State hints that it might need a federal guarantee of the debt.
New York Times’ looked at the fine print of Illinois’ proposed bond sales and it should scare the bejabbers out of Illinois taxpayers and voters.
The terms of the borrowing, as detailed by the administration of Democratic Gov. Pat Quinn in a prospectus, have given the bond market jitters. Said the story:
The first time Illinois tried to bail out its teetering pension fund by borrowing billions of dollars, it ended in disaster.
Nevertheless, the state is trying again.
Illinois hopes to sell $3.7 billion of bonds to make this year’s contribution to its fund. It is essentially paying a single year’s bill by adding to its already heavy debt load. That short-term thinking is not unlike Americans taking out home equity loans to pay for cars and vacations before the housing bust.
But investors have learned a lot about the pitfalls of debt since the state tried to shore up its fund a few years ago. This time the municipal bond markets are jittery, and federal securities regulators are investigating whether Illinois has been properly describing its pension fund and the risks it may pose.
The story describes how the state’s first cockamamy scheme to pay its obligations by massive borrowing blew up it its face. Now, on its second try, using a different scheme, also is raising questions. The sale was scheduled for last Monday, but it now everyone (investors, lenders, financial houses, actuaries, etc.)
And, as often happens, the real news is found in the find print. Reported the Times:
More warnings appear in the fine print of the governor’s budget proposal, also issued on Wednesday. Despite last year’s reform, it said the pension system is still so weak that the state may have to seek “a federal guarantee of the debt” — presumably the kind of intervention that many Republicans in Congress have been warning they will oppose.
All roads, I guess, lead to Washington. But with more states facing similar financial troubles, the road will be turning into gridlock.
And here’s some more news from the fine print:
Those [earlier] bonds called for the state to reduce its annual contributions to the pension fund, and use the money instead to pay the bondholders their interest.
Those diversions, plus enormous investment losses in 2008 and 2009, have left the pension fund with a shortfall of about $86 billion, the prospectus explains, roughly twice the shortfall before the 2003 bonds were issued.
“When I read this, quite frankly, it made me ill to my stomach, because that pension plan has been consistently abused now for at least the last 16 or 17 years,” said Brad M. Smith, president-elect of the Society of Actuaries, which is based in Illinois.
Mr. Smith,…called the state’s schedule of pension contributions for the coming years “incredibly dangerous,” adding: “There’s a reasonable chance that these plans will run out of money.”
This is more required reading for the Democrats, liberals and labor unions that think we can continue on this way.