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
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