Kamenetz's risky pension bet

Would you borrow money to pay off your mortgage and instead risk it in the market?

That is in essence what Baltimore County Executive Kevin Kamenetz would like to do by floating $255 million of pension obligation bonds to fill the official hole in the county's $2 billion pension system.

Because of accounting gimmicks, the real hole is much deeper, and the county soon will sink billions of dollars more into debt because of Gov. Martin O'Malley's shift of teacher pension costs and tougher accounting standards.

So Mr. Kamenetz wants to double down, betting that proceeds from the bond sale invested with the county fund will earn a higher rate of return each year than the fees and interest rate the county must pay on the bonds. If that happens, it would boost the official funding ratio of the pension fund — about 77 percent — and save taxpayers money by reducing the amount they would otherwise have to contribute to the fund to make it whole.

The county estimates it will save taxpayers $250 million based on the fund's projected rate of return.

The problem is, the savings are a big "if." Linda Murphy, a municipal credit analyst at T. Rowe Price Group Inc., says she does not like pension obligation bonds [POBs] like those being considered by Baltimore County because her "personal philosophy is that I am against making a market timing bet."

In other words, if governments buy POBs immediately following a stock market selloff, they will likely make money as the market climbs. Buying at highs, however, could cost municipalities a lot of money if the market falls, pushing returns at their pension funds lower than the interest rate on the bonds purchased. Right now U.S. stocks are close to record highs, due in large part to the Federal Reserve and other central banks easing monetary policy to jump-start the economy.

And overall, the record does not speak to POBs' success. A January 2010 report from the Center for Retirement Research at Boston College of 2,931 pension obligation bonds issued between 1986 and 2009 found: "Only those bonds issued a very long time ago and those issued during dramatic stock market downturns have produced a positive return; all others are in the red."

Stockton, Calif., is one of the places where the strategy failed, and it is a key reason the city is in Chapter 9 bankruptcy.

The fallout from bad bets could be why there is a slowdown in the number of POBs being issued this year — $492 million so far in 2012, compared with $5.2 billion in 2011, according to Bloomberg. The fact that some localities, including Fort Lauderdale, Fla. (which earlier this month raised $340 million from POBs) still consider them an option likely speaks to the bad financial shape many governments across the nation are in as a result of years of spending more than they were collecting in taxes and years of underfunding pension plans. Moody's Investors Service places the unfunded national public pension liability at $2 trillion.

Baltimore County is one of a small number of counties with an AAA credit rating and is in better shape than many of the places stung by losses in POBs. It has also moved to shore up its pension plans in recent years by increasing the age at which employees can retire and the number of years of service required to earn a pension, among other changes.

But the county has not been immune to the recession. Revenue fell about 5 percent in the county from 2008 to 2011, while interest on long-term debt rose 9 percent over the same period. As a result of lowering the rate-of-return assumptions on the pension fund, the county now owes $15 million more per year. And we haven't even gotten to the partial shift of teacher pension liabilities to the county from the state.

Mr. Kamenetz declined to comment until after the County Council votes on the bonds in October. Councilman Tom Quirk is the only one of the seven council members who responded to a request for comment. Mr. Quirk, who is a financial planner, said, "I don't think it's a bet that will lose money for taxpayers" because interest rates are so low and because of the county's comparatively strong financial position.

But would taxpayers want to invest in something that Jon Corzine, the former New Jersey governor and CEO of now-bankrupt MF Global, the company that lost hundreds of millions of dollars in customers' money, called "the dumbest idea I ever heard … It's speculating the way I would have speculated in my bond position at Goldman Sachs"?

Marta H. Mossburg is a senior fellow at the Maryland Public Policy Institute and a fellow at the Franklin Center for Government and Public Integrity. Her column appears regularly in The Baltimore Sun. Her email is marta@martamossburg.com.

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