History Shows Chicago Picked a Risky Time for a Pension Bond Sale

(Bloomberg) -- Chicago Mayor Rahm Emanuel is bullish on the stock market.

That’s one implication of the plan he offered up to bolster the city’s struggling pension funds before he leaves office in May. It calls for selling $10 billion of bonds and handing the money over to its pensions, wagering that they will make more on their investments than the city will pay out in interest. It’s like a massive margin loan, secured by Chicago’s tax dollars.

It’s a well tried tactic, and one that has met with success, according to a 2014 study by the Center for Retirement Research at Boston College, which found that governments on the whole came out ahead by doing so. But there’s a big caveat: Those that sold so-called pension obligation bonds after the dot-com and housing bubbles found themselves deeper in the hole when stock prices collapsed.

"Historically, the timing of pension obligation bonds to seize the right window has played out fairly poorly," said Dora Lee, vice president at Belle Haven Investments. "Right now, going into 2019 and 2020, it doesn’t look like you’ll have the stock market that will be able to generate the returns necessary to make it economically feasible."

Emanuel said the window on its sale is closing, given the upward shift in interest rates.

But the other side of the equation appears more iffy. U.S. stock markets have endured dramatic volatility this year, with investors worried about a widening world trade war, slowing growth and rising interest rates.

The S&P 500 Index has tumbled about 9 percent from the peak it hit three months ago. And with the economic expansion verging on a decade, two-thirds of business economists expect a recession to begin by the end of 2020, according to a poll released in October by the National Association for Business Economics.

During the last recession, state and city pension funds were hit hard when the value of their investments plummeted. Emanuel’s plan suggests he’s not worried that it will happen again. Or at least not on his watch.

To contact the reporter on this story: Danielle Moran in New York at dmoran21@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Michael B. Marois, William Selway

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