I’ve been writing about the incentives for underfunded public pension plans to take higher risks for a couple years now. These incentives pose issues for the appropriate timeliness of pension plan financial reporting, as I argued in this article in 2014.
Today, we had another indicator of these possibilities. Pensions & Investments magazine is reporting that the Chicago teachers’ pension fund is considering buying bonds issued by the Chicago Board of Education.
The Pensions & Investments article asserts that this would ‘double down on its risk.’
That needs a little more thought, but let’s assume that it does. What might that imply, given that the Pensions & Investments article also reports that the fund is evaluating the appropriateness of this action in light of its fiduciary responsibilities?
Well, a case can be made that under current law, it is entirely appropriate. The “prudent person rule” that applies to managers of public pension investments in Illinois calls for assets to be managed “solely in the interests of the beneficiaries.” Given that taxpayers effectively guarantee the defined benefits in the plan, after last year’s Illinois Supreme Court decision cementing those benefits, the downside of risky investments is borne by taxpayers.
Does anybody see holes in these arguments?