Wednesday, March 28, 2012
What Not to Think (on pension bonds)
The LA Times article describes what some municipalities have done in the past to deal with unfunded pension liabilities or just to make a speculative profit. Essentially, they have issued bonds and used the proceeds to make pension investments. If the interest cost of the bond is less than what they earn in financial markets, the profit enhances the pension fund portfolio.
Less clear in the article is that if the pension fund has an assumption of earnings higher than the interest rate on the bonds, at least temporarily the accounting measured of the unfunded liability goes down.
They key point is that none of this speculative and questionable activity is behind what UC might someday do (and, again, has not done). Those who follow this blog know that the UC pension is unique relative to most public pension funds in that roughly $2 of every $3 of employer contributions come from non-state sources (such as hospital revenues and research grants). However, unless the state (currently the Regents) make its contribution, the other sources won't either. So putting money into the fund on behalf of the state triggers a de facto match ($1 of state contribution produces $2 extra dollars of non-state contribution). This match dwarfs any interest rate differential or accounting artifact.
Bottom line: If UC ever issues pension bonds, it won't be for the reasons listed in the LA Times article and will actually be to the fund's benefit.
The LA Times article is at http://www.latimes.com/business/la-fi-pension-bonds-20120327,0,5884419.story