Politicians’ next pension “fix”: Gambling with your money – Wirepoints

By: Ted Dabrowski and John Klingner

Imagine a husband going to his wife with a grand scheme to get his family out of the financial trouble they’re in. Out of control spending and too much debt has made a mess of their lives and his wife has been asking him for years to scale down spending and cut back excesses. Unfortunately, that’s never happened and now things are desperate.

Now he’s come up with a new plan, promising it’s a low risk idea:

“Ok, I’m going to borrow a bunch of money at a pretty low rate. I know it sounds counterintuitive but trust me, banks are giving away money right now at really cheap interest rates.

I’m going to take that money and invest it in the financial markets – you know some tech stocks, some real estate trusts, some hedge fund investments and for sure, some private equity. It’s a no-brainer. After about 20 years, we’ll earn lots more on those investments than it will cost us to borrow the money.

When it’s all over, we’ll repay the loan and with all the money we make, we’ll pay down our other debts.

There’s really no risk. What could possibly go wrong? The markets always go up.”

Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as Pension Obligation Bonds, or POBs.

The whole borrowing scheme is a bit more complicated than the household example above, but in essence, POBs are all about taking out a loan, then investing that money and hoping the returns on investment beat out the costs of the loan.

It’s a lose-lose game for taxpayers. If politicians get it right, governments will have extra money to spend and grow even bigger. And if politicians get the bets wrong, they’ll come after taxpayers to pay off their gambling losses. That’s one of the reasons why national organizations like the Government Finance Officers Association say “state and local governments should not issue POBs.”

That hasn’t stopped a new trio of cities, Moline, East Moline and Rock Island, from considering the pension bond gamble, a recent article in the Quad-City Times reported.

All three communities owe tens of millions to their local public safety funds, and pension costs continue to devour more and more of their city budgets.

Now, rather than fight for actual solutions through pension reform – local officials are basically pitching POBs as a silver bullet to their public safety retirement crisis.

The city of East Moline, for example, wants to borrow $41 million via a pension obligation bond, which they say would be used to fully fund their public safety pensions. Fully funding the city’s pension sounds good, but it ignores the fact that the city taxpayers would be on the hook for repaying the $41 million POB.

Officials claim the gains on their scheme would save the city $30 million in the long run, but that’s only based on their assumption that their investments will pan out. The city’s gamble could go the other way and hit local taxpayers with losses. Nobody knows the outcome.

The crises in the Quad-Cities

For sure, communities in the Quad-Cities area are struggling with their public safety pensions. In all, the sum of their local pension shortfalls now exceeds $300 million – and that’s a big problem for everyone. 

Spread that burden around and households in East Moline are each on the hook for $4,800 in local pension debts, Moline households for $7,700, and Rock Island households for $8,500 each. Those household debts have more than tripled in Rock Island since 2003. In East Moline’s case, they’ve quadrupled.

Nevermind these debts have grown despite city taxpayers pouring more and more money into the funds. Taxpayer contributions are three times higher today versus 2003 in East Moline and Rock Island, and more than four times higher in Moline.

Retirement security has also collapsed for the public safety workers counting on their pensions. East Moline’s combined public safety systems are only 54 percent funded and Moline and Rock Island’s are only about a third percent funded. Anything less than 100 percent funding is considered unhealthy by actuaries, and some experts consider 60 percent funding a “point of no return” for pension systems.

Meanwhile, the neediest residents in the Quad-Cities area are seeing funding for core services swallowed up by the ever-growing pension crisis. Today, nearly 25 percent of Moline, East Moline, and Rock Island’s collective budget is devoured by pension costs. In 2003, around 10 percent was taken up by pensions.

The problems for these cities will only get worse as the number of public safety beneficiaries in all three cities now outnumber the number of active workers. That means the burden to fund these debts will continue to increasingly fall on taxpayers.

