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* Yet another hit piece from Bloomberg…

California debt is beating Illinois bonds by the most in three months as investors choosing between the two lowest-rated U.S. states reward efforts to bolster the finances of the nation’s biggest pension.

Illinois lawmakers failed to advance any measures in a special session Aug. 17 aimed at addressing the nation’s worst- funded pensions. Standard & Poor’s last week cut the state’s credit one level to A, sixth highest. That’s one step above California, where the Legislature passed a plan last week that is projected to curb pension liabilities by as much as $55 billion.

The two states are “a study in contrasts in what they’ve done recently, especially as it relates to pensions,” said James Dearborn, managing director in Boston at Columbia Management Investment Advisers, which oversees $16 billion in munis. “Illinois continues to be the poster child for pension issues.”

Um, huh? Most of the changes approved by California legislators apply only to future employees…

Assembly Bill 340, authored by Assemblyman Warren Furutani, D-Gardena, would apply immediately to state or local government employees hired after Jan. 1, 2013. The measure sets caps on how much of their pay can be counted toward their pensions, rolls back the formulas used to calculate those benefits and pushes back the retirement age.

Those new workers would also share half the normal cost of their pensions with employers. Current employees also would pick up at least half of that cost within five years through collectively-bargained agreements. After that, employers could impose the 50-50 split.

Illinois passed a far tougher pension reform bill for new hires well over two years ago. And most of California’s provisions for current workers have already been adopted via collective bargaining.

Better experts, please.

posted by Rich Miller
Tuesday, Sep 4, 12 @ 11:13 am

Comments

Unlike California’s plan, Illinois’ plan for pension reform, targets current and retired members, and is going to be ruled unconstitutional, and will have been a waste of time. Time for Mr. Madigan to come up with a new plan!

Comment by Billy Tuesday, Sep 4, 12 @ 11:21 am
No surprise someone from out of state would get it wrong … even the IL citizens don’t understand it.

I constantly see letters and hear discussions where the writer / speaker is unaware of the “tier 2″ reforms that have taken place. These same people are also under multiple other delusions about State employees contributions and benefits.

I’ve said it off and on for the past two years: I fault the unions for failing to counteract the Chicago groups disinformaton campaign. Recently the unions have finally started to educate the voters but they have a very long way to go to counteract those two years of inaction …

Comment by RNUG Tuesday, Sep 4, 12 @ 11:31 am
I could care less about the spread. Borrowing costs are the lowest we’ll probably ever see and we should lock down as much as we can to reap the long-term benefits of future inflation.

The knock on Cally has been their annual operating deficits and the knots they tie themselves up in with contradictory public referenda.

According to Pew, their pension funds are 78% funded.

Comment by wordslinger Tuesday, Sep 4, 12 @ 11:32 am
===California debt is beating Illinois bonds by the most in three months as investors choosing between the two lowest-rated U.S. states===

The investors must know something if they’re picking CA over IL.

Comment by Foxfire Tuesday, Sep 4, 12 @ 11:33 am
Firefox,

Not necessarily. See this NYT story about how poorly most pension bond issues have done:

http://www.nytimes.com/2012/09/04/business/how-a-plan-to-help-stockton-calif-pay-pensions-backfired.html?_r=1&nl=todaysheadlines&emc=tha25_20120904

Comment by RNUG Tuesday, Sep 4, 12 @ 11:34 am
–The investors must know something if they’re picking CA over IL.–

Investors can’t get enough of both. It’s been in all the papers.

Next time Illinois puts out some paper, how’s about the Big Brain underwriters earn their half-a-point by getting a price that’s close to the intersection of supply and demand, rather than oversubscribed by a factor of four?

Comment by wordslinger Tuesday, Sep 4, 12 @ 11:38 am
===The investors must know something if they’re picking CA over IL. ===

Yeah. They read idiotic stories like this one.

