POBs = Wall Street Deceptions

Dear Legislators,

Wall Street specializes in fancy names for old fashioned financial schemes. Eg, as the Archegos scandal demonstrated, “Total Return Swaps” are nothing more than a way to exceed margin limits. In the government world, the most misleading phrase is “Pension Obligation Bond,” which has nothing to do with pension obligations. Here’s how they work:

When governments make pension promises, they are supposed to deposit enough money into pension funds so that, with investment earnings on those deposits, there will be enough money in the funds to satisfy the obligations when they fall due. But governments usually don’t set aside enough money, which creates a deficit that shows up on balance sheets as an “unfunded liability,” an accounting term representing the difference between pension obligations and pension assets. Along comes Wall Street bearing a poisonous gift in the form of a loan — an additional obligation — the proceeds of which would be deposited into the pension fund, thereby boosting pension fund assets, which in turn reduces the “unfunded liability.” It’s a lie to call such a product a “Pension Obligation Bond.” No pension obligation is touched, much less erased. Economically all that happens is an increase in debt, the proceeds of which are gambled on stock markets, and big fees for Wall Street.

Accounting can drive dangerous activity in both the private sector (eg, AIG’s “Credit Default Swaps” played a big role in the mortgage meltdown of 2008) and the public sector, especially public pension accounting. Governments should just say no to POB loans masquerading as reductions in pension obligations.