By Tom Moutes, RLACEI Director
Last month, I wrote about the City’s budget issues and their impact on LACERS. Since that time, the City’s budget woes have grown to a projected budget gap of $675 million for the current fiscal year.
On Dec. 4, the City Administrative Officer (CAO) released a report identifying the growth in the budget gap and recommending that the City Council immediately consider a number of actions, including, but not limited to:
- The possible elimination of 1,894 filled positions;
- Additional labor concessions such as more furlough days; and
- The issuance of Pension Obligation Bonds (POBs) next fiscal year.
What Are Pension Obligation Bonds?
Following is the Government Finance Officers Association (GFOA) explanation of POBs: “Pension obligation bonds are taxable bonds that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt. The use of POBs rests on the assumption that the bond proceeds, when invested with pension assets in higher-yielding asset classes, will be able to achieve a rate of return that is greater than the interest rate owed over the term of the bonds.”
In other words, the City would sell bonds to cover some of its annual contribution to LACERS and/or pay down some of LACERS’ unfunded pension liability. LACERS would then invest the proceeds from the bond sale in the same manner it invests its other funds.
So, Are Pension Obligation Bonds Helpful?
The short answer is “it depends.”
If the investments of the POB proceeds perform well, the results may be a better funded pension system. However, if the investment of the POB proceeds fails to earn more than the interest rate owed over the term of the bonds, it can add to the additional fiscal stress that the City may face.
Frequently, I have compared POBs with “doubling-down” in blackjack – you may come out ahead, but you may also lose more than you would have. At least in blackjack, you would only double-down when the odds are in your favor. Many jurisdictions that implement POBs do so due to financial distress, and therefore they are unable to control the timing of the POB issuance. This makes the odds of a successful POB implementation less than it otherwise would be.
The GFOA, whose mission is “to advance excellence in public finance,” is opposed to the issuance of POBs due to the risks involved, the additional debt burden it places on the jurisdiction, the fact that the overall cost of POBs frequently increases the jurisdiction’s overall costs, and because credit rating agencies may take a dim view of jurisdictions employing POBs.
We hope that, when the City Councilmembers consider POBs, they will make sure they have all of the necessary facts before them.