Pension Obligation Bonds: Fallacies & Realities

It is on the table in Illinois:

Lawmakers in Illinois are so desperate to shore up the state’s massively underfunded retirement system that they’re willing to entertain an eye-popping wager: Borrowing $107 billion and letting it ride in the financial markets. The legislature’s personnel and pensions committee plans to meet on Jan. 30 to hear more about a proposal advanced by the State Universities Annuitants Association, according to Representative Robert Martwick. The group wants Illinois to issue the bonds this year to get its retirement system nearly fully funded, assuming that the state can make more on its investments than it will pay in interest.

Here is what will be conveniently overlooked by those pushing these Pension Obligation Bonds (POBs)….

Funded Ratio:

  • Fallacy: Put the bond money into the plan and the funded ratio goes from 42% to 100%.
  • Reality: It’s a liability. A debt. Even if the repayments will not be filtered through the plan itself it will need  to come from a source (taxpayers) who would otherwise be making those payments into the plan. It is deceptive and disingenuous to pretend an asset has been created without a corresponding liability.

Interest Rate Arbitrage:

  • Fallacy: You make repayments at 4% that earn 7.5% per the plan assumptions
  • Reality: Interest rate assumptions for funding public pensions are a fiction designed only to understate contribution calculations. There could easily be an honest estimate of what the asset mix in a particular plan will return but picking a random (high) number is so much more efficacious for the deciding parties.

Cost of Borrowing:

  • Reality: There is a cost to borrowing. You pay it to get a house or a car since you are willing to pay the price of admission into the middle class. But if you already have an obligation to pay off (either student debt or a home mortgage) are you going to take out another loan with the proceeds to be invested in hedge funds that hopefully return more than the loan payments? Who would buy that as a reasonable strategy…..outside of an Illinois politician?

10 responses to this post.

  1. Posted by NJ2AZ on January 28, 2018 at 7:39 pm

    probably just playing the long time. i’m sure its a more politically viable strategy to soak a bunch of “Greedy wall street bondholders” when the time comes than it is to deny the PWs the pensions they “earned”


  2. Posted by NJ2AZ on January 28, 2018 at 7:56 pm

    Also how on earth would there be a market for $107B of Illinois debt at 4%? ‘Investing’ in these bonds should be an indictable offense. there no reasonable way anyone could expect them to be repaid


    • Posted by Stanley on January 29, 2018 at 4:24 pm

      “how on earth would there be a market for $107B of Illinois debt at 4%?” That’s true and how could anyone think they can profitably invest $107B in today’s financial market. Maybe buy a bunch of puts and inverse funds. This is a crazy world to try to invest in.


      • Posted by NJ2AZ on January 29, 2018 at 5:29 pm

        per the link i posted below, seems maybe there won’t be the market that Illinois hopes for

        anyways what would the rate on these bonds me if interest rates weren’t being artificially depressed? 20%?


  3. Posted by Tough Love on January 28, 2018 at 8:47 pm


    Re your “Funding Ratio” section……… of course the Taxpayers’ net obligation remains the same, but the security of the pensioners is VERY measurably enhanced because the POB proceeds can’t taken away from Plan assets once turned over to the Plans ….. and that’s all the Plan participant’s care about. They couldn’t give a hoot about the Taxpayers.

    Re your “Interest Rate Arbitrage” section …….. it’s always presented to Taxpayers as a 4% vs 7.5%, but it really 4% vs WHATEVER THE NET POB PROCEEDS ACTUALLY EARN. AND with Illinois credit worthiness in the toilet, the “market” is likely pricing these bonds at MORE than what they believe IIlinois can earn (not less).


  4. Posted by Mike on January 29, 2018 at 2:06 am

    The House Personnel & Pensions Committee is scheduled to meet on Tuesday January 30, 2018 at 3:30PM Central Time in Room 122B of the Capitol Building in Springfield, IL to discuss Pension Obligation Bonds.

    There are 8 Democrats (Committee Chair Robert Martwick, Committee Vice-Chair Michael Zalewski, Carol Ammons, Kelly Burke, Linda Chapa LaVia, Barbara Flynn Currie, Scott Drury, & Carol Sente) and 6 Republicans (Republican Spokesperson Thomas Morrison, Mark Batinick, Jeanne Ives, Sheri Jesiel, David McSweeney, & Grant Wehrli) on the Committee.


  5. Posted by geo8rge on January 30, 2018 at 10:07 am

    Phil Murphy to tax your carbon. Basically, he wants to extend the gas tax to heating and air conditioning. So it will be interesting to see if there is any push back.

    The gas tax is unique in that if you drive and have a minimal income, the gas tax got people off the road making your trip more productive. Increasing your heating and cooling bills will not make you better off in anyway, unless the money is going into your pension plan.

    The public school sytstem can actually fund their own retirements by being energy inefficient as carbon tax from state institutions will be paid by taxpayers and go into state pensions.

    Murphy directs New Jersey to re-enter Regional Greenhouse Gas Initiative


    • Posted by Tough Love on January 30, 2018 at 10:31 am

      Heavens forbid that NJ’s in-the-Union’s-pocket Murphy should (INSTEAD of indirectly raising revenue via a carbon tax) address the ROOT CAUSE of the pension mess head on ……. reduce the ludicrously excessive pension (AND benefits) promises.


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