Pension Crisis

Nightmare In Deep Ellum: How Pension Obligation Bonds Ruined Dallas Employees' Retirement Dreams

Dallas' pension crisis is another example of why cities and states shouldn't use pension obligation bonds.

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World History Archive/Newscom

Like the victims in any good horror film, officials in Dallas, Texas, find themselves in a situtation that was entirely avoidable—if only they'd realized it before it was too late.

In 2005, Dallas issued a $500 million bond that was supposed to plug the leaks in its police and fire pension system.

Now, just more than a decade later, the city is scrambling to prevent a "run on the bank" that's threatening to bankrupt the pension system before 2028. By one count, more than $200 million was withdrawn from the system in less than six weeks as Dallas' police and firefighters are making a run for it—yanking their investments out of the system that's teetering on the edge of collapse.

That makes Dallas the latest example of why cities and states facing huge piles of pension debt should steer clear of pension obligation bonds, or POBs, which usually do more harm than good.

In Dallas, the story goes like this: the city sold $535 million in bonds to refill the Dallas Police and Fire City Pension Fund. In essence, that moved the debt from one pile—the pension system—to another pile—the city's municipal debt obligations, in the hope that payments on that debt would be less, in the long term, than the cost of the pension system. It was a risky move, like "taking $535 million and throwing it on the dice table," said city council member Mitchell Rasansky at the time.

With the pension problem supposedly "fixed" by the POB, Dallas politicians went back to their old ways and continued underfunding the pension system, allowing the debt to grow again. Dallas hasn't fully funded the pension system since 2009, and shortchanged it by $14 million this year, according to the Dallas Morning News. Now, an immediate infusion of $600 million—equal to 20 cents of every dollar the city spends in its current budget—to fix the city's pension problem, members of the pension board told the city council in May.

Dallas isn't the first city to discover the hidden horror of POBs. It's another sequel in a long-running series, with the victims piling up.

Stockton, California, sold $125 million in POBs in 2007. Five years later, the city declared bankruptcy and claimed the decision to issue the bonds was partially responsible. Detroit issued $1.4 billion in POBs in 2005 to avoid increasing contributions to the pension fund or cutting employees' benefits. When the city declared bankruptcy in 2013, it also blamed the decision to sell pension bonds.

Even when they don't drive cities to bankruptcy, POBs can be bad news. Philadelphia used a $1.3 billion pension obligation bond sale in the 1990s to shore-up its municipal pension system. Soon after, the city relapsed on pension payments and ended up with a deficit that was as large as it had been before the bonds entered the equation. The city then was faced with the debt to pay on the bonds, in addition to the regular pension debt.

In theory, POBs can work if—and it's a big "if"—politicians suddenly discover fiscal responsibility and make all the necessary future payments to both the pension fund and the bonded debt.

In reality, POBs are fraught with political risk way because they make pension funds appear to be in better shape than they actually are. By papering over the underlying problems in the system—in Dallas, those problems included rules that allowed police and firefighters to collect pension benefits while they worked other jobs—all you've really done is shift the debt from the pension fund to the bonds.

A 2013 study from the Center for Retirement Research at Boston College concluded that it was hard to find examples where pension obligation bonds worked, because they are usually undertaken by governments in poor financial straits and unable to shoulder the investment risk.

Credit ratings agencies like Moody's—which recently downgraded Dallas because of all the debt in the city's pension systems—generally warn against using pension obligation bonds because of the high levels of financial and political risk that come with them.

Luckily, some policymakers are starting to get the message. In Alaska, Gov. Bill Walker called off a plan to sell $3.3 billion in pension obligation bonds this week, citing a lack of support from members of the state legislature.

Walker told Reuters that he still favored the POB idea, but that members of the Senate Finance Committee talked him out of it because they worried about the consequences of taking on more debt.

Another thing about good horror movie franchises: they never seem to run out of potential victims.

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  1. Why don’t the feds just print dollars and fill the pension with cash? Government debt isn’t like regular debt.

