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My story from Wednesday on pension obligation bonds examined whether the investment return on the borrowed money exceeds the interest rate a government pays on the bonds.

That’s a major argument for the bonds, but it’s not the only one, as April Boling e-mailed me later to reiterate:

Boling, the former chairwoman of San Diego’s Pension Reform Committee, referred to recent talk about stretching out San Diego’s pension payment schedule, including from her former campaign opponent, Councilwoman Marti Emerald.

Boling said pension bonds can be good because they lock in a required payment by partially replacing the annual pension payments, which are often viewed as a “soft” debt. Pension bonds are considered a “hard” debt because the city must make the debt service payments.

Boling wrote:

Once you have sold POBs, you must make the payment. No more games. And proper POBs will have principal payments right from the get-go. No negative amortization — they work more like a standard mortgage … you pay all of the interest and some towards the principal.

So if you have a Council with no self-control, POBs (if the interest rate is good) force the issue.

And the argument against pension bonds isn’t limited to the risk that the investment rate won’t outstrip interest rates. Some of that reasoning is covered my first article on the subject. TaxpayersAdvocate.org President Scott Barnett made another interesting point when I interviewed him for this story.

Barnett isn’t necessarily against pension bonds. But he noted that the bonds limit a government’s ability to borrow for other long-term needs, namely infrastructure improvements. When weighing pension bonds, San Diego city officials shouldn’t forget the severe infrastructure backlog, Barnett said.

“It’s as much of a ticking time bomb as the pension situation,” he said.

RANI GUPTA

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