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The present reality of the situation is that the ability of other, larger sovereigns to roll over maturing debt on their own is increasingly in doubt, and in any event, will involve very high, economically penalizing, interest rates. Under these circumstances, one or more sovereigns may be unable to issue new debt to redeem old debt at par value in the future. If this happens, and the Rescue Fund does not provide taxpayer funds to meet the maturity at full value, the sovereign will be forced into default – that is, it will be forced to restructure with a unilateral offer of new debt for old | iBmtfW Evaluating the Use of Pension Obligation Bonds By James B. Burnham Facing a 5 billion budget deficit for fiscal year 2004 the State of Illinois recently turned to its five retirement systems for savings in its operating budget. The plan borrow money to refinance a portion of the state s 36 billion unfunded pension liability and use a chunk of the proceeds to cover operating budget contributions to the pension systems thus freeing up nearly 2 billion to offset budget deficits. As attractive as this plan may appear from a budgetary perspective the issuance of pension bonds generally carries significant risks that are often downplayed in light of immediate fiscal pressures and the concerns of pensioners. Using two pension bond issues by a previous adopter of this strategy this article evaluates the conditions under which pension bond issuance may or may not be appropriate. THE FACTS The challenge of conscientiously managing pension fund obligations and their funding has never been an easy one. This is especially true after three years of declining stock markets in which the Standard Poor s 500 has lost roughly 40 percent of its value. This decline in the value of equities has had a major impact on pension fund performance. As the recent bankruptcies of several major airlines and steel companies dramatically illustrate past promises to retirees play important roles in a fiscal crisis. Exhibit I Pension Bond Issuance 1990 - 2002 ly to be available to meet those promises. One device to help close this gap which has gained increasing popularity over the past decade is the taxable pension bond. Since 1990 state and local governments have raised more than 18 billion through pension bonds see Exhibit 1 . In 2002 some 20 borrowers issued roughly 2.6 billion with issue size ranging from 2 million to 775 million. When permitted by state legislation the pension bond is generally issued by the plan sponsor or pension system entity and is backed by tax revenues. Proceeds .
