The Final Minority Report

Because Even Minorities Oppose Liberalism & Statism

The Future of Pensions in the US

This could be the US in the next 20 years! Hooray for horrendous social and fiscal policies!

March 3 (Bloomberg) — The Chicago Transit Authority retirement plan had a $1.5 billion hole in its stash of assets in 2007. At the height of a four-year bull market, it didn’t have enough cash on hand to pay its retirees through 2013, meaning it was underfunded to the tune of 62 percent.

The CTA, which manages the second-largest public transit system in the U.S., had to hope for a huge contribution from the Illinois state legislature. That wasn’t going to happen.

Then the authority found an answer.

“We’ve identified the problem and a solution,” said CTA Chairman Carole Brown on April 16, 2007. The agency decided to raise money from a bond sale.

So far so good, eh? I mean especially if you don’t think about it too hard. After all, the only way a scheme to borrow money to plug a fiscal hole can work is if you are earning more from investing that cash that you are paying out in interest. Makes sense right?

Your investment gains have to exceed your interest costs or the scheme becomes a sure-fire money loser.

Well, here’s the punch line:

In the CTA deal, the fund borrowed $1.9 billion by promising to pay bondholders a 6.8 percent return. The proceeds of the bond sale, held in a money market fund, earned 2 percent — 70 percent less than what the fund was paying for the loan.

Wow. I am speechless. That was the “plan”?

Borrow at 6.5% and earn 2%

03/10/2009 Posted by | Pensions | | Leave a comment