At Wirepoints, we’ve laid out a summary of the local pension crisis across Illinois’ largest 175 cities. All three cities included in this piece received an “F” grade for their crisis, driven largely by the falling funded ratios, higher burden on households and the increase in retirees relative to active workers. For more detail, check out the 2-page city profiles for East Moline, Moline and Rock Island.

Reforms, not can-kicking POBs

Illinois’ Quad-Cities are being crushed by the costs of their public safety pensions. But POBs could simply make matters worse.

The bottom line, as we’ve said before, is this: POBs are inherently unethical. They transform local governments from service providers into trading houses – with taxpayers unwittingly providing the risk capital.

The real solution to the state and local pension crisis – that can improve retirement security for government workers and make Illinois more affordable for everyone – is actual, structural reforms.

Learn more about Wirepoints’ pension reform plan by visiting our Pension Solutions page.

Read more about Pension Obligation Bonds and why they’re such a bad idea:

26 Comments
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Fauci from the Gallows
2 years ago

When is the final timebomb for the ridiculous pensions? When the market finally tanks 20-40% from these levels?

Or when the USD craters from a Fed and Treasury that allow for $80 trillion debt?

Last edited 2 years ago by Fauci from the Gallows
Aaron
2 years ago

When the tax payers can’t pay up. Only a matter of time.

s & p 500
2 years ago

There’s a you-tube vid where the pretty lady talks to the former mayor of Costa Mesa. He tells her the wealthy Orange County city is in a lot of trouble with its pension bills, even if it gets $50 million a year in tax from South Coast Plaza.

Pensions and the CalPERS Time Bomb – YouTube

Mr. Daniel Pimental
2 years ago

That means the burden to fund these debts will continue to increasingly fall on taxpayers.Our state pension crisis is nearly always quantified by the press .https://www.alignfg.com/

Pensions Paid First
2 years ago

The burden to fund these debts has always been on the taxpayers.

Marie Gardner
2 years ago

I just wish all of these politicians who come up with all of this cockamamie stuff would use their powers for good and let’s say, maybe cure cancer. My God, I can’t believe some of the stuff they come up with. They’re not dumb they’re devious and callous. I sure wish they would use their evil for good.

Aaron
2 years ago
Reply to  Marie Gardner

Why don’t they just legislate a cure for cancer. Problem solved.

Juicy Smollier
2 years ago

2022-23 starts the Chicago downfall, and American as well.

Get real assets. Soon. BTC is the best among those.

They can and will take the debt to 80 trillion +

You’ll be amazed how quickly that happens once we hit 40.

Stephen Douglas
2 years ago
Reply to  Juicy Smollier

POBs are bad (true), but BTC is solid?

Evan
2 years ago
Reply to  Juicy Smollier

I’m getting to Australia ASAP so it won’t be my problem.

ProzacPlease
2 years ago
Reply to  Evan

Martial law going on in Australia…

TDG
2 years ago

“…as the number of public safety beneficiaries in all three cities now outnumber the number of active workers.” It’s impossible to continue the trajectory. If the good people of those three communities keep looking the other way while the political class continues to fleece them, I can’t see how they can be helped.

debtsor
2 years ago
Reply to  TDG

It’s racism and inequitable.

Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴
2 years ago

Here is what happens, or can happen very easily, when you start to “gamble” in the stock/equities markets, on POB or anything else with leveraged risk: “The San Diego County Employees Retirement Association (SDCERA) has sued Amaranth Advisors, LLC, three of its officers, and its former natural gas trader, to recover losses suffered by the pension plan in the Amaranth Partners, LLC hedge fund.” But what was the funds investment PLAN with this fraud hedge fund? It was “gambling” on the commodities market, and when the hedge fund LOST BIG TIME the fund then claims they were “mislead” by these… Read more »

Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴
2 years ago

Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as Pension Obligation Bonds, or POBs. The EXPERTS all AGREE, Pension Obligation Bonds (“POB”) are a a MAJOR risk to any pension system. It is just as the article states, a “gamble”. But it is also more than that, it is a fools “bet”. Heads I WIN, tails… Read more »

Last edited 2 years ago by Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴
Richard L Broberg
2 years ago

Why not?
They know Biden will bail them out.
Privatize the gains, socialize the losses.

