Illinois Ponders Pension Moonshot Gamble: $107 Billion Bond Sale

What better time than now to borrow $107 billion to invest in stocks? That's what Illinois is actually considering.

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

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

No. 1-25

I think you can put a different interpretation on this. It will be much harder for Illinois to default on bonds than pension obligations (despite what the Illinois Supreme Court says) and so by shoring up the pension fund, there is a lower likelihood of the pensioners being stiffed (or they will be stiffed less). Pretty smart move on the unions' part.


Meg Whitman did something like this in the New Jersey in the late 90s and we all know how well that turned out. We're the highest tax state in the union, with arguably the most precarious pension scheme in the county, besides Puerto Rico. I know Illinois is sometimes ranked as worse than NJ, but Illinois still has lower taxes than NJ, so they have, perhaps, more wiggle room to try and catch up.


There seem to be two questions that are impossible to answer. First, who would buy Illinois bonds? Second, how is the pension fund going to get a 6% return? I know a magic answer to both! Have Illinois issue $100 million in bonds, and sell them all to the Pension fund! Just like magic, the pension is fully funded, and has a nice 6% return, exactly matching what they need. How will Illinois ever repay the bonds? Shhh... Obviously they aren't, but in the meantime they've kicked the can down the road, and after all, isn't that the goal? No one actually wants to face the problem; they just want to kick it far enough down the road that someone else will have to deal with it. What better way to kick the can than to instantly fully fund the pension fund by making a fictitious journal entry.


Seems rational. If the gamble pays off-well and good. If it doesn't, declare bankruptcy. Their going bankrupt any way so if your going down for $1 billion, why not $100 billion. End result is no different.

Mike Mish Shedlock
Mike Mish Shedlock


Lets' say the state did this in 2012 - The state would look like heroes, doubling its pension assets assuming it was all in stocks. Then lets' take back that entire move over the next 7 years. The state would be further behind. because it would still be paying 6% per year on the borrowed money. The plan is insane. Just to break even the investment needs to return 6% a year to beat the interest payment!