Illinois Public Pension Fund Association urges communities to examine Pension Obligation Bonds as possible solution to unfunded liabilities
The Illinois Public Pension Fund Association (IPPFA) urges communities to examine Pension Obligation Bonds as a possible solution to unfunded pension liability issues. The IPPFA is offering a free informational bulletin on the benefits and risks of these bonds to assist police and fire pension funds and their local governments in any decision-making process.
“Pension Obligation Bonds are not a risky financing bet,” said IPPFA President James McNamee. “These bonds are a well thought-out technique in which the possibility exists to substantially lower the taxes needed to meet pension obligations.”
While the IPPFA neither endorses nor opposes the use of Pension Obligation Bonds, the organization encourages all pension funds and their mayors and treasurers to discuss the option with their bond and legal advisors.
Communities and fire districts can issue government bonds and place the bond sale proceeds into their pension funds to attain full funding. This technique can work if the investment return in the local pension fund over several decades exceeds the interest rate that must be paid on the bonds, as it typically would in many municipalities. If the Pension Obligation Bond approach is successful, local residents and businesses would pay less in taxes to retire the municipality’s unfunded pension liability.
The IPPFA bulletin notes that the local tax savings comes both from the low interest rate on the bonds and the elimination of the so-called “ramp” financing, in which higher pension fund payments are made in later years. The bulletin notes, however, that the Pension Obligation Bond approach is not for everyone, particularly local pension funds with a lower rate of investment return.
“The Center for Retirement Research at Boston College found that the best chance for success is when bonds are issued by financially sound and well run governments who understand the risk and have a pension reform or financing strategy,” McNamee said. “Bonds issued by fiscally stressed cities seeking budgetary relief are riskier.”
The IPPFA was founded in 1985 as a not-for-profit organization whose mandate was to educate public pension fund trustees. In 2009 the IPPFA became the primary education provider for public pension fund trustees in the state of Illinois, and its members manage more than $18 billion in pension assets.
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To view IPPFA’s study on Pension Obligation Bonds, please click here.