Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale

https://www.bloomberg.com/news/articles/2018-01-26/illinois-ponders-pension-fund-moonshot-a-107-billion-bond-sale

by koolba • 8 years ago

42 83 8 years ago

conanbatt• 8 years ago

Public pensions. And people still argue that we should have those over 401ks.

lotsofpulp6• 8 years ago

Because investing in education and enacting policies to support raising families and future generations isn't popular for some reason, so we'd rather entrust our retirement funds in the hands of some politicians and fund managers, and if they end up making corrupt and stupid decisions, we can still raise taxes in the future, or divert funds from education and other social welfare to pay for the pensions.

snarf21• 8 years ago

Don't you think that the people who run the pensions invest that money with those same "fund managers"?

underdown• 8 years ago

the argument is between defined benefit vs defined contribution plans. The former are unsustainable as evidenced by illinois’ ballooning deficit, while the latter are somewhat variable in return.

adventured• 8 years ago

Because investing in education ... isn't popular for some reason

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...

davio• 8 years ago

Reminds me of this: https://ianayres.yale.edu/sites/default/files/files/Mortgage...

Take out a mortgage in your 20s to finance your retirement so can diversify over a long time period.

phyller2• 8 years ago

Taking out a mortgage and buying stocks on margin are different things. The author is recommending using margin. Taking out a mortgage and having money available to invest requires that you first own an unmortgaged house, or have significant extra equity in a house. And if you have that in your 20s, well, you are already really far ahead.

nshelly• 8 years ago

Right, but the mantra in the personal finance circles is "Mortgage Your Retirement" because you are borrowing all the money you will need to retire -- say $2m, investing it in the S&P 500 and paying that off over time. If the market goes up than you're that much closer to paying it off and retiring. The authors recommend only 2:1 leverage so only a 50% decline would wipe you out. The problem I personally have with this is the declining marginal utility of money. Losing everything (or a large portion) to squeak out better returns isn't worth it.

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

phyller2• 8 years ago

This sounds like a horrible idea.

kasey_junk2• 8 years ago

Illinois is well into “all ideas are horrible” territory.

cobbzilla3• 8 years ago

What will stop legislators from siphoning off this chunk of cash? How much will be lost in infamous Illinois corruption? The system is already $129B in the hole; this smacks of desperation.

rayiner2• 8 years ago

Is corruption the main problem? When I moved to Illinois in 2009, I was shocked to see it had public services like New York but taxes lower than Virginia or Georgia. State income tax was like 3% until recently. Obviously that wasn’t going to work.

kasey_junk2• 8 years ago

And further one side of the equation (benefits) are constitutionally garaunteed but the other side (funding) isn’t. There is t a lot of room for corruption when allocation doesn’t happen.

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.

spamizbad• 8 years ago

IL is a bit distinct in how it funds things: At the state level its per-pupil education funding is the lowest in the nation. Medicaid rolls are also lower than the national average as well. If you are looking at the state level, it's a fairly lean operation, ranking quite low in terms of government employees per capita (see: http://www.governing.com/gov-data/public-workforce-salaries/...) -- just 49 FTEs per 10,000 residents. There are deep-red stats with nearly double that figure.

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.

cobbzilla3• 8 years ago

When you moved there in 2009, were you also shocked to know that your previous two governors were (or would soon be) serving prison sentences related to corruption charges?

mkempe• 8 years ago

Is there a term for a fund that takes money from people (let's call them "investors"), promises to pay them back that money plus abundant interest in the future, and doesn't actually have enough (or any) money to pay all of these "investors", so it resorts to borrowing money to keep payments going a little longer?

AnimalMuppet3• 8 years ago

"Technically not insolvent"?

"Extend and pretend"?

"Fool me once, shame on you..."?

"Greater fool theory"?

pg_bot• 8 years ago

Illinois is bankrupt, and the worst thing that you can do when you are bankrupt is pretend that you aren't. If I were a resident of the state I would strongly consider moving somewhere else as your taxes are going to explode, and services will likely be cut. The tax base is already shrinking which will cause a negative feedback loop destroying property values and new business formation.

dragonwriter4• 8 years ago

Illinois is bankrupt

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.

rayiner2• 8 years ago

Insolvency means your liabilities exceed your assets, or you can’t pay your debt as it comes due. If you’re a state like Illinois that has a constitutional restriction on reducing future pension obligations through a change in the law, then you’re cooking the books if you don’t count them as liabilities. And if you do, Illinois is almost certainly insolvent under the first definition. And since it’s not able to pay its bills in due course, it’s probably insolvent under the second definition too.

admax88q• 8 years ago

Yay it's time for HN pedantry!

