Over 40 states have underfunded pensions for government employees. Instead of setting up reasonable obligations or switching to employee contribution funds like most companies, politicians look for the easy solution first and so they’ve started to fall for financial gimmicks. For readers that do not watch government finances, whenever Wall Street “comes to the rescue” to a government entity, it always ends in a larger and faster bankruptcy with taxpayers owing a lot more money. The latest Wall Street “solution” to underfunded government pensions is called Pension Bonds, and is sold as a “free fix without raising taxes.”
The pension bond method consists of raising money with bonds, say $1-to-10 billion, and placing that money into the pension to reduce its underfunded level. Then, the pension fund will “magically” earn so much more than any investment fund ever has. This new pension money will routinely earn unrealistic profits to not only make the bond payments, but make additional payments to reduce the underfunded amount of the pension. “Everybody wins” is the argument being pitched by the people selling this high-risk and unlikely arbitrage.
Pension bond programs are so likely to fail that the Government Finance Officers Association issued an advisory report warning against pension obligation bonds with 5 grave reasons; https://www.gfoa.org/pension-obligation-bonds But you cannot stop politicians from employing reckless ideas that leave everyone poorer. Local governments (like Houston and Muskegon) have already issued pension bonds. A couple states have jumped in while several are attempting to pass legislation to do it, such as Alaska, Illinois, California, Michigan, and Kansas.
What happens when the unrealistic investment returns do not materialize? Hence the term ‘pension bombs.’ The pension defaults on the bonds and the pension’s financial position becomes worse than if they hadn’t rolled the dice on this program. (This is what exacerbated Detroit’s financial position when a complicated Wall Street debt product went against them in 2009; it became a huge additional debt that helped force the city into bankruptcy in 2014). Per usual, the taxpayers end up with higher taxes to fund the mistakes of the politicians and their Wall Street buddies with their latest high-risk gimmick.