February 15, 2010

ILLINOIS UPDATE: Emperor Has No Clothes: Pensions Are Short Cash.

In early January, while everyone was busy watching the nasty campaign commercials, the State of Illinois pulled an end-run on the budget process. On Jan. 7 the state sold $3.5 billion of “pension obligation notes.” In simple English, the state borrowed money to finance the state’s contribution to its five retirement systems.

These five-year debt securities carry an interest rate of 3.84 percent, tax free to bondholders. It’s a much higher yield than you could get in the bank because of the risk involved. Moody’s and Standard and Poors rated them at least 6 notches below the top AAA rating. In fact, all the rating agencies characterized the outlook for Illinois finances as “negative.”

It just gets worse.

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