By: Mark Glennon*
We’re hesitant to suggest anything that would make Chicago’s proposed $10 billion pension obligation bond more attractive because it’s fundamentally an awful idea that shouldn’t be pursued in any form. (See our articles linked below for the background.)
However, if it it does proceed, it should be linked to reforms for Chicago’s pensions that would reduce the unfunded liabilities crippling the city. Why just give $10 billion to the pensions with no strings attached?
The $10 billion could easily be tied, constitutionally, to just the kind of pension reforms that Illinois courts have struck down.
Here’s one way it might work: Put the $10 billion of bond proceeds into a new, separate retirement account. Let participants in the existing pensions have their share of the new account but only if they agree to a benefit reduction in their existing pension — perhaps an increase in the retirement age or a reduction in the automatic annual COLA. Maybe the new account would be a 401k-style plan or some other defined contribution plan.
Existing pensioners would then have a choice of either 1) accepting the new, fully funded benefit plus their modified old benefits, or 2) keeping their entire existing promises from their old pension. Those old pensions, however, are hopelessly underfunded (their consolidated funding ratio is just 26%.)
Use your imagination and it’s pretty easy to come up with variations on how it might work. The basic idea, however, would be a voluntary trade of something new, funded with the $10 billion, for some adjustment to benefits in the old pension.
Yes, some pensioners still think the Illinois Constitution makes their existing pension risk-free and wouldn’t make any trade. But most have to know that haircuts are inevitable. They’d also see the virtue in changes that improve the funding level of their existing pension.
In any case, the choice would be entirely voluntary, and the value of the benefit in the new account could be properly matched to the benefit adjustment in the old pension, to ensure fairness and sufficient participation.
No constitutional problem would arise because participation would be entirely optional.
How much would it save? That is, by how much could the current $28 billion of unfunded pension liability be reduced? I can’t venture an estimate, but the savings no doubt could be very meaningful. That’s because $10 billion in hard cash provides a darn big incentive, and surely could be traded off for significant benefit adjustments.
Regardless of how big the savings would be, why not get something? Why just hand over $10 billlion?
*Mark Glennon is founder and Executive Editor of Wirepoints.
For further background on the proposed pension obligation bond:
- Aug. 5 – Rahm Emanuel’s latest can kick: Borrow $10 billion for Chicago pensions
- Aug. 15 – $125,000: The pension debt each Chicago household is really on the hook for
- Aug. 19 – How Emanuel is misleading you on the city’s debt – Crain’s
- Aug. 24 – Pension Obligation Bonds Are Like Big, Fat, Dangerous Margin Loans For Stock
- Aug. 26 – Chicago CFO’s Stupendously Bad Timing On Her Last Pension Obligation Bond
- Aug. 28 – Emanuel’s real motivations for Chicago’s $10 billion pension bond plan
- Aug. 29 – A plan to make “bad pension borrowing” good? Greg Hinz is mighty confused
- Aug. 30 – Liquidation Sale. That’s How To Think About Chicago’s Proposed Pension Bond
- Aug. 31 – Emanuel’s misleading pension bond presentation to Chicago aldermen