The purpose of this letter is to express my strong objection to Baltimore County Executive Kevin Kamenetz's proposal to float a $250 million Pension Obligation Bond (POB). Words make it difficult to accurately express my opposition.
I believe that it is a fiscally irresponsible and risky proposal to fix a problem. In my opinion, it represents an extreme amount of risk for the taxpayers of Baltimore County.
You cannot borrow your way out of debt!
Supporters of this financial gimmick generally hype the proposed benefits and rarely take into consideration the risk/reward consequences.
On the rewards side, it is a temporary fix at best.
On the risk side, it could bankrupt the county.
A brief review of the 2008 financial collapse shows that all of the smart guys in the room were wrong and most equity portfolios lost 50 percent of their value.
Due to the risk involved, these bonds are difficult to sell and, therefore, cost more than other types of municipal bonds to bring to the financial markets. These bonds are expensive to create and syndicate.
Like all borrowing, it can go terribly wrong. The theory is that borrowing costs (interest rates) are so low, while returns on equity (stocks) are fairly positive, and that will result in a profit.
Most financial experts agree that the recent rise of return on equities has been fueled by the inflationary monetary policies of the entire world banking system, led by our own Federal Reserve. The loose monetary policies are flooding the financial markets with money.
The low interest rates are an historical anomaly and they will change; that is, they will go up.
On the equity side, there are circumstances around the globe that could have catastrophic effects on U.S. equities. The idea that equities do not pose any risk is inherently flawed.
If a large equity collapse happens any time over the duration of these bonds, a monumental failure will occur, and the taxpayers will be on the hook. All too often, the experts say "oh, we didn't think of that!" when it's too late.
The real point of my objection is that the POB solution fails to address the underlying problem of the pension system. There is a growing necessity for the reform of the county pension system.
Like the Social Security system, all of the numbers are going the wrong way. People are living way beyond the actuarial assumptions that were made 30 years ago when these systems were put in place.
In the 50s and 60s, as a way of attracting qualified employees into public service (including teaching), retirement packages allowed for early retirement and full benefits. That was done at a time when life expectancies were under 70 years of age and government wages were low.
Today's retirees can easily expect to live into their late 70s and, in the very near future, retirees should expect to live into their 80s and 90s.
The system needs to be fundamentally reformed.
Rather than kick the can down the alley again, perhaps the County Council could create a commission for reforming the county pension system. This would show real leadership and present the county with a unique opportunity to lead the entire nation.
I strongly urge Councilman Tom Quirk to vote against this proposed bond offering and also defeat it in the County Council.
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