The American Interest
Analysis by Walter Russell Mead & Staff
The Moral Challenge of America's Pension Crisis

America’s pension crisis has crossed the line from financial challenge to moral crisis. The chief evidence for that judgment is this Tennesseean article, which describes how pension obligation bonds are making a comeback.

These bonds allow politicians in cities whose pensions are dangerously underfunded to shirk difficult decisions like raising taxes or cutting services; they do so, however, by running a risk of steep losses down the line.

We’ve already seen what happens when these bets don’t pay off. A major factor in Stockton, California’s bankruptcy was its decision in 2007, just before the crisis hit, to issue $125 million in bonds to cover a shortfall. When the market tanked, the city was on the hook for millions more it didn’t have and wouldn’t be able to raise. The Tennessean mentions a 2010 study by the Center for Retirement Research at Boston College, which found that “most pension obligation bonds issued since 1992 were in the red.”

Yet cities across America are once again turning to these vehicles. This is a disease like addiction—except it is also contagious, apparently:

Franklin [Tennessee] this year agreed to issue $10 million in bonds to invest in the city’s pension fund.

Elsewhere, the Connecticut towns of Hamden and Stratford agreed this year to borrow up to $125 million and $220 million, respectively, to shore up their pension plans.

Last year, Fort Lauderdale, Fla., issued $337 million in bonds to cover a $400 million unfunded liability in two separate retirement funds.

And Oakland, Calif., the city believed to have issued the first pension obligation bond in 1985, again used them last year to pump more than $200 million into the city’s retirement account for police and firefighters.

Like virtually any investment vehicle, there are responsible uses of pension obligation bonds. But, as the Boston College researchers found, they are too tempting a drug to cities that are already in financial distress.

This is a political, financial, and moral issue of the highest magnitude.

Published on October 17, 2013 8:35 am
  • Boritz

    …allow politicians to shirk difficult decisions like raising taxes or cutting services, but they do so by running a risk of steep losses down the line.
    -VM

    Is this not the way all ‘budgeting’ and funding is done at the national level and is it not the principal reason we are XX trillion in debt? Local politicians are simply emulating the big boys.

  • qet

    History shows that attempting to place obligations to creditors on the same moral plane as obligations to and debts of “the little guy” like retired firemen and schoolteachers is doomed to fail. Since the time of Solon, if not before, cancellation or dishonoring of debt to the detriment of creditors has been considered not only wise and sound policy, but moral. In fact, if you review the Wikipedia page on Solon, you will see his cancellation of the commoners’ debts discussed under the heading “Moral reform” rather than in the immediately preceding “Economic reform.” Really, creditors who continue at this point to buy municipal bonds deserve to be stiffed.

    • gerald

      I don’t recognize the authority of a Wikipedia page to determine the classification of the morality of acts. “History” is written by the winners, so your “history shows” doesn’t say anything about the morality of the actions as much as it is a self-selecting recording by those who got away with it.

      The end effect of “cancellation” and default is the same: people who lent the money won’t get it back, but I don’t think that the label slapped on the act will substantially affect the way those who lost their money behave toward the defaulter going forward. Typically, the way international bankers took care of kings in default was to finance their enemies.