Pension Crisis Facts: Are Pension Obligation Bonds Risk Free?

Icon  PensionsThis is the third in a series of blog posts debunking the myths surrounding Pennsylvania’s pension crisis.

Pennsylvania’s two main government worker pension systems, the Public School Employee Retirement System (PSERS) and the State Employee Retirement System (SERS), are dramatically underfunded. Together these funds owe more than $47 billion in unfunded liabilities, which works out to around $8,400 per Pennsylvania household

Myth: Pension obligation bonds are a risk-free investment to finance pension plans.

Fact: Issuing a pension obligation bond is like taking out a second mortgage on your house, investing the money in the stock market and hoping for a great investment return. It’s a risky bet that requires investment returns to consistently exceed interest payments on bonds.

Moody’s Investor Service has warned state and local governments on such borrowing to finance underfunded pension systems. Their report stated:

“[P]ension bonds are often a red flag associated with greater rigidity of long term obligations, failure to find sustainable solutions to pension funding and a pattern of pushing costs off into the future.”

Under Mayor Ed Rendell in 1999, Philadelphia issued $1.29 billion in pension bonds to balance the city’s budget. But officials continued to underfund the city’s pensions, leaving Philadelphia in the same predicament as before the bonds were issued, only now with more than $1 billion in additional debt.

So what does genuine pension reform look like? To find out, see our myths and facts on the pension crisis.