Assignment Desk: Pension Obligation Bonds
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.