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Emperor has no clothes: Pensions are short cash
 Illinois politicians are at it again. They're borrowing from the future to make state pension contributions today. Illinois has one of the most underfunded public pension plans in the nation.When boomers start retiring, there won't be enough money to pay those pension promises. Both political parties are still trying to hide the magnitude of the problem. In early January, while everyone was busy watching the nasty campaign commercials, the State of Illinois pulled an end-run on the budget process. On Jan. 7 the state sold $3.5 billion of "pension obligation notes." In simple English, the state borrowed money to finance the state's contribution to its five retirement systems. These five-year debt securities carry an interest rate of 3.84 percent, tax free to bondholders. It's a much higher yield than you could get in the bank because of the risk involved. Moody's and Standard and Poors rated them at least 6 notches below the top AAA rating. In fact, all the rating agencies characterized the outlook for Illinois finances as "negative." The money raised will go to shore up the Teachers Retirement System, which is scheduled to receive $2.08 billion of the proceeds, and the Illinois State Universities Retirement System, which will get $702.5 million from the bond offering. The Illinois State Board of Investment gets nearly $813 million for funds, including the Illinois State Employees' Retirement System, and the Judges Retirement System, and -- big surprise -- the Illinois General Assembly Retirement System. But what happens in five years when those bonds must be repaid? Where will the state find $3.4 billion -- plus the interest that must be paid along the way? Will investors be willing to lend to them at any yield? Will the next governor return to Blagojevich's plan to lease out the state lottery and sell the toll roads? Or will this "Ponzi scheme" finally be exposed? On that day, the war between the taxpayers and the public pensions will officially begin. Posted by: Fred 2010-02-16 |
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