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Bad Ideas Tried Again: Pension Plans Borrow Money at a Record Pace to Invest

Despite past failures at timing, cities and municipalities are borrowing money at a record pace to shore up pension plans.
Take a Chance on Me!

Pension obligation bonds contributed to the chapter 9 bankruptcies of Detroit, Stockton, Calif., and San Bernardino, Calif. 

Nonetheless, expanding bubbled have lured government bodies into repeating past mistakes, this time at a new record pace.

Hooray! We broke the pace of 2008.

Main Street Pensions Take Wall Street Gamble

Bonds Issued for Pension Funding

Please consider Main Street Pensions Take Wall Street Gamble

State and local governments have borrowed about $10 billion for pension funding this year through the end of August, more than in any of the previous 15 full calendar years, according to an analysis of Bloomberg data by Municipal Market Analytics. The number of individual municipalities borrowing for pensions soared to 72 from a 15-year average of 25.

Among those considering what is known as pension obligation borrowing is Norwich, a city in southeastern Connecticut with a population of 40,000. Its yearly payment toward its old pension debts has climbed to $11 million in 2022—four times the annual retirement contribution for current workers and 8% of the city’s budget. The city will vote in November on whether to sell $145 million in 25-year bonds to cover the pensions of retired police officers, firefighters, city workers and school employees.

Comptroller Josh Pothier said that spread helped him overcome his initial hesitation. “It’s pretty scary; it’s kind of like buying on margin,” he said he thought to himself. “But we’ve had a long run of interest rates being extraordinarily low,” he added.

Here is how a pension obligation bond works: A city or county issues a bond for all or a portion of its missed pension payments and dumps the proceeds into its pension coffers to be invested. If the returns on pension investments are higher than the bond rate, the additional investment income will translate into lower pension contributions for the city or county over time. (The $10 billion in pension borrowing captured by the Municipal Market Analytics analysis also included some money used directly for pension benefits, rather than being invested, and at least one borrower directed some bond proceeds to other uses.)

Take a Chance on Me! 

The higher the market goes, the less likely the maneuver is going to work.

I drew a dotted line in the lead chart at the place where I firmly believe the stock market will revisit at a future date. 

That line holds no matter what the stock market does in the next few years. 

And that is a likely best case scenario, not a worst case one. 


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Two-Way Bet

This is the most insanely overvalued market in history.   

But bear in mind that it's a two-way bet. 

To Ways to Win

  1. The stock market keeps rising forever or at least long enough to cover the borrowing costs without a huge drawdown. 
  2. These maneuvers and a stock market plunge inspire Congress to bail out the boomers, the cities, and the states.

Care to take a chance?

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