More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data. Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.
The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019. Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history.
While most pension funds still avoid investing borrowed money, the use of leverage is spreading faster than ever. Just four years ago, none of the five largest pension funds used leverage.
Investing with borrowed money can juice returns when markets are rising, but make losses more severe in a down market. This year’s steep slump in financial markets will test the funds’ strategy.
It’s too soon to tell how the magnified bets are playing out in the current market, as funds won’t report second-quarter returns until later in the summer. In the first quarter, public pension funds as a whole returned a median minus 4%, according to data from the Wilshire Trust Universe Comparison Service released last month. A portfolio of 60% stocks and 40% bonds—not what funds use—returned minus 5.55% in the quarter, Wilshire said.
A new study published by Pioneer Institute finds that issuing pension obligation bonds (POBs) to refinance $360 million of the MBTA Retirement Fund’s (MBTARF’s) $1.3 billion unfunded pension liability would only compound the T’s already serious financial risks.
With POBs, government entities deposit revenues from bond sales into their pension funds and use the money to make investments they hope will deliver returns that outpace borrowing costs.
“Virtually every study of POBs finds that timing and duration of the bond issues are critical,” said E.J. McMahon, author of “Rolling the Retirement Dice.” “Bonds floated at the end of a bull market are the most likely to lose money, and that makes this idea a wrong turn at the worst possible time.”
If investments don’t meet a pension fund’s assumed rate of return, it could be left with debt service costs in addition to the pre-existing unfunded liability. In 2015, the Government Finance Officers Association bluntly warned that “State and local governments should not issue POBs.” It reaffirmed its guidance last year.
The dollar auction is a truly evil game. I used to forbid people from playing it at Mathcamp. That’s not a joke.
I had a really ugly graph on that post, and yes, I’ve gotten better with the graphs over the years. The ugliness of that graph was a partial inspiration to seek solutions. (Other ugly graphs as well).
You can barely see it, but there was a POB between 2003 and 2005. It barely made a dent in the unfunded pension liability.
And what then? In the ten years since 2005, Illinois underfunded the TRS pension fund by at least a billion dollars a year.
With regards to contributions, there was a choice on the part of the “government”.
With regards to all the other reasons for shortfalls — investment experience, experience in salary changes and longevity — the government had less direct control. But they definitely had a choice with regards to how much of the budget to apply to the pensions.
And every damn year, the Illinois government made a conscious decision to shortchange the pension. That was not an accident.
POBs are most often used by governments that were shortchanging the pensions, or goosing the benefits in insane and seemingly sane ways, to paper over said shortchanging. This farce lasts only so long.
The city of Providence’s pension fund, which is among the most underfunded in the country, just got one step closer to approving $515 million in pension obligation bonds. A majority of voters cast ballots in favor of the mayor’s proposal to issue $515 million in bonds in a non-binding referendum. While the results do not give Mayor Jorge Elorza the authority to issue the bonds, they do help build his case to the state, whose approval he needs to issue the bonds.
Pension obligation bonds are essentially loans that the pension takes out with a fixed interest rate. The hope is that investment returns exceed the interest rate on the bonds, thus allowing the pension fund to increase its funded ratio. However, a recession or investment downturn could lead to the pension losing money on the bonds. Such was the case in Puerto Rico when it issued pension obligation bonds in 2008. While a total collapse like what occurred in Puerto Rico is unlikely to happen in Providence, according to experts,
Public pensions have more than doubled their borrowing this past year, according to S&P Global. In 2020, the S&P rated $3 billion in public pension bond issuances. In contrast, the S&P rated $6.3 billion in public pension bond issuances between January 1 and September 15, 2021. However, as interest rates begin to rise again, bond issuances will likely decrease again.
Yes, for over five years now, they’ve been contribution more than 50% of payroll to the pension plan as the full contribution to the pensions.
In the past, they mostly contributed the full requirement, though in some years they didn’t. The requirement used to be less than 50%, but when you short the fund, and when you underperform on investments (which we will see in a bit), that’s expected, right?
So let’s see how the funded ratio has been doing — for all these full payments, the funded ratio must be healthy, correct? [if you didn’t read my excerpts above]
Fewer than 3,600 city voters on Tuesday backed Mayor Jorge Elorza’s proposal to borrow $515 million to shore up Providence’s ailing pension fund, according to unofficial results from the Board of Canvassers.
