Understanding the Role of Pension Obligation Bonds: The California Experience

Source: John G. Kilgour, Compensation Benefits Review, Vol. 46 no. 2, March/April 2014
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From the abstract:
Taxable pension obligation bonds (POBs) emerged in 1993 and have been issued extensively by a number of state and local governments. POBs are almost always general obligation bonds (GOBs or GO bonds). They convert “soft” unfunded pension liabilities on the pension plans balance sheet into “hard” bond debt on the governmental employer’s balance sheet. California has been one of the big issuers of POBs. Due to a court decision requiring voter approval, the State of California has not issued POBs as have some states. However, a judicially created loophole allows county, municipal and other local governments to issue such pension bonds without voter approval and without regard to state constitutional debt limits. Many have done so. Bond issues are usually insured by one of a handful of Wall Street bond insurers. There have been a number of Chapter 9 municipal bankruptcies in California including that of the City of Stockton. The combination of POBs, bond insurers and Chapter 9 proceedings can result in an outcome that allows a government to transfer a large amount of unfunded pension debt to a bond insurer. That’s what happened in Stockton. There may be others.