Editorial: Pension obligation bonds are risky

Published Dec 26, 2012 at 04:00AM

There are no easy answers to Oregon’s public pension problems. With the state struggling to fill a $16 billion gap between what it has for its Public Employee Retirement System and what it will owe retirees, there’s more than enough pain to go around. That $16 billion, by the way, is more than $1 billion greater than the state’s general fund for the current biennium.

Nor is the problem just the state’s. Nearly every public agency in Oregon, from school districts to counties to cities to rural fire protection districts, will pay a larger percentage of their budgets to PERS next year than this year. Without change, the situation is unlikely to improve soon.

Not surprisingly, knowing that they’ll be forced to spend a larger chunk of their budgets on the retirement program — and have less to spend on teachers, social workers and other current government employees — some school districts and others have chosen another path, issuing something called pension obligation bonds to ease their pain.

The public buys the low interest bonds, giving the selling agency an immediate cash infusion that is then used to make higher-risk investments that pay more than the cost of the bonds. If all goes well, the agency makes enough money to reduce its annual public pension obligation.

Like any such system, it works well — if. If the agency sells the bonds at the right time, for one thing. Portland Public Schools did just that, according to The Oregonian, selling bonds years before the stock market took a serious dive and watching the invested proceeds grow to three times the size of its payroll by 2007. The Lane Education Service District, by contrast, sold late and has seen its side investment drop by 27 percent since. To break even, an agency’s payroll must grow by 3.75 percent each year and its side investment must return at least 8 percent.

In reality, issuing pension obligation bonds is risky business, and agencies can make their financial situation worse by issuing them. They’d be far better off to work with lawmakers and their unions to reform PERS than to hope a bond gamble will pay off.

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