Lies And Leverage In La Habra

Last night the La Habra City Council was scheduled to approve the issuance of debt the proceeds of which would be deposited in the city’s pension fund. But that’s not what they disclosed. Instead, they said the city was seeking approval “to exchange higher cost variable rate debt with lower cost fixed rate debt.” But no such exchange is taking place. Even the name of the instrument — “pension obligation bond” — is a lie, as explained in POB = Wall Street Snake Oil. Worse, La Habra plans to invest the proceeds into a pension fund managed by CalPERS, which itself is adding debt leverage to a portfolio that’s boosting its allocation to private equity that uses additional debt leverage to acquire businesses that employ their own debt leverage.

I cringed recently when an elected official asserted the federal government would never allow the stock market to decline now that people have come to rely on their stock portfolios as checking accounts. As their city council leverages up to speculate on stocks, La Habra residents should be cringing too.

PS: We’ve heard from some lawmakers about the US Department of Labor’s denial of transit funds to California on the grounds that public pension reforms were imposed by law rather than collectively bargained. We applaud Governor Newsom for pushing back and with irony would point out that another change to pensions in CA that was imposed by law yet not objected to by DOL was SB 400 in 1999, which increased pension benefits and retroactively at that. Sauce for the goose?