Pension Obligation Bonds: No More False Promises

Time and Money

Chief Financial Officer, Carole Brown, said the city is exploring a plan to sell up to $10 Billion in pension obligation bonds. If approved, it would be the largest such bond issuance in history and the largest bond deal that any city in the world has ever done. 

 

It would also be a historically bad idea for this administration and the city’s residents.

 

The current administration claims that taxpayers would save the difference between what the City pension payments are scheduled to be an annual debt service on the pension bonds.  According to Brown, this could save to up to $200 million a year in pension payments and reduce pressure to raise some revenue.

 

This is false advertising.

 

Today’s pension payments are calculated using interest rates set by the pension fund boards, who in turn are selected by the Mayor and the unions.  They are inherently political.  If the pension fund boards reduce that rate to more realistic levels, savings would disappear, using their logic.

 

The problem is that there is 100% certainty of more risk with only a potential for savings. What taxpayers must look at is how much it costs to borrow and what investment return we can generate on the bonds.  If the City borrows at 6% and invests at 5%, taxpayers lose. Plain and simple. Can this administration guarantee that won’t happen?

 

Experts are far from sold on the potential plan.

 

“The market has hated pension bonds for a while here now,” said Ciccarone, president, and CEO of Merritt Research Services, noting defaults in Detroit, Puerto Rico and three California municipalities. “Many people got burned on them.”

 

The return on fund investments could fall behind the interest rates on the bonds, Ciccarone said.

 

“The year over year returns have got to beat the rate at which the city borrowed. Pension fund investments recently haven’t achieved the 7 percent to 7.5 percent returns that the funds projected. “If the current market continued on into the future, you wouldn’t be better off, because now you’ve even lost something because of the cost of doing the bond issue,” Cicarrone said.

 

Another expert was flat-out against the plan.

“There is no best practice for pension obligation bonds,” Matt Fabian, a partner at Municipal Market Analytics, said in an email response to Chicago Tribune questions. “When you invest borrowed money, you lose twice if the stocks you buy decline in price.”

If this plan is approved, we are basically letting the current administration taking your money to Vegas and double down in hopes of a win and risk our city’s financial future. 

 

As alderman, I would be against this POB plan, which is nothing more than a false promise.

 

The State of Illinois is a perfect example of why pension obligation bonds are a bad idea. In 2003, Governor Blagojevich sold $10 billion of pension bonds primarily to boost the retirement systems’. Unfortunately, the assets have earned the minimum investment returns needed to break even in just seven of the last 10 years.  

Chicago’s administration and the City Council must be more creative with its revenue plans — that means less taxing and more spending reductions.

 

As aldermen, I would vote against this irresponsible bond issuance that could burden taxpayers for decades to come.

I hope our current alderman does the right thing.