The POB – It’s Back! But, Is It A Wise Move?

The comeback of Pension Obligation Bonds (POB) shouldn’t surprise anyone. State and local governments are desperate for ways to address projected public pension deficits of >$4 trillion when liabilities are marked to market.

In one of the more recent examples, trustees of the Kentucky Teachers Retirement System, a DB pension plan funded at barely 50%, and with nearly $14 billion in unfunded liabilities, moved forward with a proposal to issue a $3.3 billion POB, passing the bill to the state Senate, where it is expected to be reviewed next week. With passage of the legislation, the $3.3 billion infusion into the plan would immediately bump the teachers’ funding level to 63 percent, according to KTRS trustees.

In Kansas, meanwhile, Gov. Sam Brownback is proposing Kansas sell $1.5 billion in POBs to help close the Kansas Public Employees Retirement System’s $9 billion funding gap.  We understand how tempting it is to issue bonds at these low interest rates to close huge funding gaps in these public pension plans, but does it make sense in this environment, especially after six years of an equity bull market?

In July, 2013 the KCS team published a Fireside Chat on the subject of POBs.  Here is a link to the original article http://www.kampconsultingsolutions.com/images/kcsjul13fc.pdf

We weren’t thrilled with the idea of POBs at that time, and given how markets have continued to rally, we are less supportive at this time.  Please don’t hesitate to reach out to us with any thoughts related to this subject.

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