Don’t buy mom Illinois bonds for Christmas

Would you invest your mother’s money in municipal bonds? In a recent interview on Fox Business News, host Gerri Willis asked me that very question. It didn’t take me long to say I’d certainly do my homework first. Based on the growing number of city bankruptcies from Alabama to Rhode Island to California, it’s clear to me...

Would you invest your mother’s money in municipal bonds?

In a recent interview on Fox Business News, host Gerri Willis asked me that very question.

It didn’t take me long to say I’d certainly do my homework first.

Based on the growing number of city bankruptcies from Alabama to Rhode Island to California, it’s clear to me I’d keep my mother’s retirement money, and mine, far from those governments running the risk of bankruptcy. Many cities are collapsing due to out-of-control pension costs, but it’s only the demise of Detroit that’s awoken retail investors like my mom to those risks.

Bonds from the state of Illinois and the city of Chicago certainly qualify as investments that have become too risky. Chicago’s rare triple-notch credit downgrades by both Moody’s Investors Service and Fitch Ratings earlier this year are evidence of that.

That’s forced the city and state to pay higher interest rates ­to get investors to part with their money – Illinois pays the highest penalty for borrowing of all 50 states. But the market has yet to uncover the full extent of the city and state’s pension shortfalls.

Chicago, for example, says its four city-run funds have an official pension shortfall of $19 billion. But Moody’s Investors Services says the hole is $36 billion, nearly twice as much.

The story is the same at the city’s sister governments including the Chicago Public Schools, the Chicago Transit Authority and the Chicago Park District. Their official debt is much lower than what Moody’s says it is.

All told, Chicago households are officially on the hook for nearly $63 billion in debt. But if you take Moody’s more realistic analysis of the city’s pension shortfalls, the number jumps to $87 billion. That’s nearly $84,000 per Chicago household and more than its taxpayers could ever swallow.

And Chicago taxpayers don’t just have to worry about its city’s woes – in addition, they’re on the hook for Illinois’ crumbling state finances.

Illinois’ mismanagement of its pension crisis, along with its general failed governance, hasn’t gone unnoticed. Big-time money managers who invest retirement money for people like my mom are cautious about Illinois. In fact, many avoid investing here altogether.

Recently, the head of T. Rowe Price’s municipal bond team, Hugh D. McGuirk, said the fund has “historically avoided Illinois and Chicago [general obligation bonds],” and that they want to be “insulated from the pension risk.”

McGuirk’s comments are telling. Financial investors can come in and out of Illinois with the click of a button. They can change their mind from one day to the next. And yet many are choosing to stay out.

If it’s that ugly for a financial investor who can flee Illinois at a moment’s notice, think about what it must look like for a business that needs to commit years to a brick-and-mortar investment.

Or consider how it looks to my mom, who just wants to protect her retirement funds with safe and predictable income – the traditional role municipal bonds have played.

Illinois and Chicago bonds have moved far from being safe. In fact, they might just be junk.

If Illinois wants to attract investors of all types – from my mother’s retirement fund to those looking to build factories – it needs to commit to real, deep and sustainable pension reforms.

Anything less is just delaying the day of reckoning.