Pension Obligation Bonds: Financial Crisis Exposes Risks

Source: Alicia H. Munnell, Thad Calabrese, Ashby Monk, and Jean-Pierre Aubry, Center for State and Local Government Excellence, Issue Brief, January 2010

From the summary:
It is risky for state and local governments to shore up pensions with such bonds except in certain circumstances.

The brief’s key findings are:
* Some state and local governments issue Pension Obligation Bonds (POBs) to raise cash to cover their required pension contributions.
* POBs allow governments to avoid increasing taxes in bad times and could reduce pension costs, but they pose considerable risks.
* Those who issue POBs are often fiscally stressed and not well-positioned to handle the investment risk.

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