By: Mark Glennon*

Bailout folly was sure to be on the table. With markets down about 25% from their recent highs, pension funds are taking a beating, and ideas for bailing them out are brewing.

The first specific proposal we’ve seen would be a three-fer, piling wrong on top of wrong on top of wrong. It’s from the Rockefeller Institute’s Liz Farmer, published nationally and in Crain’s Chicago Business.

That idea is for state and local government to issue bonds to borrow money for pensions. They are called pension obligation bonds, or POBs, which we have criticized repeatedly at Wirepoints. And the proposal is to make those bonds tax exempt, meaning federal taxpayers would subsidize them.

First, POBs are inherently foolish. They represent nothing more than borrowing to cover debt — one credit card to another — replacing unfunded pension debt with unfunded bond debt. They are a can-kicking at its purest.

Worse, they gamble that interest paid on the bond will be less than earnings made on the stocks a pension would buy with the borrowed money. Farmer says “a boost in assets now would likely produce a welcome return on investment over the next few years and ultimately help stabilize government pension bills.” That’s pure speculation, and nothing more than market timing, an investment strategy widely shunned as a suckers’ game by pension managers and all but a few experts who specialize in it. Basic market economics say that the likely return on stocks and bonds, if properly risk adjusted, should be equal.

Who would buy those bonds from Illinois, Chicago and others that were in death spirals even before the current downturn? Therein lies the second wrong in Farmer’s proposal. She says the deal could be sweetened by making interest on the bonds exempt from federal income taxes. That would be a backdoor way to force all Americans to pay for a bailout, including those in responsible states that have managed their pensions sanely.

The final problem with Farmer’s suggestion is she omits any conditions that should be attached to federal help. In our view, any open-ended federal assistance for state and local governments, and any direct assistance to pensions, should be conditioned on pension reforms in the states that need it. See our new column in RealClear on that. Under no circumstances should federal money go towards the futile hope of filling the bottomless pits of the worst-managed pensions in Illinois, New Jersey, Connecticut and certain other states.

That reform condition must apply to other bailout ideas in the nature of block grants, general notions of which are now percolating.

House Speaker Nancy Pelosi wasted no time after passage of the $2 trillion emergency appropriations last week, saying she wants another bill that would include direct assistance to state and local governments as well as pension assistance. And Illinois Senator Dick Durkin had already tried to insert straight cash bailouts in the bill passed last week.

The Federal Reserve Bank is also reviewing new ways to support financing for state and local governments, as nicely detailed by the Wall Street Journal last week. The Fed has already begun some purchases of short term obligations, though just to calm the market in municipal finance. Among the questions Fed is now considering, according to the Journal, are whether to expand existing facilities to accommodate other municipal debt or to launch a new facility devoted to state and local finance.

“The states and localities that need the most help are the most risky by definition,” said an economist quoted by the Journal.

That is precisely the problem with potential aid from either Congress or the Fed. If that aid goes where it is most needed it would bail out the most fiscally irresponsible states and cities. Fairness, however, would demand that it go pro rata based on population and help should be conditioned on reform in states that have refused to reform.

*Mark Glennon is founder of Wirepoints.

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6 months ago

My wife and I are in our 60s having recently retired. Fortunately we didnt have much in the market a but have saved well. It amazes me that because our house is paid off and we own used cars and love to cruise, that now we will be punished. We dont mind helping people but many have been reckless buying expensive cars and houses. Of course we wont see any stimulus help because the politicians classify $200,000 a year as rich.

Rick
6 months ago

Pelosi: “people are dying! For gods sake lets fund public sector pensions!”

Fed up neighbor
6 months ago

Totally, absolutely disgusting to even think about this.

bagelgirl
6 months ago

It sure is.

nixit
6 months ago

Why don’t all the pension systems insured by the PBGC get better insurance coverage? If those systems want better protections in bankruptcy, why don’t members and employers pay the premiums necessary to provide the level of insurance that annuitants expect? Seems to me they paid the bare minimum and are now upset they’re getting what they paid for.

bagelgirl
6 months ago
Reply to  nixit

Public pensions have no such coverage that I am aware of. The state governments should be reforming their pension systems to make the funds last longer.

NB-Chicago
6 months ago

WSJ article states the importance for feds in the past to keep “fire wall” distance between Fed & state fiances. Once fed starts buying or backing muni debt what next? where will it end? what will keep states independent from federal gov? Would fed impose any overreaching accounting standards to cover muni debt or pension actuarial standards or just for example let Illinois ridiculous 7,000+ units of local government pretty much do there own thing? Or just except MMT theory–debt doesn’t matter–just keep printing the $bucks$. and no questions asked

Douglas
6 months ago

This is my email from March 27th to Farmer on her story. I should tell you that I was so angry reading her story, some things are out of order. When I read your article in crains, there wasn’t one single mention of the federal government having a 23 trillion dollar debt, and running an over 1 trillion dollar deficit every year in the near future (that was in a good economy prior to covid 19). Is it your intention to push the federal budget over the edge, do you not care that you are taxing individuals yet to be… Read more »

debtsor
6 months ago
Reply to  Douglas

You said: “Trump took this very lightly, and the federal government has over 1 million n95 masks that it’s not releasing in a warehouse in Indianapolis. How much more god damned incompetence, ineffective and inefficient examples do you need before you understand that government is involved in entirely way too much and can’t effectively do what it should be taking care of/prepare for–like pandemics!”