Comment by Rich Miller Tuesday, Sep 4, 12 @ 11:46 am
Investors are desperate for yield as the Fed keep rates down. They are simply looking for a safe harbor that pays a bit more.

Regardless of the costs to borrow, Illinois will have to pay the debts back someday. Rather than taking the respite in borrowing costs to help put the State’s fiscal in order, our representatives continue to spend money they don’t have and ignore the looming catastrophe. The reconciliation will not be pretty.

The time will come when folks will ask the old campaign question “what were they thinking?”

Comment by Plutocrat03 Tuesday, Sep 4, 12 @ 11:54 am
California’s pension funds are 78% funded right now, as opposed to Illinois’ which are below 45%. http://www.pewstates.org/research/data-visualizations/the-widening-gap-interactive-85899377237. So CA doesn’t need to pass the same kinds of tough reforms for currently employees that IL politicians have neglected to pass. Face it: IL is in a class of its own in terms of poor fiscal stewardship.

Comment by awdo47 Tuesday, Sep 4, 12 @ 11:55 am
–Regardless of the costs to borrow, Illinois will have to pay the debts back someday.–

There is, however, a state payment cycle, especially for Medicaid, which has stabilized at about five months late.

That, too, is borrowed money, at an annualized late payment rate of about 18%.

I’d imagine the whiz kids could come up with some short-term paper, not a long bond, obviously, that could get square on a significant portion of that debt and shorten the cycle going forward with some significant savings.

Comment by wordslinger Tuesday, Sep 4, 12 @ 12:04 pm
The proposed COLA change is one of the largest contributors to the savings that Wall Street is clamoring for. If the lower of 1/2 of CPI of 3% is such a great idea, let’s carry this further. Cap all budgets, vendor renewals, and payroll at those rates as well. If it’s good enough for seniors on fixed incomes, it should be good enough for everyone else too, right?

Comment by thechampaignlife Tuesday, Sep 4, 12 @ 12:05 pm
as Ron White says about stupid….no pill for it, no surgery for it, you just can’t fix stupid

Comment by steve schnorf Tuesday, Sep 4, 12 @ 12:13 pm
Maybe instead of fighting over who is #49 and who is #50, the State of Illinois could do something really radical and, oh, I don’t know - shoot for #45 on the list. Heck, at this point I’d be happy to be #46.

Comment by Ghost of John Brown Tuesday, Sep 4, 12 @ 12:25 pm
==I’d imagine the whiz kids could come up with some short-term paper, not a long bond, obviously, that could get square on a significant portion of that debt and shorten the cycle going forward with some significant savings.==
I thought the republicans blocked this common-sense effort.

Comment by Robert the Bruce (formerly just Robert) Tuesday, Sep 4, 12 @ 12:27 pm
===Yeah. They read idiotic stories like this one.===

Right. I make all my investment decisions by reading stories in Bloomberg.

Comment by Foxfire Tuesday, Sep 4, 12 @ 1:09 pm
Foxfire - Do you think there are secret publications that tell investors exactly what they should buy?

Or are these folks just omniscient beings that never make mistakes?

I guess the whole financial collapse was just a big prank, good one.

Comment by Small Town Liberal Tuesday, Sep 4, 12 @ 1:17 pm
CalPERS also has adopted a more reasoned 7.5% rate of return in their calculations. Illinois still has funds like TRS running around with an 8.5% rate of return calculation. That alone makes Illinois’ problem many times worse than California’s. If Illinois used something more realistic, then you’d really see the depth of our hole. By simply using more realistic return assumptions, we’d find ourselves owing tens of billions more to the pension funds than is already owed.

Comment by Shemp Tuesday, Sep 4, 12 @ 1:33 pm
How much has the GOP cost the state by blocking bonds to pay off current debts?
OR
How much has Madigan cost the state by not ramming through bonds to pay off current debts, even without GOP support?

