Imagine a husband going to his wife with a grand scheme to get his family out of the financial trouble they’re in. Out-of-control spending and too much debt has made a mess of their lives, and his wife has been asking him for years to scale down spending and cut back excesses. Unfortunately, that’s never happened, and now, things are desperate.
Now, he’s come up with a new plan, promising it’s a low-risk idea:
“OK, I’m going to borrow a bunch of money at a pretty low rate,” he says. “I know it sounds counterintuitive, but trust me, banks are giving away money right now at really cheap interest rates.
“I’m going to take that money and invest it in the financial markets — you know, some tech stocks, some real-estate trusts, some hedge-fund investments and, for sure, some private equity. It’s a no-brainer. After about 20 years, we’ll earn lots more on those investments than it will cost us to borrow the money.
“When it’s all over, we’ll repay the loan, and with all the money we make, we’ll pay down our other debts.
“There’s really no risk. What could possibly go wrong? The markets always go up.”
Gambling on the stock market to get out of financial troubles. It’s a fool’s game, but that’s exactly what some politicians in Illinois are considering now to address their cities’ growing pension crises. Lawmakers want to borrow money from the bond market to pay down pension debts by issuing what are known as pension-obligation bonds.
The borrowing scheme is a bit more complicated than the household example, but in essence, pension-obligation bonds are all about taking out a loan, then investing that money and hoping the returns beat out the costs of the loan.
It’s a lose-lose game for taxpayers. If politicians get it right, governments will have extra money to spend and grow even bigger. And if politicians get the bets wrong, they’ll come after taxpayers to pay off their gambling losses.
That’s one of the reasons why national organizations like the Government Finance Officers Association say “state and local governments should not issue POBs.”
That hasn’t stopped a new trio of cities, Moline, East Moline and Rock Island, from considering the pension-bond gamble, a recent article in the Quad-City Times reported.
All three owe tens of millions to their local public-safety funds, and pension costs continue to devour more and more of their city budgets.
Now, rather than fight for actual solutions through pension reform, local officials are basically pitching the bonds as a silver bullet to their public-safety-retirement crisis.
East Moline, for example, wants to borrow $41 million via a pension-obligation bond, which officials say would be used to fully fund its public-safety pensions. That sounds good, but it ignores the fact that taxpayers would be on the hook for repaying the bond.
Officials claim the gains on their scheme would save the city $30 million in the long run, but that’s only based on their assumption that their investments will pan out.
The city’s gamble could go the other way and hit local taxpayers with losses. Nobody knows the outcome.
Crises in the Quad Cities
For sure, communities in the Quad Cities area are struggling with their pensions. In all, the sum of their local pension shortfalls now exceeds $300 million — and that’s a big problem for everyone.
Spread that burden around, and households in East Moline are each on the hook for $4,800 in local pension debts, Moline households for $7,700, and Rock Island households for $8,500 each. Those household debts have more than tripled in Rock Island since 2003. In East Moline’s case, they’ve quadrupled.
Never mind that debts have grown despite taxpayers pouring more and more into the funds. Taxpayer contributions are three times higher today than in 2003 in East Moline and Rock Island and more than four times higher in Moline.
Retirement security has also collapsed for the public-safety workers counting on their pensions. East Moline’s combined public-safety systems are only 54 percent funded, and Moline and Rock Island’s are only about 33 percent funded. Anything less than 100 percent funding is considered unhealthy by actuaries, and some experts consider 60 percent funding a “point of no return” for pension systems.
Meanwhile, the neediest residents in the Quad Cities area are seeing funding for core services swallowed up by the ever-growing pension crisis. Today, nearly 25 percent of Moline, East Moline, and Rock Island’s collective budget is devoured by pension costs. In 2003, around 10 percent was taken up by pensions.
The problems for these cities will only get worse as the number of public-safety beneficiaries in all three cities now outnumber the number of active workers. That means the burden to fund these debts will continue to increasingly fall on taxpayers.
At Wirepoints, we’ve laid out a summary of the local pension crisis across Illinois’ largest 175 cities. All three cities included in this piece received an “F” grade for their crisis, driven largely by the falling funded ratios, higher burden on households and increase in retirees relative to active workers.
Reforms, not can-kicking
Illinois’ Quad Cities are being crushed by the costs of their public-safety pensions. But pension-obligation bonds could simply make matters worse.
The bottom line, as we’ve said before, is this: The bonds are inherently unethical. They transform local governments from service providers into trading houses — with taxpayers unwittingly providing the risk capital.
The real solution to the state and local pension crisis — one that can improve retirement security for government workers and make Illinois more affordable for everyone — is actual, structural reforms.