Desperate to cover a $40 million shortfall in its pension fund for retired police officers and firefighters, the city of Richmond, Calif., turned to an exotic loan, the Center for Investigative Reporting explains.
Today, Richmond still owes more than $12 million on the bond, plus about $5 million in interest, and its pension fund remains roughly $12.5 million short. Some public officials and investment bankers have portrayed pension obligation bonds as a good way to shore up pension funds. Governments sell bonds to investors to plug shortfalls and reinvest in the hope of generating some profit for their pension funds. The proceeds can be invested in the stock market, reaping returns potentially higher than the bonds’ interest rate.
But that gamble is not panning out so far for at least five pension obligation bonds issued by California public agencies between 1999 and January, an analysis by The Center for Investigative Reporting has found.