Seems Illinois is having a pension problem.
And so it was prophesied: Illinois is headed into a public-pension death spiral even sooner than predicted. The Land of Obama leads the way.
The state of Illinois — broke, overleveraged, and still refusing to get its accounts in order — is up to something interesting: selling bonds to meet its pension obligations. As one of the many states that refuse to set aside adequate money to fund its public-employee pensions, Illinois is headed to the debt markets to raise $3.7 billion for pension liabilities to get it through the year. This is a double dip: In January, Illinois sold $2.4 billion in bonds for pension obligations. Actually, make that a triple dip: It sold $10 billion in bonds to fund its pension liabilities in 2003. “States don’t traditionally fund their pensions with debt,” says CNN in a nice bit of understatement, “but the practice frees up other money that can be used for operations.” The double whammy here is that Illinois’s pensions are in trouble because it already spent the money it needed for its pension contributions in past years on other spending: Which is to say, Illinois is borrowing money it will have to repay eventually to repay the pension money it already spent to pay for other spending it couldn’t afford then and can’t afford now. If you’re wondering where Barack Obama developed his fiscal finesse, you don’t have far to look.
And U.S. taxpayers will be on the hook.
Naturally, it gets worse, and every taxpayer in the United States will be partly on the hook for Illinois’s fiscal incontinence. That’s because they’re also using something called “Build America Bonds,” a financial instrument created by Obama’s stimulus bill, to fund what amounts to a social-services program under the guise of a “capital project.” Build America Bonds are like municipal bonds, except that the profits are taxable — sort of. In the first version of Build America, the federal government paid 35 percent of the interest on the bonds. In the current version, investors get a 35 percent tax credit for the interest they are paid on the bonds, meaning that Washington uses the tax code to give the bonds a higher real after-tax yield, encouraging more borrowing and more reckless spending. The bonds are supposed to be used for infrastructure projects, but Illinois has made it clear it is going to be using them to fund what amounts to a make-work jobs program: Look for a lot of bridge-building, school-cafeteria retrofitting, and an asphalt jungle of expansive roadwork, regardless of whether the project is needed or makes financial sense.
Possibly for the whole thing thanks to those “stimulus” bonds.
Here’s a concern about Build America Bonds: They are a creation of the federal government, and the federal government picks up a piece of the tab through its tax subsidy. The law says that the federal government is not to be considered a guarantor of the bonds — but how firm is that commitment? If Illinois reneges on a few billion dollars’ worth of securities created by Obama’s stimulus act, there is going to be tremendous political pressure for Uncle Sam to make good on the balance. In other words, U.S. taxpayers, already on the hook for a piece of this boondoggle, may end up on the hook for the whole rotten enchilada. (Source: National Review Online)
Powered by ScribeFire.
Related articles by Zemanta
- Illinois ‘Fiscal Malpractice’ Widens Yield in $900 Million Issue (businessweek.com)
- Build America Bonds Dealt Setback in Senate Fight Over Job Bill (businessweek.com)