* Bloomberg has a very scary story about pension bond schemes, including an ill-advised Chicago Transit Authority deal that has crashed. This is a very long story, so make sure you read it all. Here are some excerpts…
With stock market losses this year, public pensions in the U.S. are now underfunded by more than $1 trillion.
That lack of funds explains why dozens of retirement plans in the U.S. have issued more than $50 billion in pension obligation bonds during the past 25 years — more than half of them since 1997 — public records show. […]
The CTA concluded it could borrow $1.9 billion, paying an interest rate of 6 percent to bondholders, and invest the proceeds to receive its expected rate of return of 8.75 percent. Such an annual return would add $52 million a year to bolster the fund.
The CTA chose to ignore not only Illinois’s auditor general but also its own actuarial firm, Detroit-based Gabriel Roeder Smith & Co. The company had determined there was just a 30 percent chance of earning 8.75 percent.
“We executed the best transaction we could, given the legislative and political restraints,” says CTA Chairman Brown, who is also co-head of municipal finance at Chicago-based Mesirow Financial Inc.
Since the bond sale, the authority has held the money as cash, earning 2 percent. And, with the credit crunch forcing municipal bond interest rates up to attract buyers, the CTA wasn’t able to sell bonds with a 6 percent return.
A team of underwriters, including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley, sold the CTA bonds in August 2008, at a yield of 6.8 percent, so the fund had to pay bondholders more than it had expected.
“There is negative arbitrage,” Brown says. “It’s better than having dumped the money into the equity market.”
I’m afraid to even call the state pension funds to see how Blagojevich’s scheme is holding up.
Again, go read the whole thing. But let’s try not to get into some goofy debate about the stock market and the president and whatever, OK? This isn’t just about the current stock market conditions. The CTA was warned not to do this and they did it anyway. Let’s try to keep the talk as focused as possible.
* Meanwhile, the Tribune is one of the first newspaper editorial boards to actually propose or at least suggest some large-ish budget cutting ideas, even if they were cribbed from the Civic Committee of the Commercial Club of Chicago…
Reforming how Illinois does business may well require unpopular steps: moving Medicaid recipients into managed-care programs; outsourcing food, janitorial, technology and other internal services; slimming revenue sharing and grants to local governments.
But Illinois desperately needs to create the government it can afford to replace the government it has now. A new report from the Civic Committee of the Commercial Club of Chicago puts the state’s unfunded present and future obligations at $116 billion—almost $10,000 for every man, woman and child. The report says that total could be increasing by as much as $10 billion a year.
We hope Illinois lawmakers, from Gov. Pat Quinn on down, caught this comment from committee Chairman W. James Farrell: “We need someone to take action, and that action has to be reform [and] cut costs—what responsible people do when they can’t live within their means. You really can’t tax your way out of this problem. If you tax your way out of this, businesses would be leaving the state in droves.”
Think that’s an idle threat? Illinois has trailed the nation and the rest of the Midwest in job creation for years. Piling on taxes will put more people out of work.
* Oh, come on already…
Illinois still has not officially submitted a list of shovel-ready road and mass transit projects to the federal government for funding under the economic stimulus package, U.S. Transportation Secretary Ray LaHood said Tuesday, warning that time is running out.
“The law requires us to get the money out the door very quickly,” LaHood said. But “we have not received a list from the state or from Chicago.”
State transportation officials vowed to get moving with the application process, but they expressed no concerns about possibly losing federal aid. […]
The deadlines vary depending on the different modes of transportation. But the stimulus legislation aimed at putting Americans to work requires Washington to distribute funding to the states for highway, bridge and transit projects by March 10, which is 21 days from the law’s enactment.
Illinois would not be eligible to receive any money until the General Assembly approves a special appropriation totaling $693 million to cover contracts for the first round of stimulus projects in the spring, according to the Illinois Department of Transportation. Once the money is spent, the federal government would reimburse the state.
* Now, on to some frivolity because I’m too depressed from reading all this gloom and doom. This could be pretty cool…
One thing is for sure, security will be tight if the Fenwick boys basketball team makes it to the Class 4A Farragut Regional Championship to face Whitney Young on Friday night (March 6, 7:30 p.m.). After all, the governor may be on hand, as well as His Airness.
But before the Friars can have the pleasure of playing in front of Gov. Pat Quinn, the brother of Fenwick head coach John Quinn, and Michael Jordan, the father of Marcus Jordan, who plays for Young, they’ll need to find a way to get past Farragut on its home court tonight (Wednesday, March 4, 8 p.m.). Even though the Admirals are having a bit of a down year - they’re 15-9 and seeded eighth in the Morton Sectional - a first-round win won’t be automatic for the Friars, who closed out the regular season last week with a 61-33 slashing of Northside Prep. Fenwick is 16-9 overall and was awarded the 10th-seed in the sectional.
“We’ve had an up and down season, but we’ve managed to stay on the positive end of things,” said Fenwick head coach John Quinn. “Our tendency to have a bad quarter in a game just can’t happen against the teams we could possibly face early in the playoffs.”