State and local governments issued more pension bonds this year than ever
US municipalities are issuing more and more bonds to repay their accumulated pension obligations, a move that is akin to the “game”, according to an analysis released Monday.
The report, from Municipal Market Analytics, a mainstay of the municipal bond market, notes that nearly 80 state and local governments have issued such bonds so far in 2021, the highest number on record since 2000. The amount issued up to present, $ 10.5 billion, is eclipsed by the roughly $ 16 billion issued in 2003.
Governments have been prompted to issue the bonds due to the strength of the stock market and still low interest rates, although MMA notes that both conditions are ripe for a change.
The issuance of pension bonds is essentially a coin toss, the report points out. If a government uses bond proceeds to pay a large lump sum into the pension plan and pension administrators are successful in meeting their investment goals, it is money well spent.
If that doesn’t happen, which is arguably more likely with SPX stock prices,
to records and the Federal Reserve is preparing to remove the monetary accommodation TMUBMUSD10Y,
– then taxpayers are responsible for future pension deficits as well as debt service on bonds.
The 80 issues so far this year have been almost exclusively local governments, but most of them participate in state-wide pension plans, which typically invest at least 70% of their assets in actions and alternatives, notes MMA.
Beyond the big picture, MMA’s list of reasons to be wary of pension obligations spans two pages.
Bonds intensify the “procyclicality of credit”, according to the group. In other words, if pension fund investments are underperforming due to poor financial market returns, it probably means that the economic environment for local government is also weak. This means that “the POB will increase gross liabilities and annual costs, while other fiscal challenges will increase during a recession.”
Most public finance experts think budgetary discipline is the most important consideration in maintaining healthy pension plans. Yet, as the report points out, in the event of a severe recession, a local government might consider moderating a contribution to a pension. Payments to bondholders, on the other hand, are not as flexible – and could crowd out payments to other services that taxpayers rightly expect.
“A community comfortable with issuing a massive taxable bond to invest in its future should, at a minimum, consider all the ways in which the proceeds of that bond might be invested,” write MMA analysts. “There may well be a better use of the proceeds (for example, neighborhood schools and education funding, a small business incubator or vocational training, the creation of a public STEM university) to benefit the community. local economy and stakeholders and therefore long-term growth and tax revenue capacity. “
Importantly, some recent studies support the idea that local governments often unnecessarily subordinate the immediate needs of taxpayers to the long-term health of their pensions. Many public finance guidelines advise a pension plan to be able to provide all necessary benefits to current employees and retirees for 30 years. But some experts are now suggesting that a pay-as-you-go system like Social Security would work just as well.
See: Public pensions don’t need to be fully funded to be sustainable, article says