Down with governmental doublespeak about pension funds. Talking gobbledygook instead of English does a disservice to everyone, especially to public fund participants and taxpayers who actually finance the pension funds.
Unfortunately, this disturbing practice shows no signs of abating. The latest example of ridiculousness comes from the office of the new governor of Illinois, Rod R. Blagojevich.
Since he was elected on a no-new-taxes platform, Mr. Blagojevich, a Democrat, has been scrambling to figure out how to eliminate the state's budget deficit. One idea he proposed in February was to issue pension obligation bonds.
Pension obligation bonds have been used by many state and local governments but have fallen out of favor because the issuers have been pummeled by a bear market. That's because they borrowed money at, say, 6% (as Mr. Blagojevich proposes), expecting to earn far more in stocks. But with three-plus years of a down market, many governments have ended up in the red from their pension obligation bonds.
Mr. Blagojevich's proposal doesn't address the merits of issuing pension obligation bonds in this market environment. In the statement on the proposal, Mr. Blagojevich compares the concept of the state issuing pension obligation bonds to a homeowner refinancing a mortgage. He uses that term "refinancing" frequently. He says the state, like the homeowner, will save money by refinancing its pension debt.
The reality, of course, is the state will "save" money only if it can reap investment returns greater than the proposed 6% interest rate the state must pay to investors in these pension obligation bonds. And there aren't many places the state could invest the bond proceeds to get even 6%. Otherwise, all Mr. Blagojevich will accomplish is to delay paying the piper.
Plus, he confuses the issue by his liberal use of the word refinancing. To refinance a debt instrument, you first have to have a debt instrument. Until the state issues these POBs, there isn't anything to refinance.
We could forgive him that omission, assuming the news media would read between the lines and transmit to the public complete and balanced information on the subject. But the press release from the governor's office does nothing to help the media understand pension obligation bonds. In fact, some in the media (including a reporter and a copy editor at Pensions & Investments) interpreted the press release to mean the governor wants to refinance existing pension obligation bonds. After all, he kept talking about "refinancing" the state's pension debt.
As one reader said in an e-mail: "A clarification on your piece in yesterday's (Feb. 26) P&I Daily on Illinois Gov. Blagojevich's pension bond obligations proposal. I believe that the governor's proposal is to float bonds to fund a portion of the state's pension obligations, not to refinance existing pension obligation bonds. The difference is significant, because it means making a bet that the state can earn investment returns in excess of the interest rate on the bonds. That is much riskier than reducing the interest on existing bonds, which is more akin to refinancing a mortgage."
The reader, of course, is correct. Thank goodness for readers like him, who are able to write English instead of doublespeak.