Sell $100 billion in bonds? Not completely crazy

Last updated on: February 1, 2018 at 10:46 am by Jane the Actuary

Sell $100 billion in bonds? Not completely crazy 2018-02-01T10:46:39-06:00 Jane the Actuary

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

Illinois state capitol; https://commons.wikimedia.org/wiki/File:Illinoiscapitol2.jpg

That’s the proposal in front of the Illinois legislature: the state pension is underfunded to the tune of $129 billion dollars (that’s almost double what the state spends, in total, in a year), so the State Universities Annuitants Association has proposed borrowing $107 in bonds, and hoping that there is no major market correction and that asset returns will exceed the interest rate at which the government is able to issue the bonds — an interest rate which, to be sure, will be higher than it otherwise would be due to the state’s poor credit rating, just barely investment-grade, and the risks of nonpayment that such bonds pose for investors.

Have you ever borrowed money, in order to invest it in the stock market? It’s only marginally better than borrowing money to take to the casino, not because the stock market is the equivalent of gambling, but because the core reason why stocks pay better returns than bonds is because of the risk inherent in those investments. And, yes, over the long term, one expects the stock market to reward one for taking that risk from year to year, but in the short-term, well, no. Just no.

And this isn’t the first time Illinois would be doing this — in 2003 Illinois made a similar deal, but with an order of magnitude less, only $10 billion, and at a time when our credit rating was far more favorable.

So why do I say this is “not completely crazy”?

In the first place, because it treats our pension obligations as what they are, true debt. In making pension promises to state employees in lieu of paying them competitive salaries, we have incurred debts that have to be paid, even though the nature of pension funding and accounting requirements gives legislators the ability to imagine that pension obligations are something different, just a “thing that will be paid in the future.” (See my New Year’s blog post.) In a perfect world, the bond issuance would be structured in such a way as to force the state to pay for benefits as they are accrued, but if staring down a big fat debt in the form of bonds coming due is what it takes for legislators to recognize that public pension provision is in urgent need of reform, than this would be a benefit of what’s otherwise a massively foolish idea.

And in the second place — well, Illinoisians, look around you. We’ve got two billionaires vying for our votes in the fall. Rauner wants to rein in the unions but has failed to succeed in his ventures due to his inability to negotiate with Madigan. His Democratic opponents (Pritzker, Biss, and Kennedy) are in a bidding war for how much additional state spending they promise, with Biss taking the cake as the Bernie of the race, promising single-payer healthcare and free tuition, among other goodies, and all three have promised that they will “support” the unions, which, based on past Democrats’ track record, I take to mean readily meeting the state unions’ demands at contract-negotiating time. Our government doesn’t show any signs of getting its act together. Perhaps massive levels of debt would be what it takes for our elected officials to finally realize the seriousness of the situation.

And, third, well, yes, I’d hate to move at any point in the near future (kids in school, husband started a new job without the ability to move to another location elsewhere), but that’s not out of the question eventually, and, after all, we need neither exit visas nor residency permits to pack up and find a better-governed state in which to live.

Image: Illinois state capitol; https://commons.wikimedia.org/wiki/File:Illinoiscapitol2.jpg

Uncategorized

Illinois

public pensions

Previous Post

January 30, 2018

Amazonian Healthcare? Good luck . . .

Next Post

February 2, 2018 Why I object to unconditional "Dream" legalization

Browse Our Archives

Select a Category Actuarial/Retirement Issues Politics Uncategorized

Select a Month September 2026 August 2026 July 2026 June 2026 April 2026 March 2026 February 2026 January 2026 December 2025 November 2025 October 2025 July 2025 June 2025 May 2025 April 2025 March 2025 February 2025 January 2025 December 2024 November 2024 October 2024 September 2024 August 2024 July 2024 June 2024 May 2024 April 2024 March 2024 February 2024 December 2023 November 2023 October 2023 September 2023 August 2023 July 2023 December 2022 September 2022 August 2022 July 2022 June 2022 May 2022 February 2022 January 2022 December 2021 August 2021 June 2021 April 2021 February 2021 January 2021 December 2020 November 2020 October 2020 September 2020 August 2020 July 2020 June 2020 May 2020 April 2020 March 2020 February 2020 January 2020 December 2019 November 2019 October 2019 September 2019 August 2019 July 2019 June 2019 May 2019 April 2019 March 2019 February 2019 January 2019 December 2018 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 March 2018 February 2018 January 2018 December 2017 November 2017 October 2017 September 2017 August 2017 July 2017 June 2017 May 2017 April 2017 March 2017 February 2017 January 2017 December 2016 November 2016 October 2016 September 2016 August 2016 July 2016 June 2016 May 2016 April 2016 March 2016 February 2016 January 2016 December 2015 November 2015 October 2015 September 2015 August 2015 July 2015 June 2015 May 2015 April 2015 March 2015 February 2015 January 2015 December 2014 November 2014 October 2014 September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013

TAKE THE

Religious Wisdom Quiz

For all have _____ and come short of the glory of God.

Select your answer to see how you score.

Tried Sinned Believed Prayed