The Blagojevich administration's plan is to sell up to $10 billion in bonds and place the money in the pension funds, where it will be invested. The governor's budget team says that by selling the bonds at an average interest rate of 6 percent and earning an average, long-term return on the investment of 8 to 81/2 percent, the state will come out ahead.
There are three reasons to be extremely skeptical about this idea.
First: This plan would whittle down the state's $35 billion in unfunded pension liabilities--but would double the bonded debt of the state. That would almost certainly hike the cost of borrowing for future capital improvement projects.
Second: The state will, in effect, be borrowing money and throwing much of it in the stock market, betting that the market will provide a very robust return over the long term. But if the market does not perform well, the state will be saddled with diminishing pension assets and all that debt. Pension fund investments performed very well during the go-go 1990s. But the value of state pension system assets dropped by $5.7 billion between 2000 and 2002, while the systems' liabilities increased by $13.7 billion.
Third: The scramble by political insiders to grab as much as $50 million in underwriting and legal fees from this deal looks all too much like business as usual in Illinois politics. As Crain's Chicago Business reported recently, an investment bank has just taken on the wife of U.S. Rep. Luis Gutierrez, and one of the authors of the Blagojevich plan has just formed a company that could cash in on the bond fees. Others with a connection to Blagojevich are lining up for this deal as well.
Friday, June 03, 2005
GOP on Illinois pension deal
Read this here. Not the last paragrapn on who the investment banks hired.