But even fewer voted against the bond.
In a special election that saw just 4 percent of the Providence’s 124,000 registered voters participate, the $515 million pension obligation bond won approval by a wide margin, with 70 percent supporting the proposal.
The plan still needs to be approved by the state Senate, but Tuesday’s vote dramatically increased the likelihood that Providence will be allowed to borrow $515 million and deposit the proceeds into the retirement system to invest.
Elorza has said the infusion of cash from the bond will allow the city to stabilize its pension fund, which has just 26 percent of the $1.6 billion it needs to pay current and future retirees over the next several decades, according to the city’s financial records.
Decisions made more than 30 years ago drive challenges. The seeds of the City’s pension problems were sown more than three decades ago when the City promised unsustainable benefit increases to members of the retirement system without funding the associated annual Actuarily Determined Contribution (ADC).2
The severity of the situation makes Providence an outlier. The City of Providence’s Employee Retirement System (ERS) is among the lowest funded pension plans in the nation. Since 1991, the City’s unfunded pension liability increased by more than $1 billion. In addition to the pension liabilities, and over and above the pension shortfall, the City’s retiree health benefits are underfunded by approximately $1.1 billion.3 The unfunded liability of the ERS drives costs to City that outpace revenue growth, limiting investments in other priorities. As of June 30, 2020, the ERS was only 22.2 percent funded.4 Total pension liabilities equated to $8,518 per resident – of which $6,629 is not funded.5 In the last twenty years, the City’s unfunded liability per capita increased by $4,000 per resident.
The governor of the U.S. Virgin Islands signed a bill Wednesday to refinance more than $800 million worth of bonds following numerous attempts to save a public pension system that officials say faces collapse.
Gov. Albert Bryan Jr. said the savings from improved interest rates would help stabilize the pension system for at least 30 years. Nearly 9,000 government retirees and 8,000 active workers rely on the public pension system, which officials warned could run out of funds by 2024 or sooner without a fix.
The kinds of messages that are welcomed are “innovative” in terms of telling you that you don’t have to do the thing you really don’t want to do (put more money into the pensions, promise less, cut back on many things, tax more, etc.)
According to its most recent actuarial report, the Milwaukee County Employees’ Retirement System (ERS) had a funded ratio of 75.3% and unfunded liabilities of $569 million. The county also has separate retirement plans for mass transit employees and temporary employees, but these plans have relatively small unfunded liabilities.
Milwaukee County ERS’ liabilities grew, in part, because the county did not make its full actuarially determined contributions between 2012 and 2016, according to its most recent Annual Comprehensive Financial Report. During that five-year period, the county’s contributions fell $12 million short of recommended levels.
Since 2015, Milwaukee County’s contributions to ERS have tripled from $19 million to $57 million, as it began to meet and then exceed actuarial recommendations. These contributions exclude debt service the county pays on pension obligation bonds it issued in 2009 and 2013.
In what is the product of the sustained low-rate environment, many municipalities are considering addressing their pension position through bonds. This should be encouraged by policymakers and explored by pension systems.
Bond markets are offering municipalities the opportunity to exchange discount rates of 6, 7 and sometimes even 8 percent for bonds with yields below 3 percent. The spread between the discount rate and the bond yield is the root of the appeal of pension obligation bonds.
It is bad Illinois has the nation’s worst pension crisis, but state politicians have made it worse by using risky debt to delay the day of reckoning, and done so to the point that Illinois now owes 30% of the nation’s pension obligation bonds.
Pension obligation bonds are a form of debt used by state or local governments to fund their pension deficits. Illinois holds $21.6 billion of the nation’s $72 billion pension obligation bond debt.
The theory behind the bonds is that if a pension system can borrow money at a lower rate by selling bonds and earn a higher percentage from investing those funds, then it has realized a net gain using them. The issue is the gamble rarely works out that way, as the Government Finance Officers’ Association points out. Pension obligation bonds place taxpayer money at risk and often leave governments saddled with more debt rather than less. They often do not achieve a high enough return to justify their use.
Illinois’ five statewide retirement systems hold $144 billion in debt, according to official state reporting based on optimistic investment estimates. But Moody’s Investors Service says the true debt is $317 billion, which it calculates using more accurate methods common in the private sector.