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Illinois Pension Bonds To Test Investors’ Faith

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The first time Illinois tried to bail out its teetering pension fund by borrowing billions of dollars, it ended in disaster.

Nevertheless, the state is trying again.

Illinois hopes to sell $3.7 billion of bonds to make this year’s contribution to its fund. It is essentially paying a single year’s bill by adding to its already heavy debt load. That short-term thinking is not unlike Americans taking out home equity loans to pay for cars and vacations before the housing bust.

But investors have learned a lot about the pitfalls of debt since the state tried to shore up its fund a few years ago. This time the municipal bond markets are jittery, and federal securities regulators are investigating whether Illinois has been properly describing its pension fund and the risks it may pose.

Amid the heightened oversight, Illinois is providing more information about its troubled finances than in the past. So much unfavorable detail is emerging that the bond issue will test investor faith in a deeply troubled state’s commitment to do whatever is necessary, raise taxes or cut services, to keep its promises to bondholders.

Illinois was initially scheduled to sell the bonds on Thursday. But on Monday, the sale was pushed back until next week, state officials said, so the bond markets, and overseas investors, would have more time to digest Gov. Pat Quinn’s budget address on Wednesday.

In his budget address, Mr. Quinn praised what he called “the most far-reaching public pension reform in our nation’s history,” a law passed last year sharply reducing the pensions of state workers to be hired in the future and cutting the state’s yearly pension contributions for the next few years. Some actuaries who have studied the documents have expressed strong reservations, saying the new contribution schedule is not based on any accepted actuarial methodology and puts the pension system at risk.

More warnings appear in the fine print of the governor’s budget proposal, also issued on Wednesday. Despite last year’s reform, it said the pension system is still so weak that the state may have to seek “a federal guarantee of the debt” — presumably the kind of intervention that many Republicans in Congress have been warning they will oppose.

An excellent idea funding a pension deficit with the issue of debt.

Seriously this can't possible fail, just as long as the money invested makes more than the debt servicing costs and the needed growth rate to meet the pension commitments and everyone's a winner. If it fails Uncle Ben will come to the rescue with his printing press.

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Lol, fail plan.

The pensions are just too generous. Many, many older people are making twice in pensions after retiring from a career in things like teaching.. than young people who are working full time in those same jobs make! (and thats the rare young person with a good job like teacher).

I was reading about school districts in America where 50% of the budget goes to pensions and retirement benefits. And since tax revenues were down like 20%.. they would have to close down 40% of the schools.

Luckily for state governments they are sovereign. They are not bound by contracts. Whereas private firms would have to go bankrupt to get out from underneath the pension liabilities. So next time you hear a politician from a sovereign entity fall back on the excuse of 'its bound contractually', do not listen to them.

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