“I believe that instead of going to Wall Street to borrow money, that in the fixed portfolio of your pension system, borrow it from the pension system because right now you might get 2 percent on a 10-year bond. Well if I’m paying Wall Street 6.2, why not pay it to my pension instead. It will get us funded quicker, and I’m working on legislation to do that”.
So what’s wrong with this idea?
There are a lot of federal pension laws that do not apply to public retirement systems (funding topping the list) but, among the laws that do, is the exclusive benefit rule:
Applicable to governmental plans. Code section 401(a)(2) requires that a qualified plan be maintained for the exclusive benefit of employees or their beneficiaries and that under the plan’s trust instrument, it be impossible, at any time prior to the satisfaction of plan liabilities, for any part of the principal or income of the trust to be diverted for any other purpose.