The Chicago Public School Teachers' Pensions & Retirement Fund is considering doubling down its risk by making its first investment in its sponsor's debt securities.
The fund's board is evaluating an investment of $50 million in bonds issued by the Chicago Board of Education, including whether such an allocation is permissible under fiduciary standards.
Even though it's a relatively small investment, such a move is unacceptable. The fund can ill afford to lose even $50 million; but the greatest danger is that it would set a dangerous precedent. Perhaps $50 million, now, how much in the future?
For participants of the fund, the allocation would double their risk. Both their livelihoods as teachers and the contributions to their retirement fund come from the Board of Education.
With a 51.8% funded level as of last June 30, the fund has plenty of risk of its own underfunding without adding to it with the Board of Education bonds.
The Board of Education faces financial challenges to make its required contribution to the fund. It barely made its full required contribution of $634 million before the 2015 fiscal year-end close last June 30.
In July, the Board of Education sought legislation to delay much of its 2016 contribution to 2017, a move that failed in the Illinois Senate.
In addition, the Board of Education bonds have fallen into what is considered junk or highly speculative status by most credit rating firms. The board sold $725 million in federal tax-exempt general obligation bonds at an 8.5% yield Feb 3. The bonds were rated B+ by both Standard & Poor's and Fitch Ratings, and BBB by Kroll Bond Rating Agency, all with a negative outlook. Moody's, whose rating weren't sought in the latest sale, gave the board of education a B2 credit rating as of Feb. 1.
With B+ or B2 ratings, bonds are considered highly speculative, vulnerable to non-payment and subject to high credit risk.
In January, Illinois Gov. Bruce Rauner and some state legislators proposed a state takeover of the Chicago public school system and pushing it into a bankruptcy filing to reorganize its bleak finances, subjecting bondholders and other creditors to court proceedings to work out a plan for any repayment of debt. So far, nothing has come of the idea but the board's dismal finances might compel some sort of restructuring.
The allocation the fund has been considering amounts to 0.5% of its $9.8 billion in assets. Even with a potentially high yield in a low-interest-rate environment and weak equity markets, the bonds would make the fund more vulnerable to the fortunes of the participants' employer, an unacceptable risk. n
