The county’s pension obligation bond work group is holding an informational session today (at 9:30 a.m. in room 203-R of the courthouse). It would be fun to attend just to see if there is a quorum of any County Board committee and then to ask if the meeting has been noticed as a potential County Board committee meeting. It would also be interesting, if there is not a quorum of any committee, to wonder why the hell not and why there is so little interest on the part of supervisors.
County Supervisor John Weishan is skeptical of the plan to issue $400 million in county pension obligation bonds. The county’s proposal is to issue the bonds at 6% and invest the proceeds to get an 8% return. That’s all fine and dandy as long as the county can get an 8% return, but the market hasn’t been kind to investors lately and yesterday fell to a 12-year low. Yes, the market will rise again some day, but when? And what risks should the county take until then?
Weishan’s concern is not only risk, but the county’s plan for the bonds — or more accurately, it’s lack of a plan. If a 95% funded plan is the goal, he said, “this isn’t going to do it.”
In addition, experts on this topic advise that “you have to make a commitment that you’re not going to allow another unfunded liability to develop,” he said. Can the county, with all its huge fiscal problems, actually do that?
Weishan believes that one reason the bond issuance looks so attractive right now is that the timing of the deal and the influx of bond funds, could allow the county to skip a pension payment next year — a payment, according to the JS, that could be as much as $80 million. That one-year break would give the county the illusion of a little bit of financial stability, which County Executive Scott Walker likely would appreciate as he runs for governor.
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There was a big write up on Bloomberg about this: http://www.bloomberg.com/apps/news?pid=20601109&sid=alwTE0Z5.1EA#. When was the last time any of these bond proposals saw a return of 8%? All of the ones that have been issued in the last 5 years are costing money to run. I think the best return was 2% and that was over a year ago, so it was only costing the fund 4.5% to run. This past year that one also fell into the negative column. The selling houses haven’t been able to get any body to take them at only a 6% return, so another problem. Seems like a lose lose proposition.
There’s no question this is a bad idea, especially the way the County is doing it. First off, they wanted to do it each of the last three years, I think it’s pretty obvious where that would have gotten us. Secondly, the Pension fund is 45% fixed income (Bonds), selling Bonds to buy Bonds is insane! The new allocation should be totally non-corralated. Third, the fees pretty much doom the whole thing, the Bonds will issue at around 6.5% (plus fees), then the county wants to use a cash overlay (recreate their allocation with a synthetic derivitive) which has a fee, then there will be the usual Mnager fees. This concentrates your Risk (and reward) in Equities (Stocks), but raises the potential unit return per unit of Risk to a very high level. Let me ask a question, would you borrow money from your home equity to invest in buying you neighbors House, in the hopes that it would have a greater return than your interest payment, enabling you down the road to be able to afford your mortgage? That’s pretty much what they’re doing. My two cents, pay what you owe and forget the schemes and high fees.
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