Portents Of Bankruptcy

Pension Obligation Bonds (POB) are a stupid idea sold to desperate governments looking to camouflage debt for a few years rather than dealing with it. They are not solutions to but rather portents of either public pension defaults or government bankruptcies.

The ProPublica website has a handy chart on the 20 largest POB issues since 1996 with the warning:

Governments that borrow money to fund their pensions often pay less into their pension funds in future years than they’re supposed to. That can leave the funds in a worse shape than they were when the debt was sold, even if the pensions earn more on the borrowed money than taxpayers owe in interest.

Standish condensed the chart for their POB paper and it looks like this:


It is no coincidence that the worst funded public pension systems (NJ, IL, CT, PR) all tried the POB gambit not because it made any fiscal sense but because they chose not to look at immediately unpleasant alternatives (i.e. cutting benefits or affording honest contribution amounts).

The POB money suddenly appeared in trust assets making the plans seem better funded which would theoretically reduce future contributions. In practice, in New Jersey at least, future contributions were reduced anyway as politicians simply chose to pick their contribution numbers with expediency as the primary determinate.

A look at the 1997 Official Statement for New Jersey’s POB sale lists the costs:



12 responses to this post.

  1. Posted by Anonymous on January 5, 2017 at 1:48 pm

    Here’s the punch line, those at the State level involved with the POB scheme were labeled geniuses and given hefty pay increases! BTW the POB were issued by EDA and are not part of NJ’s “constitutional debt”.


    • Posted by dentss dunnigan on January 5, 2017 at 6:06 pm

      If they put that constitutional question on the ballot and it passes …it becomes “constitutional debt”….they better hurry and slip all this by the voters like the gas tax .


      • Posted by Anonymous on January 5, 2017 at 6:31 pm

        Functionally (not practically) NJ could bond the total unfunded obligation through the NJEDA or any autonomous quazi governmental entity w/o voter approval. Of course the interest rate would be outrageous and even then impossible to market.


        • Posted by boscoe on January 6, 2017 at 2:51 pm

          Since 2008 (the “Lance” amendment), it is no longer possible to use a conduit state agency or authority (e.g., NJEDA, State Building Authority, NJ Turnpike Authority) to issue debt backed by a promise of future state appropriations to repay the bonds and pay interest on the debt, without having been approved by the voters. See Article VIII, Section 2, para. 3b. Whitman’s 1997 POB issuance predated this amendment and probably contributed to the change in the constitution 11 years later.

          For what it’s worth, I don’t believe there is anything intrinsically flawed with the concept of Pension Obligation Bonds. If you can exchange one form of debt with another of the same maturity (the 1997 POBs were issued with maturities to match the unfunded liabilities of the pension funds) and achieve fixed annual payments, a net debt service savings, and have your new debt be a hard obligation of the issuer (no default possibility), then it is feasible if exceedingly complex. The state refinances its own general obligation bonds continuously to achieve debt savings. But as with most complex financial transactions, the devil is in the details. And the details didn’t add up to anything but a fraud in 1997. First, the future accrued liability was discounted at 8.75% to match the assumed investment earnings assumption. There has been extensive discussion on this board about how flawed that procedure is. Second, the Whitman administration then marked their assets to current market value from a more reasonable spreading mechanism. This produced a paper “overfunding surplus” that led to a much-abused “pension holiday” for public entities in NJ that went on for years. (This is mentioned in the Pro Publica article cited above.) And then Whitman cited this bogus surplus to stop pre-funding post-retirement medical benefits, a practice that had only recently been implemented.

          I guess one takeaway is connivers connive and maybe shouldn’t be tempted with schemes like POBs. The temptation to cheat by deferring on future soft debt (i.e., pension contributions) is just too great.


          • Posted by Anonymous on January 6, 2017 at 7:31 pm

            Really is that why the Gov is funding the $300M Statehouse reno through an EDA bonding??

          • Posted by Anonymous on January 6, 2017 at 7:39 pm

            BTW, there have been others – like DMV & Tobacco Securitizations…..

          • Posted by boscoe on January 6, 2017 at 8:41 pm

            Tobacco bonds were backed by a dedicated revenue stream (the tobacco settlement payments), and they predated 2008 const. amendment anyway. DMV also predated 2008, although I don’t remember much about the payment mechanism.

            Statehouse renovations — your point is well taken, but other than the participation of the EDA, the financing is still mystery meat. Possibly have title to state house turned over to EDA and pay them annual rent under lease agreement?? For EDA to take this bond issue to market, there will have to be an identified and reliable funding source.


          • Posted by Anonymous on January 6, 2017 at 9:10 pm

            Thanks for the date clarification but do you think a dedicated revenue stream is relevant to superseding the debt limitations clause?

            I thought most if not all of the conduit debt is backed by nothing more than subject to the legislature making an annual appropriations.

            Where do you think EDA’s financing of business tax credits fall in this whole mess?

  2. Posted by dentss dunnigan on January 5, 2017 at 3:46 pm

    What a crying shame …that annual debt service could have gone straight into the fund to help lower the yearly cost …..this fund is so far underwater the politicians will mask the real yearly contribution needed just to keep it afloat ….yep a few million here and a few million there …it starts to add up to real money


  3. Posted by Kvetch-22 on January 6, 2017 at 2:57 pm

    Once the bond proceeds are in the pension trust, they are dedicated to public retirees so in the event of a future bankruptcy of the sponsor those retirees won’t have as much at risk. This tends to favor this class of creditors over other creditors, not to mention causing the municipality to have greater obligations to pay in the future with less revenue available for other necessary public services.The public officials doing this stuff (with the aid of financial consultants and bond lawyers) are, at the same time, assuring the safety of their own pensions.


    • Posted by PS Drone on January 6, 2017 at 11:05 pm

      Soon there will be 10 sellers for every buyer in this god-forsaken POS state. Then let’s see the drones fund their grand larceny pensions.


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