A spokesperson for Stifel, which has managed the most such deals in 2021 -- 27 of the 74 sold -- said the firm didn’t have a comment.
Timing Challenge
The catch with pension bonds is two-fold. First, they don’t offer a permanent fix to the fiscal strains that pushed municipalities to sell them, says Michael Rinaldi, a Fitch Ratings analyst. The second is the issue of market timing.
Timing worked against Stockton, California, which sold pension debt in 2007 and filed for bankruptcy in 2012. The 2008 crisis drove investment returns below assumptions and the bursting of the housing bubble slashed revenue collections.
One reason for confidence now is that Treasury yields remain low by historical standards, with 30-year rates hovering below 2%. The yield will probably be closer to 2.6% a year from now, according to the median forecast in a Bloomberg survey.
In August, Kansas sold about $500 million of pension bonds, its first such issuance since 2015, “to take advantage of the attractive interest rates in the bond market right now,” Adam Proffitt, the state’s budget director, said in an email. Proceeds will go into the public pension system to pay down a portion of its unfunded actuarial liability and accelerate payments, he said.
Dozens of smaller governments have jumped in as well.
Localities are addressing “unsustainable” costs and unfunded liabilities that are threatening the ability to serve residents, said Kevin Phelps, city manager for Glendale, Arizona, which issued about $253 million in pension bonds in June. The city pays around $50,000 a year per firefighter and per police officer into the retirement system, close to the median household income in the community, he said.
The sale of almost $54 million in pension debt in recent days by Naugatuck, Connecticut, will go toward financing unfunded retirement obligations for borough employees and firefighters. The borough ended its defined-benefit pension plan in 2012 and shifted to a 401(k) plan for new employees to ease pressure on its budget long-term.
“We can definitely see the end,” said Mayor Pete Hess.
This article was provided by Bloomberg News.