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.
S&P Global Inc. should “carefully consider” a proposed tweak to how it assesses the creditworthiness of bonds owned by insurance companies, the Justice Department said, warning that such a change “could raise significant concerns” under U.S. antitrust law.
The Justice Department’s antitrust division said in a letter dated last Friday that a proposed methodology change by S&P — the world’s largest credit ratings company — could raise barriers for its rivals. The changes could end up hurting the credit grades of insurance companies that invest in bonds that aren’t rated by S&P.
The firm should “carefully consider whether penalizing insurers that purchase securities rated by S&P’s competitors has the potential to raise barriers to entry and expansion by competitors, insulate S&P from competition, or otherwise suppress competition from rival rating agencies,” said antitrust chief Jonathan Kanter in the letter. “Such actions could raise significant concerns that the Sherman Act has been — or will be — violated and warrant additional scrutiny.”