    1. I read one of the most horrid articles this week from “The Street” (Website founded by Jim Cramer) in which they were trying to claim their is no such thing as a “national debt”. It’s all a made-up fallacy (to what end I do not know, as I couldn’t make it all the way through the article). I am quite sure Paul Krugman loved it, though.

      1. Here is the article:

        http://realmoney.thestreet.com…..esnt-exist

        1. Yep, that one’s been making the rounds.

          It’s one of those arguments that takes a nugget of truth: we owe the debt to ourselves– while ignoring or downplaying the implications of what that actually means in practice.

          1. We don’t owe the debt. The government owes the debt.

            1. The government is the thing we go in debt with together.

              1. I’m making over $12k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do… http://www.Trends88.Com

            2. In a government which taxes its citizens to pay its debts (and obligations or bills in general), the reality is that in fiscal matters we *are* the government. It all comes out of our pockets.

    2. One of the tendrils that snapped between me and the Republicans was a smarmy dumbass waxing poetic about “debt you never have to pay back!” It was roughly the same time another Republican smirked his was through and explanation that the revolutionaries in the 1770’s REALLY didn’t have anything to revolt over. Toss in the average treatment of a Paul (Ron or Rand) the last decade and another anecdote about a fiscal conservative politician actually standing to descry the endless upping of unemployment benefits (to about two years from six months) and was hissed down BY REPUBLICANS. People are SO economically ignorant (and grown to be so) that it’s depressing how many people can’t grasp that there is no basis for freedom without economic freedom. And, no, not it the “I should get anything I want from the government” brand of economic “freedom”. Just the idea that you create a bunch of unfunded promises (promises people use in calculating their every day behaviors for decades) backed by liens that added up TEN YEAR AGO to about $450,000 per household, probably closer to $550,000+ today, can’t in ANY WAY be seen as anything other than a form of collectivism. And a deep form at that. But people operate under some illusion that “we’ve had tough times before and we always make through” but fail to see the crushed bodies underneath the Welfare/Warfare machine.

    3. Printing money is the same as taxing institutions who hold cash or debt, and they don’t want to get taxed and have the political power to prevent it. In addition, it would make issuing more debt really hard

  2. CA, IL, NJ, OR, and PA issue the most POBs by far. Fuck em.

    1. Great, I escape CA and land in PA.

    2. This is part of the end. Cities borrowing on borrowed money try to stave off bankruptcy. Detroit just happen to collapse by itself but has not recovered. When more of these liberal cities collapse at the same time, it will take all of us to demand that the fed not step in and bail the cities out. Let the market reset their horrible fiscal policy.

      Let the people of these take their own politicians to stockades and publicly humiliate them. Hopefully, these people will slowly become more and more Libertarian or at least fiscally conservative.

  3. Oh, sweet Mama, your Daddy’s got them Deep Elem Blues.

    1. Don’t you let that deal go down

      1. Beat it on down the line.

  4. My Deep Ellum “Cool story, Bro” story:

    I sat behind Thomas Haden Church at Sol’s Taco Lounge, Circa 1993-1994. And I mean, right behind him, as the booths had those dual-sided bench seats, with no partitions.

    I think he heard me tell my friend who he was- “You know..Lowell, from Wings!”

    Has fuck-all to do with city pensions, but whatevs.

  5. The new mayor of Houston is proposing doing this right now with $1b of new public bonds.

    In 2003, the TX legislature passed a law exempting municipal pension bonds from the typical voter approval requirement. So this huge new debt can be added with only the approval of the city council.

    1. I miss Sols…it survived for a while, but folded right before deep ellums current resurgence.

  6. RE: Nightmare In Deep Ellum: How Pension Obligation Bonds Ruined Dallas Employees’ Retirement Dreams
    Dallas’ pension crisis is another example of why cities and states shouldn’t use pension obligation bonds.

    Why don’t the Dallas city employees get their own 401k and not use taxpayer’s money for a pension?
    Oh, wait.
    That makes sense.
    My bad.