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.

[1] https://www.merriam-webster.com/dictionary/bankrupt

gpm• 8 years ago

Bankruptcy is an English word that just means you are insolvent (unable to pay your debts) not a legal state. There just happens to be a legal state named after it in the US.

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).

bogomipz• 8 years ago

No, it also means "utter ruin, failure, depletion, or the like."[1]. A person can be said to be "morally bankrupt" and that would also be correct usage.

Maybe consult the dictionary before before engaging in such unproductive pedantry.

[1] http://www.dictionary.com/browse/bankruptcy

_m8fo2• 8 years ago

Out of curiosity what's the difference between a public pension, where all funds are invested into a 401K like device, vs. each member in the group having their own 401K? I know that's not how Illinois' pension worked, but wouldn't the former be superior as the highest principle results in a proportionally higher (raw) return vs. an individual's?

Spooky235• 8 years ago

Pensions are awesome when funded. Illinois stole from its future by underfunding it.

_m8fo2• 8 years ago

Sure, but my comment was supposing a hypothetical. Say you're a new state, Zion, and you have the two options available to you:

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.

jeffbax• 8 years ago

No, politicians sold out their taxbase by not reforming unsustainable and over-promising public pensions for years. The sooner they go away the better, no reason unions should be able to negotiate budget busting benefits, then run them poorly, and expect the majority of people without the sweet deal to have to bail them out while being responsible for their own 401ks and IRAs. Cronyism and special interests aren't just for corporations.

teej• 8 years ago

Just off the top -

* 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.

wahern• 8 years ago

Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans.

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.

trevyn• 8 years ago

It is generally unwise to give someone else control of where your money is invested, particularly long-term; the incentives become twisted.

pjschlic• 8 years ago

1) A major difference is the fact that currently they are generally 'unfunded' in that the money isn't actually invested on your behalf.

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.

ghostly_s2• 8 years ago

most all pension plans use a subset of the worker's last years to determine the defined payment,

This is absurd. Why wouldn't it be calculated on lifetime compensation?

lotsofpulp6• 8 years ago

These are two different financial devices. A taxpayer funded defined benefit pension (usually referred to as a public pension) is legally obligated to provide a set amount of money according to the formula in the pension plan to the recipient after they retire, on a monthly basis.

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.

ww5202• 8 years ago

Individual retirement plan can be inherited when you died. Public pension that pool resources take over the remaining fund once you and your spouse died.

logfromblammo• 8 years ago

Ha ha ha. Not falling for that one, Illinois. You just want to take my money and find some way to never pay it back.

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.

chaostheory• 8 years ago

California's pensions are in trouble as well: http://www.sacbee.com/news/politics-government/politics-colu...

gwern• 8 years ago

I wonder if you could implement communism/socialism this way. If the supposed immortality of governments/pensions allows one to moneypump financial markets as easily as 'borrow at low interest, buy and hold and reinvest forever', what stops governments from asymptotically approaching 100% ownership of capital?

milesvp• 8 years ago

My gut says that eventually prices will reflect a major player like this. Eventually it will get harder and harder for a government to borrow money to pump into other investment systems, or the other investments will get more and more expensive giving a lower yield. Couple this with the fact that the government still needs to deficit spend occasionally (or at least politically it's nearly impossible not to run a deficit) , means that they can't just buy and hold, but will inevitably have to cash out some of their holdings.

toomuchtodo2• 8 years ago

If done at the central bank level, you can simply print the money necessary to acquire equity investments. Japan’s central bank does this, and is slowly consuming the Nikkei.

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...

cnorgate• 8 years ago

Sounds like it's time for a change to the state constitution. Everything is a negotiation:

"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."

jedberg• 8 years ago

Why would anyone invest in these bonds? By doing so, you're essentially investing in the State of Illinois as your hedge fund/bond manager (depending on the returns promised).

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".

Spooky235• 8 years ago

States are sovereign and can’t go bankrupt.

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.

toomuchtodo2• 8 years ago

If they are revenue bonds, you get dibs on the tolls, tax, etc.

This did not work out for Puerto Rico bond holders.

RestlessMind• 8 years ago

We really need to prevent the short-term game played by politicians, where they promise rich pension benefits, do not contribute enough to the pension funds and kick the problem down the road for someone else to solve.

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.

Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale

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