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Keyword: pension obligation bonds

Baltimore County Sealby Keith Dorsey
Baltimore County, Director of Budget and Finance

by William Cobbs
Public Resources Advisory Group, Chairman

In the wake of the financial crisis of the past few years, many public pension systems have been advised to reduce risk and volatility in their investment portfolios. Reducing risk and volatility, coupled with forecasts of a weak economic outlook for the foreseeable future, would typically result in a reduction in investment return assumptions. Baltimore County reached agreement with its collective bargaining groups on pension benefits and adopted legislation in 2007 grandfathering members who were hired prior to 2007, but not permitting those hired post 2007 to participate in the prior system. As a result of effectively creating two separate retirement systems, the time horizon for investing for the closed plan will decline through the next several decades.

For all the foregoing reasons and based upon information provided by the pension consultant, New England Pension Consultants, and actuarial consultant, Buck Consultants, Baltimore County recently lowered the interest rate assumption used to determine its Employees’ Retirement System (ERS) liabilities from 7.875% to 7.25%. For perspective, the 10-year average return on the County’s pension fund as of July 31, 2012 was 7.4%. Buck Consultants calculated the amount needed to fully fund the increase in the liabilities due to the reduction of the interest rate assumption for the closed plan to be $255 million.

In order to fully fund this entire obligation and maintain this more conservative approach to pension funding, the Baltimore County Executive will ask the County Council to approve the issuance of Pension Obligation Bonds (“POBs”). POBs are taxable general obligation bonds of the County. The borrowed funds are deposited into the County’s pension system and invested along with other money already in the system. What makes this strategy appealing is that taxable borrowing costs are at historic lows. The County expects to borrow funds at approximately 4.25-4.5% and by using those monies to fund the pension system, Baltimore County will reduce its long-term (30 years) pension costs associated with the pre 2007 plan by $250 million. That is, the annual County contribution plus debt service on the POBs is expected to be less than what the annual County contribution would have been in the absence of the POBs.

Issuing pension obligation bonds, while expected to benefit the County, does entail taking investment risk. Over the long term, it is important that the County earn more than the cost of the funds it borrows. Thus, the performance of such a financial transaction for the County will depend on future investment returns. As long as the pension system investment returns exceed the cost (4.25-4.5%) of borrowed funds, the POBs will ensure employee benefits and save the County money. As cited above, the most recent ten year average earnings for Baltimore County effective July 31, 2012 was 7.4%.

In the opinion of the County’s financial advisor, Public Resources Advisory Group, based upon preliminary discussions with credit analysts, the POBs will not negatively impact the County’s Triple AAA bond ratings although there has been no formal confirmation from the rating agencies.

It is important to note that this proposed financing will have absolutely no impact upon the pension benefits currently available to pre-July 2007 employees, post-July 2007 employees or retirees. In accordance with the Baltimore County Code, the County is the guarantor of the ERS and this pension obligation bond issuance is intended to strengthen the system while providing taxpayers with the lowest possible cost to do so.


Revised April 6, 2016