The Wolf At San Jose’s Door

There’s a wolf knocking on San Jose’s door.

San Jose has $9.6 billion of un-prepayable pension obligations that require payments every year. To help fund those payments, the city uses investment earnings from $6.1 billion of stocks and other investments held in a pension fund. Because pension obligations exceed pension assets by $3.5 billion, the city also has to dip into its budget to make the payments, which crowds out funding for citizen services.

Along comes a wolf from Wall Street bearing an old fashioned idea — borrow $300 million to speculate on stocks — dressed up as a sheep called a “Pension Obligation Bond” that actually has nothing to do with pension obligations. All that would happen is just an accounting change. By depositing the $300 million into its pension fund, San Jose would boost pension assets to $6.4 billion, which would allow the city to report on its financial statements that it had reduced the difference between pension assets and pension obligations to $3.2 billion. Meanwhile, on a different part of the balance sheet there would be a new $300 million debt obligation.

The wolf would collect fees from issuing the debt. San Jose could come out ahead if the costs of the borrowing plus the fees end up less than the return from investing the $300 million. But then again, Archegos Capital also could’ve come out ahead if its investments had yielded more than the cost of the debt it used to buy those investments.

San Jose should just say no to the wolf.