ADVISORIES: Pension Obligation Bonds Flashcards
State and local governments should not issue POBs.
What are Pension Obligation Bonds (POBs)?
Taxable bonds that some state and local governments issue as part of a strategy to fund the unfunded portion of their pension liabilities.
Why does GFOA recommend against issuing POBs?
Because POB proceeds might not earn more than the interest rate owed, leading to increased overall liabilities, and POBs carry considerable investment risk.
What risks are associated with POBs?
Investment risk, counterparty risk, credit risk, and interest rate risk, especially when structured with complex instruments like swaps or derivatives.
How can issuing POBs affect a government’s financial position?
It increases the jurisdiction’s bonded debt burden, potentially uses up debt capacity needed for other purposes, and may not be viewed as credit positive by rating agencies.
What structural concerns exist with POBs?
They may be structured to defer principal payments or extend repayment over a period longer than the actuarial amortization period, increasing overall costs.
