By Cezary Podkul/Pro Publica and Allan Sloan/Washington Post
If there were ever a time not to bet the moon on the stock and bond markets, it’s now, with U.S. stocks at near-record highs and interest rates on quality bonds at near-record lows. But Wall Street is urging state and local governments to do just that – and they’re listening.
Despite the risks, governments are lining up to issue billions of dollars in new debt to replenish their depleted pension funds and, as a bonus, take some pressure off strapped budgets. In some cases, the borrowing makes their balance sheets look vastly better.
Bankers, who make fat fees for raising the money, are encouraging this borrow-and-bet trend. Their sales pitch is that borrowing at today’s low interest rates all but guarantees a profit for the governments because they can invest the proceeds in their pension funds and for decades earn returns higher than the 5 percent or so in interest that they will pay on the bonds.
But there’s a catch: If the timing is wrong, these so-called pension obligation bonds could clobber the finances of the government issuers. Pension funds and beneficiaries will be better off because pensions will be more soundly financed. But taxpayers – present and future – might be considerably worse off. They will be running huge risks and could get stuck with a massive tab.
“It’s sold as a magic bean,” said Todd Ely, a professor at the University of Colorado at Denver who has studied pension bonds. “But when it goes bad it’s not free. Then it isn’t really magic. If it could be counted on to work as often as it’s supposed to, then everyone would be doing it.”
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Posted on July 10, 2015
