Assignment Desk: Pension Obligation Bonds

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Pension Obligation Bonds were one method that a number of municipalities used to ‘fund’ their unfunded pension liabilities. The thinking was that issuing bonds at a fixed rate, then putting that money into the pension fund (where it hypothetically earned a return higher than the fixed rate) made sense.

There is some logic here — it turns the somewhat malleable notion of the yearly pay-in to the pension fund into a hard number owed to bond holders. And, over the long run, most pension funds earned in excess of the typical bond interest rate.

But, we are in a brutal short-term (we hope) downturn with massive losses across almost all investment classes. Bloomberg has an article on a number of communities who have pension obligation bonds that are underwater (i.e. they have lost money on the principal but still have to make fixed payments to bondholders).

A number of Massachusetts communities have issued these instruments. I wonder how they are doing.