Juicy Smollier
2 years ago

Soon it literally can’t be done. The elites won’t sink the dollar to help out their stooge plantations/slaves.

Stephen Douglas
2 years ago
Reply to  Juicy Smollier

Breaking news, Chicago… I agree with the dog. POBs are a gamble. And even if Illinois should win, the winnings are fungible. Little, if any, will go to pay down the debt.* Thus has it always been, and thus shall it ever be, in Illinois. Agree with Richard also; Biden will bail them out. JS, not so much. It can be done. “The multiemployer pension plans are deeply in need of structural reform, and so are many public-employee pension plans, and so is the PBGC. If indeed, as Mr. Biggs argues, the political urge to bail them out is irresistible,… Read more »

Jerry
2 years ago

Bailouts assure that retired public employees will be able to pay their debts (if they have any) or will have secure (even opulent) retirements or will leave their heirs a larger inheritance. Costs will be borne by taxpayers (Illinois or nationwide). It is hard to rationalize bailing out public employees without also bailing out multi-employer plans and Social Security and Medicare and military and other federal pensions. Most of these obligations are unfunded or underfunded. Bailouts will likely burden working taxpayers.  Bankruptcy will extinguish obligations except to the extent already funded. People already retired and getting checks will probably get their checks ‘til the funds… Read more »

Mike
2 years ago

The Debt Shuffle.

Exchanging one form of debt (unfunded pensions) for another form of debt (pension obligation bonds) does not address the root problem (debt).

Rex the Wonder Dog! 🐶🐶🐶🦴🦴🦴
2 years ago
Reply to  Mike

Mike nailed it. The proper solution is NOT gambling with POB’s, but to lower the pensions and collect FAR MORE of those pension costs from the employees, many of whom pay ZERO towards their multimillion $$ pensions. And the few that do contribute pay a SMALL portion, less than 10%-20%, of the aggregate cost.

Carl
2 years ago

Pension funds should be conservatively financed. In some specific cases and under very limited circumstances, a small allocation to such bonds could be considered. However, the associated leverage can go both ways, especially short term and may result in a significant negative development in a market downturn, especially in underfunded plans as pension funds may need to sell assets at depressed valuations in order to maintain promised payouts. Using long term data, even if interest rates are ultra-low and even if there would be demand for such ‘product’ by the reach-for-yield investing crowd, from a general market valuation perspective and… Read more »

Jerry
2 years ago

A local official reads about something he doesn’t understand. Then he calls a bond lawyer. Does the bond lawyer discourage the official? No, she connects the local official with underwriters and consultants and rating agencies. (Or, maybe she calls the consultant first.)

Perhaps the local official can attend a closing in NYC; at least several grateful service providers will take him/her to dinner. Perhaps a bottle of Pappy van Winkle at Christmastime. The service providers feed first but their gratitude goes to the local official not to the taxpayers.

Old Spartan
2 years ago
Reply to  Jerry

Jerry you are exactly correct . Right on on the analysis. A local official who knows nothing about the stock market gets tied in to lawyers, bankers, financial advisors and accountants who get great fees off bond deals. What kind of advice do you think the poor guy gets. And to sell bonds at the peak of the market? Nobody in the business who thinks they can make a fee will give the guy an honest answer. And after the bonds are sold and invested in the market that crashes, do any of the so called advisors have any liability?… Read more »

Fed up neighbor
2 years ago
Reply to  Jerry

Pappy van Winkle sure sounds good.

susan
2 years ago
Reply to  Jerry

This is spot on analysis. Especially Pappy Van Winkle. Recipients can argue they got a gift of low ‘retail price’ value rather than commonly-known fair-market resale value.
Now that we know what how these scams work, why can’t we do something about them?

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