My hometown of Chicago has this problem: the government has been playing Santa Claus to its employees via pensions for too long. Now, they have truly outdone themselves. This latest Chicago edition of Dumb and Dumber has Chicago Mayor Rahm Emanuel and his finance sidekick Carole Brown in the starring roles. The Chicago Tribune print headline to this episode is “City Mulls Borrowing Billions to Lower Debt.” I guess the online editors saw the stupidity in that headline, so they changed it online to “Borrowing billions to lower Chicago’s pension debt? Emanuel’s finance team is considering it.” The idea is predicated on the strategy that the City could issue bonds at a low rate (backed by existing and new property tax revenue streams), put the money in its pension funds, and earn more on their investments than the interest paid. It’s like buying billions of dollars of stocks on margin or with a 100% mortgage on your home. What could go wrong?
In an interview, Brown noted that investors and debt rating agencies are constantly questioning how the city will handle required annual pension contributions that are expected to increase by more than $900 million between 2019 and 2023. Those looming costs are the primary reason the city’s general obligation bonds are rated mostly at junk or near-junk levels.
It sounds like investors would make more money at LendingClub.com. Tell me again just how will debt rating agencies improve their view of Chicago junk after borrowing even more money? It failed elsewhere.
“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.[…] But one key concern, Ciccarone said, is that the return on fund investments could fall behind the interest rates on the bonds.
Gee, no kidding. This whole scheme sounds like the “Socialism has failed because the wrong people were leading it” ideology. (And if the Dems take the House, the market will drop big-time and those bonds will be less than worthless. )
Puerto Rico had a form of securitization for its bonds, but the city maintains it wasn’t as well thought out and safe as the one Chicago used late last year to fetch lower interest rates between 2.4 percent and 3.6 percent. Those bonds have a dedicated sales tax revenue stream that investors get first dibs on in the unlikely event of a bankruptcy.
There are some sensible people out there.
Another bond analyst, Matt Fabian, frowned on the whole idea.
“There is no best practice for pension obligation bonds,” Fabian, a partner at Municipal Market Analytics, said in an email response to Tribune questions. “When you invest borrowed money, you lose twice if the stocks you buy decline in price.
“The ‘hysteria’ about pensions is very effective in marshaling fiscal discipline,” Fabian added. “Would be a shame to lose that.”
Yes, it would. But who cares?
New revenue, possibly through tax increases, would still be needed, but the amounts could be reduced and smoothed out over time, Brown said. “I am absolutely not eliminating the need for new revenue, but … I’m lowering the need for new revenue,” she said.
Emanuel and the City Council already have increased city taxes by more than $820 million since 2015 to boost contributions to the city’s four worker pension funds.
You have to love the “possibly through tax increases” line. How else again does government get money? Emanuel’s opponent in the next primary is a bit more sane (for a Democrat):
“Taxpayers in Illinois should well know pension obligation bonds are usually just another way of kicking the financial can down the road,” Vallas said in a statement issued Friday. “For a mayor who claims to be dealing head on with the city’s financial mess, this looks to be only adding to the city’s problems.
Adding to a city’s problems is what leftist city governments have done for decades. Combined with this proposal by economists at the Federal Reserve, the city’s problems don’t seem to be getting any smaller. The only thing getting smaller is the population of Chicago.