While we are beset by constant reminders of the faltering status of public pension systems across the entire country, there's a new source of pension funding that's showing great promise for both investors and retirees.
According to Bloomberg, cities across the U.S. sold nearly a billion dollars' worth of taxable pension bond securities in 2012, up nearly a third from the $670 million sold in 2011.
The reason? Near all-time-low interest rates are creating massive demand for investments that have offered some very strong yields to investors. BofA Merrill Lynch analysis suggests that the taxable city and state pension bond market earned 11.1 percent last year, versus 7.3 percent in standard muni credit.
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That's prompted cities such as Oakland, Calif. and Southern California's once-bankrupt Orange County to issue pension debt as an attractive investment – a move which has been advantageous in buoying up some of the city and counties' pension plans, which are at lowest funding levels in recent history.
"With yields this low, it's a very attractive time to borrow," said Bud Byrnes, president of Encino, Calif.-based RH Investment Corp., to Bloomberg. "It's a great time to put your books in order, to take care of unfunded obligations that you have on your books."
Many cities have opted to try to take care of their substantially devalued pension holdings – and ever-increasing retiree obligations – through pension bond security issues. Fort Lauderdale, Fla. recently issued more than $300 million in bonds and Oakland sold some $213 million of bonds in July, offering to pay a yield of 4.68 percent.
The gamble doesn't always pay off for municipalities and counties as they wager that their investment earnings will exceed the costs of borrowing the money; Orange County originally went bankrupt in 1994 after losing nearly $1.7 billion on derivatives.
"There's nothing inherently inappropriate about issuing" the bonds, noted Jean-Pierre Aubry, assistant director of the Center for Retirement Research at Boston College, to the news service. "The majority of plans that are doing it, they really have no other option. They needed some cash and the pension bills are looming."
Other California cities, such as Stockton, are currently facing bankruptcy based on their own substantial debt and are currently facing off against both insurers and pension bondholders, with the city goverment claiming the bonds are an unsecured liability that may not be paid back.
The California Public Employees' Retirement System has been squaring off against the city of San Bernardino, which has also been trying to shake off its pension funding obligations, both to the pension organization, and the debts owed to bond insurers.
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