Ill. Idea: More POBs

Having the state with the lowest credit rating for a U.S. state, ever, sell $107 billion in Pension Obligation Bonds (POBs) is an idea that will take an extraordinary amount of salesmanship. Here is the pitch by Professor Runhuan Feng (University of Illinois) in conjunction with State Universities Annuitants Association presented yesterday to the Illinois legislature.

The money is needed since the Pension Funding Act of 1994 backloaded contributions:

Subsequent POB sales:

did not work out because…

Yet this time:

With the resulting state contributions (and this is likely the part of the presentation where the politicians woke up) not rising substantially over the years but, amazingly, remaining the same amount through 2045:

With this breakdown of total state contributions going forward:

That all works out even under an adverse scenario:

My first impressions:

  • No repayment of principal until 2035 (26 million) and then $20 billion in years 2036, 2038, 2039, 2041, and 2042 with no indication of who will be paying that as the state payment is supposed to be capped at $8.5 billion through 2045.
  • The estimated Normal Cost of $3,621 as of 2018 is supposed to rise to only $3,952 in 2045 (9.1% over 27 years)?
  • 7% return on investments for the years 2024 through to 2045 is considered an “adverse scenario”?

13 responses to this post.

  1. Posted by dentss dunnigan on January 31, 2018 at 1:55 pm

    It drips of greed …pushing what greedy politicians promised onto the next generation to clean up …….sickening they care so little for their children

    Reply

    • Posted by Tough Love on January 31, 2018 at 2:23 pm

      Well that too, but I believe the REAL driver is that Bankruptcy Courts (while showing willingness to reduce Retiree healthcare promises) have found little willingness to reduce Public Sector pensions vs reducing the value of Gov’r Sector Bonds. The Pension participants KNOW that there isn’t enough money to pay for BOTH, so they want to firm up THEIR pensions (at the expense of Bond holders) BEFORE the proverbial SH** hits the fan.

      Reply

      • Posted by NJ2AZ on January 31, 2018 at 2:31 pm

        ding ding ding

        Reply

      • Posted by PS Drone on January 31, 2018 at 8:40 pm

        Only an idiot would purchase these bonds. I would imagine the yield will gravitate up to about 12%.

        Reply

        • Posted by NJ2AZ on January 31, 2018 at 10:58 pm

          the scary part is i have little doubt this offering would somehow be oversubscribed

          Reply

        • Only an idiot would purchase these bonds. I would imagine the yield will gravitate up to about 12%.
          No one, and I mean NO ONE with a functioning brain would buy anything even remotely related to debt from IL, Chicago or any other muni in IL. They tried to float a bond last year, a $1 billion issue, and NO ONE bought. There is NO chance of ANY bonds being bought by the public from IL or their subdivisions.

          Reply

          • Posted by Tough Love on February 1, 2018 at 5:30 pm

            SeeSaw,

            Thanks to the ludicrously generous pensions and benefits that CA (your home State) promises it’s Public Sector workers (and the grossly unjust legal protections that prevent reductions even for FUTURE service pension accruals), CA will likely be in the same position as Ill in about 10 years.

          • Posted by Tough Love on February 1, 2018 at 5:44 pm

            Sorry about that comment “SeeSaw Junior”….. I thought you were that lady from CA “SeeSaw” who (as a CA retiree) thinks that CA’sgenerous pensions are just peachy.

  2. Posted by NJ2AZ on January 31, 2018 at 2:22 pm

    maybe Illinois can beg Argentina to issue more century bonds so they can buy those up and lock in their 8% return 🙂

    Reply

  3. Posted by MJ on January 31, 2018 at 6:19 pm

    Funny how they all say what a bad deal it was after the fact and then do the same thing over and over…as long as somebody somewhere is willing to lend these corrupt and bankrupt entities money it will go on forever

    Reply

  4. Posted by geo8rge on February 1, 2018 at 8:10 am

    Why not finance it like the social security trust fund? The State of Illinois will issue $107 billion of State of Illinois bonds to the State of Illinois pension scheme at an interest rate of whatever the current market rate is. This will solve the issue of who will buy the debt and if Illinois will get a comparatively favorable rate. Since states always pay their debts always the problem will be solved. And if it is not solved, issue more bonds.

    My other genius idea is to issue a cryptocurrency, the e-Llini, named after their college sports team The Fighting Illini. Oskee Wow-Wow!!!!

    https://en.wikipedia.org/wiki/Oskee_Wow-Wow

    Reply

  5. Posted by dentss dunnigan on February 1, 2018 at 8:37 am

    The pool of suckers left to pay the pensions ,we can only dream of is getting smaller ..N.J.’s future is bleak if another 1 million millennials leave ……http://www.nj.com/opinion/index.ssf/2018/01/njs_future_is_bleak_if_another_1_million_millennia.html

    Reply

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