejournal, which I update even more infrequently, but if I’m having health issues, that’s where I write about it. My most recent such post. But I have happier reasons for not posting this past weekend:
The FDR Home, Museum, and Library (and these are two separate things, one run by the National Archives and the other by the National Park Service) is a great site, and I think the presentation was very fair. I will definitely be going back, because it’s in an awesome location, (also: I highly recommend the Eveready Diner in Hyde Park, where we had lunch), it’s chock full of stuff I barely perused, and I want to go to the Vanderbilt house and to Val-kill, Eleanor Roosevelt’s house. (And yes, they get into how/why ER had this set up).
You’re always welcome to email me: marypat.campbell@gmail.com or tweet at me (@meepbobeep), though I may not respond.
]]>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.
SURE, LET’S DO UNIVERSAL BASIC INCOME IN CHICAGO
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…
PENSION OBLIGATION BONDS FOR CHICAGO
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:
Don't dismiss the city's pension bond idea out of hand
— Jeff Johnson (@JeffJohnson_5th) August 17, 2018
With the right measures in place, POB’s could play a role in putting Chicago on a path to sustainable budgets that both cover its debts and meet everyday service needs
Interesting look by Ralph Martire https://t.co/fqV40ur0bB
While there are plenty in the muni market who do dismiss POBs outright, I'd say that's the graph at the heart of fretting among muni market folks who are willing to entertain the idea of a $10B chicago pension bond issue and whether there will be the "right measures in place." https://t.co/YuigZfMPHb
— yvette shields (@Yvette_BB) August 17, 2018
It's like thinking "Well, I've never fully paid my bills, so I'll just take out another loan, but THIS TIME I'll really pay everything down. PROMISE!"
— Mary Pat Campbell (@meepbobeep) August 18, 2018
Tell you what — cut down your spending, pay down your balances for at least a decade, then get back to us about a POB
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 WHERE IS THE MONEY TO PAY FOR THE BONDS GOING TO COME FROM DUMBASS
YAAAAAARGH
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: LET’S DIVEST!
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: marypat.campbell@gmail.com.
And a tweet:
I prefer a different deal: they get to play SJW with their own pension money… and if returns fall short, their pension benefits are adjusted (as with Wisconsin). Only seems fair. Have to have skin in the game
— Mary Pat Campbell (@meepbobeep) August 18, 2018
OTHER CHICAGO STORIES
These are obviously mainly finance-related, because that’s what I care about.
This article has been smoking our servers with traffic but the regular press ignores it. Why? It's not our spin or interpretation.. Numbers come from Moody's. #twill #tcot https://t.co/lbRISJRyWT
— Mark Glennon (@GlennonMarkE) August 16, 2018
And something intriguing:
What if Chicago did a "Grand Bargain" to reduce pension liabilities in bankruptcy? Interesting theoretical work by
ManhattanInst</a>'s Howard Husock in 2016. (Page 11) <a href="https://t.co/uBBltBk2kX">https://t.co/uBBltBk2kX</a> <a href="https://twitter.com/hashtag/muniland?src=hash&ref_src=twsrc%5Etfw">#muniland</a> <a href="https://t.co/BJ6tLzXWyr">pic.twitter.com/BJ6tLzXWyr</a></p>— Cate Long (
cate_long) August 19, 2018
Hmmmm.
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