You mean when OBAMA ran down the stockpile? GET YOUR FACTS STRAIGHT

https://www.washingtonexaminer.com/news/los-angeles-times-and-bloomberg-news-federal-stockpile-of-n95-masks-was-depleted-under-obama-and-never-restocked

Pension lawayer
6 months ago

Multiple flaws as you point out. Could this be the initial proposal in what the proposers foresee as a negotiation process? Also, is it timed to become a litmus test in the presidential election? Public employees and retirees are likely to vote for the Democrat candidate in all events. If they plan to bail out retiree health also, this could be a step toward Medicare for all. Obamacare came along “just in time” to rescue Detroit retirees from complete elimination of retiree health. Afterthought: bring us your tired and your poor and your Teamsters and your Coal Miners. It’s probably… Read more »

Susan
6 months ago

The old ways continue to work for the bad guys, and the old ways ( kvetching on blog comments, voting) continue to NOT work for the guys that the bad guy exploit for profit. Novel solutions are needed. 1. Insist that, based upon the same political class assertions that defined benefits are sustainable and righteous, ALL essential social service provision workers should be accorded similar benefits by society. This will include all medical professionals, electric power linemen, grocery store and Amazon fulfillment workers, food producing farmers, and more. Add these essential workers to another State run defined benefit pensions and… Read more »

nixit
6 months ago

Who protects my 401(k)? Why do we protect one type of retirement savings over another? My retirement investments are no different than pension investments: same stock market, same mutual funds, same bonds. Where’s my cash infusion?

chumpchange
6 months ago
Reply to  nixit

You know why nixit. Because they haven’t yet figured out a way to take a portion of your 401(k) and use it to perpetuate a self-serving/corrupt power structure that reallocates the fruits of other peoples labor into the pockets of themselves, their family, their friends, and their donors.

NB-Chicago
6 months ago
Reply to  nixit

Your getten $1,200 bucks..thats your chumbalone cash infision/ fed bailout

Poor Taxpayer
6 months ago

Save your breath if you think government will ever change.
The only solution to Illinois problems is to MOVE ASAP.
Do not tell anyone you came from Illinois as they will think you must be mentally challenged.

s and p 500
6 months ago

This editorial is as funny as this piece from Philly School District, where the education advocates call on the District to come up with a plan to deal with inequalities in online leaning brought on by the pandemic. One guy says “it remains to be seen if the resources will materialize”. No, the resources probably won’t materialize with the District $8 billion in debt. That debt hole just got bigger because of what the stock market did to PSD’s pension fund.

https://thenotebook.org/articles/2020/03/25/pa-districts-told-to-make-a-good-faith-effort-to-provide-remote-instruction/

s and p 500
6 months ago
Reply to  Mark Glennon

Cities and states should be doing everything they can to preserve cash but apparently they think a fed bail-out is coming for them. Check out the ClownfishTV vids on youtube about dismal Disney news and how that company is in a panic to save money and keep the lights on.

Mike Williams
6 months ago

Rest assured, any bailout to Illinois will be pissed away quickly. The state will still be run by fantasy world liberal voters along with their beloved Democrat party. The insane Illinois debt is a symptom of that simple fact. You are deluding yourself if you believe a bailout or change to the constitution will fix Illinois. The core problem is it’s people. How do you fix that? Personally, I don’t think you can fix it, which is why I don’t live there anymore.

mqyl
6 months ago
Reply to  Mike Williams

I agree with you. IL has mismanaged billions of dollars of its revenues for many years. Why would anyone think that IL will do a complete turnaround and manage properly the large amount of federal funding coming its way? Also, any significant change for the better is unlikely in IL in the foreseeable future as long as public unions and politicians continue to be in bed together. Therefore, even changes to the state constitution won’t provide much relief to the taxpayer because those changes won’t go far enough. Yes, moving to another state seems to be the only solution. Just… Read more »

debtsor
6 months ago
Reply to  mqyl

“Just for laughs, I was looking at houses for sale in some Chicago suburbs. The property taxes are three percent of the property value. Yikes.” Property values in the next few months will crash, and continue to crash, as foreclosures take over the market place. There’s no federal foreclosure jubilee at this time. Loan mods just increase everyone’s principal balance so borrowers owe more money for the same house that is now worth less. Also, it’s hard to get people who’ve stopped paying their mortgage to start paying again. They look at 6-12 months of nonpayment, followed by cheaper rent,… Read more »