The worst thing about Pension Obligation Bonds is that the proceeds would be gambled on the stock market. The assumption is that the investments would pay both the bond service and the pension deficit. How nuts is that?
I’ve heard various analogies – taking a credit card to the casino, taking a second mortgage on your house to pay the first mortgage, paying your credit card with your other credit card, etc. Of course people do all these things, and we’ve seen what happens to them. We’ve watched neighbors, friends, even family members lose it all in gambits like that, and we’ve shaken our heads and wondered how they could be so stupid. How is it suddenly prudent just because it’s a government agency doing the dumb thing?
They will tell us they know what they’re doing, just like CalPERS told the governor and all the state agencies that they knew what they were doing. They don’t.
The consultant who pitched this horror story in the making to the Chico City Council said the key would be to borrow the bond money at a rate of 3 – 4% interest. He speculated that money would make a good enough return on the market to pay that rate, and then some for the pension fund. But he made it clear, constantly, that a “downturn” in the market would be a very bad thing – then the city would owe both the bond money and the pension payments, both with interest.
The difference between those two debts, as reported by the consultant, is that CalPERS won’t dump us for not being able to make our full payments, our “obligation”. As long as we pay SOMETHING, they will keep on paying out the crazy pension payments. In fact, each agency negotiates their own deal with CalPERS and sets the employee contributions. Of course, if they don’t pay enough, the debt grows, with interest – that creates the Unfunded Actuarial Liability, or, the “pension deficit”.
On the other hand, a Pension Obligation Bond has to be paid, in regular installments, or the bond holders can demand either the back payments or the entire debt, on the spot. This means, they could empty the General Fund, and every other fund the city holds, except the Pension Stabilization Trust. The PST is the only truly, legally restricted fund the city has established. All other funds, from the streets fund to the park fund to the sewer fund and on, are available for allocation to the General Fund.
The proponents keep trying to tell us this is a fool proof scheme. They won’t acknowledge the fact that the market can turn ugly on a dime. Really ugly. Pension systems around the country are making some really desperate, stupid investments, according to this article from the Reason Foundation.
Unfortunately, many public pension plan managers are not interested in adjusting their investment return targets to realistic levels at this time. Instead, they are seeking riskier, potentially higher-yielding investments in an effort to make up for depressed interest rates and hit their targets.
What’s super frustrating is the double talk. Our mayor, Andrew Coolidge, acknowledges that CalPERS is doing horribly, but tries to assure us that our staff can pull of successful investments. In this market?
According to this article, government agencies’ share of the UAL is about to go up again, due to risky investments. For example, “New Mexico’s Educational Retirement Board (ERB), which serves the state’s teachers, is one such plan that dedicates roughly a quarter of its portfolio to fixed-income assets. Within New Mexico ERB’s fixed income-investment allocation, 7 percent of funds go to emerging market debt, which is essentially sovereign bonds issued by countries classified by the World Bank as lower-to-middle-income to upper-middle-income. This includes countries such as Brazil, India, and Nigeria.”
“Even though emerging market debt carries much higher yields that are attractive to pension funds, those benefits can be outweighed by enormous risks since several of these countries have defaulted on their debt in the past. Due to this risk, public pension investment allocations to emerging market debt have historically been used sparingly in pension fund portfolios. However, in recent months, pension fund managers have signaled a growing appetite for allocating more assets to this asset class.”
As more pension funds take on these risky investments, more will fail, debt will increase, and be passed on to government agencies. In California, CalPERS has a horrible record of corruption, with various board members leaving in disgrace over manipulating the public trust to their own gain. Most recently an investments advisor left after he was found to be using CalPERS funds to buy stock in funds he owned. CalPERS is also floundering under huge board member salaries – here’s a thought – CalPERS has it’s own pension deficit.
Instead of screaming for investigations and reform, I think those public employees who stand to get pensions are getting desperate to make sure the pension systems are funded. I just can’t decide whether our council members are being led by the nose or if they are coming to the table knowing exactly what they are doing.
What do you think?
Chico Taxpayers Association 
What do I think?
Well, I will tell you what i KNOW: Coolidge and the Gang will do everything BUT make the reforms necessary because that means the public employees would have to take a big hit, and there’s no way anyone on the city council will ever let that happen.
Remember, our city council is bought and paid for by the public employee unions.
So, these corrupt “public servants” will shove higher taxes and more debt down our throats and gamble with our money! Anything to satisfy who they really work for: the public employee unions!
You’re so right Bob. Get a load of next week’s finance committee agenda. They are getting ready to register and tax all rentals in the city, as well as raise the existing tax on every business in town.
And these are the “conservatives!”
Anyone who believed they were conservatives
were conned.
Which reminds me of the old saying, “How can you tell when a politician is lying? His/her lips are moving.”
All the business people who supported the 5 “conservatives” are going to feel like real idiots if this goes through.
Just goes to show, no matter who we vote for, “conservatives” or “progressives,” all we ever get is more debt and higher taxes and more gimmick financing.
THE WHOLE SYSTEM IS CORRUPT!!!
I wonder how Broadway Pawn owner and Citizens for Safe Chico president Teri Dubose feels about it.
Juanita The stock market is setting regular highs right now. The DJIA setting records. What goes up must come down. There is something called the “business cycle.” Every college business student learns the rules. To try and “beat the market” is truly a fool’s game with funds that the investor cannot afford to lose, i.e., disposable income. Chico will simply file bankruptcy. The taxpayers will be the losers. Orme and the council will move on.
On Fri, Mar 19, 2021 at 11:12 AM Chico Taxpayers Association wrote:
> Juanita Sumner posted: ” The worst thing about Pension Obligation Bonds is > that the proceeds would be gambled on the stock market. The assumption is > that the investments would pay both the bond service and the pension > deficit. How nuts is that? I’ve heard various analogies -” >
I meant *only* “disposable income” should be invested in the stock market, i.e., the money you can afford to lose.
You make a great point. If the city had extra money to gamble, that might be alright. Instead they expect us to sacrifice our streets, park, and other infrastructure, possibly even services like cops and fire. The consultants admitted that one California city that used POBs ended up having to lay off public safety employees. Two others that I know of declared bankruptcy after issuing POBs.
And of course you are right about the consequences – Orme and his staffers will just skip along down the freeway like their friend Constantin. Leaving us with 3rd World infrastructure, crime and poverty.
The worst thing about Pension Obligation Bonds is that the problem that created it (underfunding, sub par investment returns, insufficient employee contributions, bad projections, political ignorance, financial illiteracy on behalf of city management.) continues unabated. Even if POB’s were a fix, which they are not, we are back in the same spot in 5 years, if not sooner.
As usual BC, very nicely put. Again I will probably steal from this comment for my next letter to the editor, I hope you don’t mind!
I’d like to thank all of my contributors for all of the great conversation and ideas and input on this subject. I do use your comments and ideas to formulate my letters to the editor, I don’t know how I could do it without you folks.
That said, now I need you to start writing letters to. We need to turn this into a movement.