Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale
bloomberg.com
bloomberg.com
No, it's not. Bankruptcy is a legal state, and one which is not open to US states.
It's not even insolvent, which “bankrupt” is often incorrectly used as a synonym for. It may have a projected future insolvency, but that's a different issue.
You seem to be discounting assets, like taxation power (now, the politicsl consensus necessary for the state to use that power may not exist, but that's unwillingness to use an asset, not lack of assets.)
That’s like marking at 100 a bond trading at 30 while arguing the problem isn’t the asset, it’s buyers’ unwillingness to pay the right price. In any case, potential to raise taxes is like potential to raise prices. It isn’t an asset until it’s signed and producing.
assets, like taxation power
And taxation power is constrained by the US and IL Constitutions and even US and IL law.
Illinois can currently pay its debts as they come due, so it is currently solvent. It is likely to become insolvent in the future, but that is not the current state.
There's a difference between not having the money to pay debts as they come due (which is insolvency) and just paying late by choice, incompetence, or -- as happens with in some jurisdictions with budget delays -- legal prohibition on using existing funds [0] (none of which are insolvency, though they may be default on the individual debts).
[0] Which, looked at one way, is a subset of choice, since the actors not making the necessary choice to remove the legal roadblock are the political leadership of the state.
It almost certainly can, if it chooses to, but it hasn't been choosing to, if you consider the pension fund distinct from the state.
Bankrupt can also mean insolvent, it is not limited to the legal definition[1]. But more importantly you know what the person you're replying to meant. That they think Illinois is essentially out of money and pretending they're not.
You could have furthered this into an interesting discussion on the financial health of Illinois, but instead you found a way to feel intellectually superior without actually having to engage in discourse and without having put forward any ideas that could be challenged.
Your comment illustrates a common theme on sites like Reddit and HN, where people want to "win" the conversation as fast as possible. They find a easy and superficial way to call out another comment or article as "incorrect" and avoid putting forward anything of substance or actually worth talking about.
Ha! Might be the defining characteristic of HN.
And a state can go rid itself of debt similar to a normal bankruptcy. Since they have sovereign immunity they can just declare that some or all of the debt is void and won't be paid back and not face any consequences (other than lenders possibly choosing not to lend them more money - just like with a normal bankruptcy).
Maybe consult the dictionary before before engaging in such unproductive pedantry.
Take out a mortgage in your 20s to finance your retirement so can diversify over a long time period.
There was someone on Bogleheads who posted about trying this, exhausting their student loans and credit cards, but unfortunately when they started it was Fall of 2007. The guy had pretty bad luck, but I'm sure it's worked for other people especially those who don't know it (e.g. "I bought options on Google in 2006!") https://www.bogleheads.org/forum/viewtopic.php?t=5934
"Extend and pretend"?
"Fool me once, shame on you..."?
"Greater fool theory"?
Usually with a muni-bond, they are using the money for some sort of public infrastructure and then paying the interest either from fees gained through the use of that infrastructure (like a bridge or power plant) or through taxes.
Here though the state is flat out saying, "we're gonna invest in the market, which you can also do, and hope we get better returns than you do so we we can skim some off the top".
If they are general obligation bonds, you’ll make money and sell them to the next investor. If they are revenue bonds, you get dibs on the tolls, tax, etc.
This did not work out for Puerto Rico bond holders.
My big question in all of this is why the mid & early career governmental union members keep going along with the strikes. They are out of luck regardless and should be negotiating for fallback positions.
So how does IL do it?
For starters, local property taxes pick up the slack. We have some of the highest in the nation. Further compounding this, we have hundreds of local governmental layers like townships that fall somewhere between a town/city and a county that provide services, have elected offices, pay employees, etc. It's services are all heavily localized because the state's involvement is limited. It's also grossly inefficient.
IL needs a progressive income tax, pension reform, and needs to consolidate services at either the county or city level. Even Chicago, with all its graft and political machinery, was smart enough to jettison townships decades ago. I honestly have no clue what the redder, more conservative, more tax-conscious part of the state cling to them.
Yup, and now it's not deductible anymore past the first 10K thanks to the new GOP tax laws.
People rushed to their county tax offices to prepay as much as they could before the end of 2017, but it's a lot of headache and effort for a one-time small relief.
I'm in DuPage - highest property taxes in the state (closing in on 2.25%). So a $400K home will easily get you up near the 10K mark...and that's not even counting your income taxes.
The only possible solution I can see is to move from a defined-benefit system (eg. pension) to a defined-contribution one (eg. 401K). Everything else seems it can be gamed.
1) Simply let your employees invest in their own retirement via a 401k.
2) Pool everyone's money together and invest into a super 401k.
What I'm asking is if (2) is better than (1), or not. Surely someone has tried a variant of (2) before.
I agree though, that funded pensions are awesome. Since some organizations clearly have trouble with that, I was just wondering if there was a simpler way to ensure liquidity in the fund.