    1. better watch that kind of talk…

  7. What do you guys think is more secure: a 401(k), or a state pension plan?

    I had a debate with a friend of mine after I said that I wouldn’t want any kind of pension that depends on the fiscal responsibility of politicians. He countered that a 401(k) can vanish just as easily if the market takes a bad turn.

    What do you guys think?

    (I know I’ve asked this before, but different people are on at different times of day, and I want some more opinions)

    1. I’d say the 401k is less risky in the sense that you get to direct the investments, so you have a (limited) ability to manage the risk of market down turns.

      Your friend is likely guilty of a black swan fallacy: we haven’t really seen a government pension just disappear . . . yet.

      Both can be “taken” in a very subtle way: inflation. Though some government pensions do include inflation indexing, to a point.

      A 401k could be taken in a more subtle way: there have been proposals to mandate participation and restrict investment options to government securities. Basically compulsory loans to the Treasury. There is a European country that has already implemented this, though I don’t recall which one.

      I suppose I’d conclude that small failures are more likely in a 401k while catastrophic failures are more likely in a government pension.

      1. I agree with your concluding paragraph. And would add that a pension has a higher probability of paying out what you expect to get.

    2. You can put your 401k in gold if you think other investments are too risky. Any sane person strikes a balance

    3. I agree with above. 401K is less risky. You can move your money into money market etc. You might not get a growth on that money but it won’t disappear. A state pension could be cut if the state is bankrupt.

    4. A 401(k) or other self-funded and managed account is more secure for both the individual and society. No pension system is secure. It shouldn’t be this way but companies, unions, and governments that offer pensions do not have the political will power to make the needed changes to make them sustainable over time. A 401(k) is transferable and actually belongs to the individual. In a pension, you don’t own anything, just like social security, and what you have earned or are entitled to can change based on the liquidity of the pension system.

      It’s funny that you never hear the argument of sustainability and the possible “vanishing” of funds with UGMA’s and UTMA’s (Unified Gifts/Transfers to Minors Act). That should tell you a few things.

      Let’s be honest, lots of people don’t want to manage their retirement accounts and look for something that is advertised as secure like pensions and social security. Most people are not taught how to manage money and investing so it’s terrifying to them to risk their future on their non-existant money management skills. I’m not making an excuse for them, I’m just being realistic about the mindset.

    5. “By papering over the underlying problems in the system?in Dallas, those problems included rules that allowed police and firefighters to collect pension benefits while they worked other jobs?all you’ve really done is shift the debt from the pension fund to the bonds.” – How is this a problem for a pension system? If I have worked long enough to collect a pension benefit then it shouldn’t matter that I continue to work somewhere else, not at the pension granting organization. This is only an excuse for a failing system, like social security, looking to scapegoat its failings.

      When I become eligible to draw from my 401(k) the only thing limiting if I continue to work is my desired lifestyle and the amount I’ve grown my account.

  8. If the market takes such a turn that our 401k accounts vanish, the whole municipal pension system is screwed. I am not very familiar with municipal pension systems, but we are hearing about these fuck ups while the market has been experiencing excellent growth. Of course when you have been given a defined-benefits plan, what do you care. Someone else will pay for the fuck ups.

    1. Of course, this should have been posted under Akira’s post.

  9. These bonds are easy “fixes” for legislators, since the average voter doesn’t understand the implications. A few years ago there was an initiative up for vote in California for education spending. One of the backers argued that it wouldn’t affect taxes because the money would be raised by issuing bonds.

    1. Actually, since POBs show up as debt while pension obligations don’t, I’m not sure they are a bad thing: at least they make the problem of pension obligations visible.

      1. POBs are like taking out a loan to pay off your maxed-out credit card.
        If you then cut up the credit card and concentrate on paying down the loan, it works fine.
        But cities never, ever cut up the credit card. Pretty soon it’s maxed out again, and now the loan payments are also due.

        at least they make the problem of pension obligations visible
        Nope. The response is never, “OMG! Look at the debt!” It’s always, “See, we fixed it. We can keep on doing what we’ve been doing.”

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  11. Basic principle: hide debt.

    Why do we think the federal Treasury is immune from bankruptcy for the same reasons?

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