Comment by Anonymous Tuesday, Sep 4, 12 @ 1:39 pm
The spread between CA and IL paper could be explained by CA being a much larger economy than IL and floating a lot more paper than IL.

In my view, the critical factor to look at is the number of municipal bankruptcies ongoing in each state. As far as I know, IL has none and CA has several with a couple more to come.

Comment by Cook County Commoner Tuesday, Sep 4, 12 @ 1:42 pm
If the investors know so much, how come we had a financial collapse in 2008?

Comment by Truthteller Tuesday, Sep 4, 12 @ 1:56 pm
“significant savings”

Of course, that would require discipline in not coming up with new spending ideas.

Mpfff… Chortle…. Like that would happen!

Comment by Plutocrat03 Tuesday, Sep 4, 12 @ 2:41 pm
–”significant savings”

Of course, that would require discipline in not coming up with new spending ideas.

Mpfff… Chortle…. Like that would happen!–

I’m not sure what your point is. Mine was to refinance what you could at lower rates to save money.

Since the State of Illinois is and has been a going concern since 1818, I’m sure the savings would be spent on something.

Put it this way: if you could refinance a portion of your 18% credit card debt for say, 6% or 7% on short-term paper, would you do it?

Or would you just keep paying the extra juice, worried that you’d spend the savings on beer and cigarettes?

Comment by wordslinger Tuesday, Sep 4, 12 @ 3:15 pm
I think Bloomberg’s ignorance or indifference regarding the reduction in future Illinois employee pensions is revealing. This shows the pension “reform” isn’t about generating a certain amount of savings, it’s part of an ideological campaign against a group of middle-class workers.

Comment by Crime Fighter Tuesday, Sep 4, 12 @ 3:32 pm
CCC: “In my view, the critical factor to look at is the number of municipal bankruptcies ongoing in each state. As far as I know, IL has none and CA has several with a couple more to come.”

Comparing municipal bankruptcies isn’t apples to apples as the funding of local governments is so different. The real estate contraction on top of Prop 13 really hurt the municipalities. On top of that, municipal retirement benefits for public safety officers hit 90% of your final salary. That’s definitely more costly to cities in CA than to cities in Illinois, but doesn’t really speak to the two states overall problems.

Comment by Shemp Tuesday, Sep 4, 12 @ 5:23 pm
Don’t count on municipal bankruptcies being a slam dunk.

The first and most prominent in the pipeline recently was Harrisburg, PA, and it got tossed by the judge. Now, they have to figure it out.

Comment by wordslinger Tuesday, Sep 4, 12 @ 5:33 pm
“That, too, is borrowed money, at an annualized late payment rate of about 18%.”

That seems high. A provider could float a short term loan at what, 8% or so, and when the state pays he could payoff the loan and pocket 10% on his investment.

The payment cycle for dental claims is 8 months and the payments I have received have included interest at a APR of 8.22%.

Comment by capncrunch Tuesday, Sep 4, 12 @ 6:31 pm
Quinn supported the idea to change the pension formula for new hires after Dec. 31st, 2010.
But wait…the State hired 19,000 new employees in the eight months before the new formula went into effect. And Quinn says he is “working” on and in fact “put on this earth” to fix the pension system. Right after he has time to hire 19,000 new employees. Interesting…read this news report from the SRJ. http://www.sj-r.com/top-stories/x1334356420/Thousands-hired-in-Illinois-ahead-of-new-pension-system?zc_p=0

Comment by Zoble21 Tuesday, Sep 4, 12 @ 11:33 pm
The ignorance in the press and financial community is pretty scary. I heard an interview with a supposed expert from a financial firm on state and municipal finances on Bloomberg radio the other day. They talked a great deal about Illinois, and it quickly became apparent that he had no real knowledge of the pension and budget situation including the introduction of Tier 2. I’d hate to be someone who actually paid for his “knowledge”.

Comment by Pelon Wednesday, Sep 5, 12 @ 8:34 am