I'm aware that money is already pulled together with a pension, however my understanding is that pension funds are generally "managed" where most people who use a 401k put it in some sort of index fund where it's pretty passive as it tracks the market in general.
e.g. Fidelity has target date funds, and everyone in the 2050 target date funds has their money in one pool which Fidelity manages as a group.
There are 401k's that allow investing in individual securities (or so I'm given to understand) but that's not the norm.
There’s financial and social problems associated with the 401k model, namely that people won’t or can’t save enough or invest well. You’ll see the impact in a few years as the numbers of impoverished former middle class seniors increase.
With the pension model, you fund, manage it responsibly and you have a sustainable system that benefits all.
I live in a state with a constitutional guarantee of public pensions. I take a 35% pay hit, plus 10% to my own savings today for the ability to retire at 55.
All big companies were able to afford this model, but the changes to tax law incentived then to ditch pensions.
Unions don’t run public pension plans. So it really doesn’t make sense to throw around the anti union bullshit. When you are more corrupt and inept than NY government, you need to look at how you elect your legislature.
* Everyone gets lumped into the same risk tolerance bucket
* Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though.
* You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008.
* Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind.
* Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption
* People are living longer which further screws up the math that many pensions were set up on
* Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.
It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled.
In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades.
A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices.
Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.
2) The next is where the risk resides - even in cases where they are fully funded (ie: some model suggests that the returns on investment will be able to pay out obligations), there's still the issue of the risk models are wrong or investments underperform -that risk will still reside on the state to pony up the difference.
3) Lastly is the highly speculative nature of the obligation - most all pension plans use a subset of the worker's last years to determine the defined payment, so a common practice became to inform your (district, organization) that you intend to retire in 5 years, where they will then boost your pay for your last few years, thus providing a much larger pension. This esoteric issue is possibly dominating Illinois' financial problems as (from a few articles I read) retirees are receiving many times returns-compounded contributions, since their last 5 years are boosted so much over their average pay over the whole career. Gaming the system was not accounted for in the models.
This is absurd. Why wouldn't it be calculated on lifetime compensation?
A 401(k) is a tax advantaged account where an individual does not have to pay taxes on the money in the account until they start withdrawing from it after a certain age. Once the money is deposited into the 401(k), there is no guarantee how much will be there when the account holder retires, all of the risk from whatever it's invested in lies on the account holder.
Theoretically, a larger fund with professionals investing it would be able to achieve higher returns, as in the case of a taxpayer funded defined benefit pension. However, due to corruption and ineptitude, it actually ends up costing taxpayers an incredible amount of money. There's a reason why non-taxpayer funded entities stopped offering defined benefit pensions. Public pensions are sold as being cheaper, but that is using false promises and lies of excessive returns. If they were held to the same standards that regular defined benefit pensions are, they would have ceased to exist also.
"Because the state’s constitution bans any reduction in worker retirement benefits, the government’s pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois’s bond rating to the precipice of junk."
To answer the original post above, there’s nothing stopping the federal reserve from delivering communism/socialism this way except political will and leanings. The federal reserve mandates are to keep the country at full employment and keep inflation low. What better way to do so besides “seizing the means of production” through printing fiat.
https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf...
If I really want that bond yield, I could just follow whatever investment strategy you had in mind on my own, thanks. Any tax advantage is more than offset by the additional returns that I'll get to keep for myself instead of handing over to retirees, and my expectation that the fund administrator will be as crooked as the boundary of a Julia set.
Suck it up, accept you're "Detroit bankrupt", and amend your constitution now, or wait until after the state is "Puerto Rico bankrupt" and all the responsible parties are collecting their pensions from prison.
The smart move here is to not be able to touch Illinois with an eleven-foot pole. Do not buy these bonds. Do not move to Illinois. Do not keep your money where Illinois can get to it. Maybe even get some vaccinations to avoid unnecessary illness.
I don't think it is clear at all that this is inevitable.
(It certainly seems likely that they will be underfunded; why not pay for services with promises that someone else has to fulfill)
Add to that fact that in the US, taxpayer funded pensions have NO rules (they're specifically exempt from laws regarding defined benefit pension funding), it's quite easy to see politicians giving away deferred benefits to government worker unions in exchange for votes today. The only person this affects (future taxpayers in 20 to 30 years), are mostly not at the table. And not enough people pay attention to local elections or understand the numbers enough to stop this.
That's contradicted by the spending facts of the last several decades.
The US invests more per pupil when it comes to primary and secondary education, than any other nations except for Switzerland, Luxembourg, Norway, and Austria. So there's the US - 330 million people - competing with hyper rich, tiny, Luxembourg - 600k people - on education spending per pupil.
Our teachers are also among the best paid in the world.
We've dramatically over-invested into classical education. Far too many people have run up immense student loan debts, when they should have acquired a trade skill instead at a small fraction of the cost.
Germany is the model that the US should be following, rather than just blindly spending more on a traditional education path (which is not working out well).
https://www.theatlantic.com/business/archive/2014/10/why-ger...
http://blogs.edweek.org/edweek/global_learning/2017/05/the_u...
Three blocks away from my house, 30% of 6th graders are at reading level.