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We’d be so much better off if political reporters stuck to politics, which most of them understand, and stayed away from fiscal policy, which they don’t.

Chicago, as you should know, is considering doubling its bonded debt by borrowing $10 billion and putting the money into its crippled pensions.

It’s called a pension obligation bond (POB). We’ve been ridiculing the idea and most financial experts don’t like the bond idea, either.

Greg Hinz wrote yesterday how Chicago might make the idea a good one: Chicago should just do what the CTBA has proposed for state pensions.

The CTBA’s plan for the state, which they call “reamortization,” is actually pretty simple, and is what you’d expect from a public union policy shop: Just put more money into the pensions sooner.

For the state, they’d like to see the annual contribution increased to $12 billion from the current $7 billion. Where would our broke state get the additional $5 billion per year? Why, just borrow it, at least initially — $11 billion of POBs. The earnings on the additional money, which the pensions would put into the stock market, would allow the state to keep its contribution fixed at $12 billion, says the CTBA.

So, the “plan” for Chicago would be to modify its proposed POB to do the same, Hinz says.

But what does that even mean?

It’s really just a matter of whether Chicago’s new $10 billion for its pensions would be (a) in addition to scheduled contributions or, (b) a means of paying what’s now scheduled. By statute Chicago faces an up-ramp that will require it to nearly double its pension contributions in the next five years, though the city has not yet fully identified how it will handle that. The CTBA, naturally, wants the $10 billion to be in addition to what’s already scheduled.

Why not bring some clear thinking to this and just demand that the city say whether the $10 billion would be an additional contribution? That’s among the key questions unanswered. Hinz interviewed Chicago’s CFO about the POB. Why didn’t he just ask?

And does Hinz really think the city is capable of doubling its bonded debt and separately funding the up-ramp it faces? That’s what his plan would require. How might the city do that?

No answers from Hinz, but how about this? Sell a second $10 billion bond and use the proceeds to make the payments on the $10 billion pension bond. That would be only slightly more foolish than the POB idea itself, which is incurring one debt to pay off another debt.

Mark Glennon is founder and executive editor of Wirepoints.

 

 

 

 

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Rick

I think the dimishment clause in the constitution only applies to the payouts, not the funded ratio? There is no constitutional requirement to keep any pension at a particular healthy funding ratio. Just that they get their checks and increases. So just honor that, let the pension funds run out, then continue honoring the constitutionally required payouts on general revenue appropriated by simply stopping all services on anything else. Constitutionally there is no need to borrow 10b just to improve the ratio.

nixit

Forget pensions, let’s do something like POB’s for student debt. Once repayment kicks in on a graduate’s college loans, grant them a giant loan to invest it in the stock market, then they make the student loan payments with all those guaranteed stock gains plus money left over to pay the rent on their studio apt and morning lattes. Win-win.

The Nixit Principle will revolutionize personal finance.