Crain's Chicago Business reports Illinois Ponders Pension-Fund Moonshot: a $107B Bond Sale.

Springfield lawmakers are so desperate to shore up the state's massively underfunded retirement system that they're willing to entertain an eye-popping wager: Borrowing $107 billion and letting it ride in the financial markets.

The legislature's personnel and pensions committee plans to meet on Jan. 30 to hear more about a proposal advanced by the State Universities Annuitants Association, according to Representative Robert Martwick.

Illinois owes $129 billion to its five retirement systems after years of failing to make adequate annual contributions. Because the state's constitution bans any reduction in worker retirement benefits, the government's pension costs will continue to rise as it faces pressure to pay down that debt, a squeeze that has pushed Illinois's bond rating to the precipice of junk.

GMO 7-Year Forecast

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Illinois vs GMO

While Illinois is pondering a moonshot gamble, note that GMO expects real returns to be -4.7% per year, on average, for seven years.

"Real" factors in inflation which GMO estimates will "mean revert" to 2.2% over 15 years.

If correct, assume U.S. stocks will lose 2.5% a year for 7 years and U.S. bonds will gain 1.2%.


I will take a stab that pension obligation bonds will yield 7% or so. Heck, assume a generous 6%.

The state proposes borrowing money at 6% per year while losing say 2% a year.

That's a loss of 8% per year, every year, for seven years.

One Word - One Sentence

One Word: Crazy

One Sentence: These Illinois legislators are seriously nuts.

But hey, this is Illinois. Nothing less that craziness can be expected.

Mike "Mish" Shedlock

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