Local and state governments are warned of serious risks in issuing pension obligation bonds to help fund their plans in a new issue brief from the Center for Retirement Research at Boston College and the Center for State & Local Government Excellence.
“Issuing a POB may allow well-heeled governments to gamble on the spread between interest rate costs and asset returns or to avoid raising taxes during a recession,” according to the report, “Pension Obligation Bonds: Financial Crisis Exposes Risks.”
“Unfortunately, most often POB issuers are fiscally stressed and in a poor position to shoulder the investment risk,” the brief continues. “As such, most POBs appear to be issued by the wrong governments at the wrong time.”
Among the specific risks POBs impose, according to the report, is that the return on pension investments could be lower than the cost of financing the debt.
“Even over 15 to 20 years, the duration of most POB debt, interest costs can exceed asset returns,” according to the brief, which is available on the center's website, www.slge.org.