
Illinois Ponders Pension-Fund Moonshot: A $107B Bond Sale - koolba
https://www.bloomberg.com/news/articles/2018-01-26/illinois-ponders-pension-fund-moonshot-a-107-billion-bond-sale
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pg_bot
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.

~~~
dragonwriter
> 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.

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rayiner
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.

~~~
runwerks
isn't the US then the same by your reasoning? we should flee the US as well.

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apike
The US can always pay its debt because it is denominated in US dollars - it
can print sufficient US dollars to meet its debt obligations. States do not
have this ability.

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davio
Reminds me of this:
[https://ianayres.yale.edu/sites/default/files/files/Mortgage...](https://ianayres.yale.edu/sites/default/files/files/Mortgage%20Your%20Retirement\(1\).pdf)

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

~~~
phyller
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.

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nshelly
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](https://www.bogleheads.org/forum/viewtopic.php?t=5934)

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mkempe
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?

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AnimalMuppet
"Technically not insolvent"?

"Extend and pretend"?

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

"Greater fool theory"?

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jedberg
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".

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Spooky23
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.

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

This did not work out for Puerto Rico bond holders.

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cobbzilla
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.

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rayiner
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.

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spamizbad
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/...](http://www.governing.com/gov-data/public-workforce-
salaries/states-most-government-workers-public-employees-by-job-type.html)) --
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.

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joezydeco
_For starters, local property taxes pick up the slack._

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.

~~~
tptacek
Most people in IL don't have property taxes that exceed the SALT cap; the
median homeowning family wouldn't exceed that cap in property and income taxes
combined, right?

~~~
joezydeco
Most people, sure.

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.

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RestlessMind
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.

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tabeth
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?

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Spooky23
Pensions are awesome when funded. Illinois stole from its future by
underfunding it.

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tabeth
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.

~~~
Godel_unicode
2) is how most 401k's work already.

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.

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cnorgate
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."

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gwern
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
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.

~~~
toomuchtodo
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...](https://www.bloomberg.com/news/articles/2017-07-18/boj-s-etf-buying-
is-said-to-raise-concern-among-some-officials)

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chaostheory
California's pensions are in trouble as well:
[http://www.sacbee.com/news/politics-government/politics-
colu...](http://www.sacbee.com/news/politics-government/politics-columns-
blogs/dan-walters/article148181774.html)

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logfromblammo
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.

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

~~~
lotsofpulp
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.

~~~
adventured
> 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...](https://www.theatlantic.com/business/archive/2014/10/why-germany-is-
so-much-better-at-training-its-workers/381550/)

[http://blogs.edweek.org/edweek/global_learning/2017/05/the_u...](http://blogs.edweek.org/edweek/global_learning/2017/05/the_us_education_system_meets_the_german_dual_education_model.html)

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AnimalMuppet
Our teachers are, in many cases, very poorly paid. (Administrators, on the
other hand...) If US teachers are paid _better_ than in other countries,
that's pretty appalling.

~~~
Godel_unicode
The US bureau of labor statistics says that the average teacher salary is
$58k/year (with over 2 months of time off) while the average non-teacher
salary is $61k/year (average PTO less than two weeks) with at least a bachelor
degree.

~~~
RhysU
Don't forget the present value of a teacher's pension.

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phyller
This sounds like a horrible idea.

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

