By Jon Coupal | Earlier this year, this column raised the alarm over the resurgence in the use of “pension obligation bonds,” a risky financing method that fell out of favor during the 2008 recession but is now making a comeback.
Fortunately, there is more scrutiny on this form of debt financing than in years past, and taxpayers are starting to take a keen interest in whether POBs are in the best interests of their local governments.
Citizen awareness and improved oversight will be crucial.
To refresh citizens’ understanding of what this is all about, POBs are bonds issued to fund, in whole or in part, the unfunded portion of public pension liabilities by the creation of new debt. It is like paying your Visa bill with your Mastercard.
Advocates of this strategy rely on an assumption that the borrowed money from the sale of bonds, when invested with pension assets in higher-yielding assets, will achieve a rate of return that is greater than the interest rate owed on the borrowed money, which is paid back over the term of the bonds.
A policy reflected in the California Constitution since the 1800s is that government debt should be approved by the voters. The reason for this is simple — today’s politicians should not be allowed to burden tomorrow’s taxpayers without the consent of those financially obligated for the repayment. Back in 2003, the Howard Jarvis Taxpayers Association sued the state of California for its attempt to issue a statewide POB without voter approval. HJTA prevailed and the POB bond proposal was invalidated.
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