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Pension Obligation Bonds

Pension Obligation Bonds

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Pension Obligation Bonds

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  1. Pension Obligation Bonds The Transaction Issue bonds at interest rate x and deposit proceeds as an asset in the pension plan trust with an expected investment rate of return of y, where y is expected to be greater than x. Last COH transaction, x=6.3% and y=8.5%. The Objective Reduce long term pension funding obligation in a cost effective manner through the interest rate arbitrage which reduces the funding obligation by more than the cost of borrowing. Reduction of pension funding liability in this manner is considered to be better than the alternatives of (1) increasing taxes, (2) cutting City services, or (3) reducing promised benefits to employees. The Risks Pension assets do not earn more than the cost of borrowing. A somewhat flexible long term obligation is exchanged for an immutable long term obligation. There could be an adverse impact on credit rating or overall debt service capacity. CSLGE Conclusion From an Issue Brief published in January 2010 by the Center for State and Local Government Excellence - “POBs have the potential to be useful tools in the hands of the right government at the right time.”