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Pension Obligation Bonds May Soon Have Their Moment

Issuing bonds to wipe out unfunded liabilities is risky. For some municipalities, it might soon be worth a shot.

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In some corners of the finance world, the phrase “pension obligation bonds” is practically a four-letter word. The debt, which raises money to plow into public retirement systems, is deemed risky and dangerous, nothing more than a gamble on future market moves by state and local government leaders who are too clever for their own good.

It’s true that some of the most infamous municipal bankruptcies, from Detroit to the California cities of Stockton and San Bernardino, involved pension obligation bonds, or POBs. Indeed, an oft-cited study by the Center for Retirement Research at Boston College found that “the jurisdictions that issue POBs tend to be the financially most vulnerable with little control over the timing.” Chicago, which has a junk rating from Moody’s Investors Service, floated the idea of using POBs last year.