* Click here for background if you need it. Here’s Adam Schuster with the Illinois Policy Institute’s response to the Center on Tax and Budget Accountability’s defense of its pension obligation bond proposal…

The CTBA plan does use the POBs to reduce contributions, but in the long-run rather than the short-run/Blago-style. It reduces the contributions by both lowering the funding target and extending the pension ramp, both of which violate Actuarial Standards of Practice from professional actuary associations.

Hertz correctly points out that a recession is increasingly likely, but then comes to the exact opposite conclusion about what this should mean. Just prior to a recession is the worst possible time to play an arbitrage gamble with taxpayer money, which is what this plan does. It would be like going all in on a Black Jack hand knowing the dealer has 21. This will likely make our pension repayment even more expensive than already envisioned by CTBA.

Hertz’s admission that arbitrage benefit “isn’t really the point” tells us what their true motivation is here. Potential arbitrage benefit is the only positive aspect of their plan. But that’s not their goal; their goal is to trade soft debt for hard debt by putting taxpayers on the hook for these bonds, which cannot later be made cheaper through reform like the pension debt can.

Hertz claims to be worried about the service cuts being caused by the rapidly growing pension payments, but the CTBA plan explicitly puts pension payments above those services with its $11 billion cash infusion. That insulates pensions from the risk of economic downturn while also restricting the amount of revenue available for the services Hertz claims to care about, by making them hard debt.

You know what our alternative is, because I’ve seen you write about it. I know you think a federal contracts clause challenge is likely. We’ll have more on that soon, but for now its worth noting that Arizona did not face such a challenge despite a virtually identical situation. They have the same pension clause and their court also struck down a prior round of reforms, claiming they diminished benefits. And yet they’ve successfully amended their constitution twice now.

Arizona hasn’t yet faced a federal court challenge. That doesn’t mean it won’t. Or that it wouldn’t be challenged here.

…Adding… Schuster has a new post up on the topic. Click here.

…Adding… From comments…

Not weighing in on the CTBA proposal itself, but it’s worth pointing out that the IPI response seems to misunderstand (or misrepresent) it in several ways. First, IPI writes that CTBA’s proposal “reduces the contributions”, which isn’t really true. In the short-term CTBA’s proposal would increase contributions above what’s required under current law. Yes the CTBA proposal does not conform to actuarial standards, but making payments that align with actuarial best practices would require dramatically higher pension contributions (both above current law and CTBA’s proposal). Second, IPI is critical of the proposal’s use of POBs because it’s an “arbitrage gamble,” but this is simply not what CTBA is proposing. In CTBA’s proposal the POBs are meant to be a revenue source for making pension payments that are higher than required under current law in the short term. This using POBs for budgetary relief. POBs resolve CTBA’s issue of wanting to increase pension contributions without cutting other aspects of the budget or simply raising taxes. It’s also worth pointing out that Quinn issued two POBs for budgetary relief (in 2010 and 2011). The Blago POB was issued for arbitrage reasons; however, once issued Blago used some of the proceeds for budgetary relief (which was a different use than original proposed). Blago’s use of POB proceeds for budgetary relief is one source of criticism; however, it remains to be seen whether the arbitrage play materializes as the bonds aren’t paid off. As of 2017, investment returns have actually exceed the 2003 POB interest rates. (see p. 121 http://cgfa.ilga.gov/Upload/FinConditionILStateRetirementSysMar2018.pdf)

Last, I think people should realize that CTBA’s proposal actually has several distinct policy components that can be independently debated. 1) switching the amortization method (aka debt repayment schedule) from level % of pay to level dollar. Doing this alone requires higher pension payments; 2) changing the funded ratio target from 90% to 70%; and 3) using POBs to make part of the state’s pension payments.

I know who that commenter is, by the way, and the person knows this topic well.