Atlanta Public Schools is ready to bet money on the stock market to bolster the pension fund for many of its employees, one of the worst-funded pensions in Georgia.
It’s a risk that sometimes pays off but sometimes backfires, bringing in even more debt.
APS’ Pension Obligation Task Force wants the authority to sell up to $400 million in bonds, which could reduce its approximately $533 million unfunded liability, if the strategy pays off.
APS would borrow money at a low interest rate and invest it in stocks. If the rate of return on those investments is greater than the interest rate on the pension-obligation bonds, the pension fund makes money, and APS could have more room to pursue other initiatives. But, as critics say, if the market goes south, the bonds could add risk to an existing liability and sink APS deeper into debt.
The liability is 17.8 percent funded, which means APS has less than 18 cents for every dollar it needs to pay over time to retirees. The liability is for the General Employees’ Pension Plan (GEPP), a multi-employer plan that affects 15 percent of APS employees, mostly bus drivers and cafeteria workers.
States such as California and Oregon use pension obligation bonds regularly, but with mixed results. San Bernardino, Calif., went bankrupt when pension bonds created too much debt, and Oregon has suffered losses.
The task force is expected to present its recommendation to the school board in May, according to task force chairman Jason Esteves. If the board approves, it still could not issue the bonds unless voters approve in a referendum later this year.
“We won’t” issue the bonds “if it’s not at the right time,” Esteves said, referring to market conditions. “All we’re asking is for voters to give us the authority to do it.”
About $50 million, or 7 percent, of APS’ budget will go toward contributions for the unfunded liability each year, and because most GEPP participants are retirees, changing benefits is out of the question, Esteves said. So, the bonds could help reduce the amount APS contributes to the liability, freeing up some cash for other priorities.
“I have confidence that we will be able to manage any risks in the market to limit our risks,” Esteves said. “I think it’s going to help change the direction of the school system.”
New York University professor Thad Calabrese, who specializes in public and nonprofit financial management, is critical of such bonds. "There's no way that these are winners for governments," he said. "Even from a financial perspective, these are losers. The idea that you can use debt to finance debt — it's like paying off your mortgage with a credit card."
The timing, borrowing rate and amount issued will determine how much APS could save, but Segal Consulting, the actuary for the pension fund, expects a 25 percent chance that the bonds could save APS $100 million — and a 5 percent chance it could go wrong, according to board chairman Courtney English, an ex officio member of the pension task force.
Segal also estimated the annual savings from a $200 million pension obligation bond could range from $6 million to $21 million, and issuing a $400 million bond could provide savings from $8 million to $28.2 million. The projections are based on a 7.5 percent rate of return, but Calabrese said basing them on a lower rate would be safer.
APS is on track to fully cover its unfunded liability in 16 years, or by July 2031, through a plan adopted last year. The bonds would move that date much closer — if they work.
APS officials say they would pull out of the stock market if it dives. At the April board meeting, APS Superintendent Meria Carstarphen emphasized that if given the authority, APS would use the bonds very carefully. “We’re not Wall Street experts,” she said. “We need to do our business, hit our target and then get out.”
English said the proposed bonds would allow APS to keep its promises to retirees without raising taxes. “We’re not in this to make money,” he said. “We’re trying to find a solution to this 40-year problem right now.”
The unfunded pension liability has been a decades-long issue. In 1985, the pension was only 15 percent funded — not far from where it is today.
APS chief financial officer Nader Sohrab said the task force looked at several options, presented by various experts, and the pension obligation bonds were the best one.
“If I knew what the yields would be six months from today, none of us would be sitting at the table,” Sohrab said. “None of the experts that we’ve talked to have been able to tell us what the yield is. If the risk is at a good point, it’s one thing that should be considered.”
Calabrese also said that, while bonds of this type are risky, they could force governments that “behave badly” or have a severely unfunded liability to discipline themselves. That’s because, “If you have a bond outstanding, you can’t not pay the debt service. You can’t default,” he said.
But overall, Calabrese said pension-obligation bonds have a poor track record and “from what I can tell, don’t do what their proponents claim it does — almost universally,” he said. “Many times it makes it even worse. It looks like it will solve a problem, but it … prevents difficult choices that managers and elected people are asked to make.”
About the Author
