The Corner

Politics & Policy

Today in ‘What Could Possibly Go Wrong?’

Goodness gracious. From the New York Times:

The City of Tucson, Ariz., decided last year to pay rent on five golf courses and a zoo — to itself. In California, West Covina agreed to pay rent on its own streets. And in Flagstaff, Ariz., a new lease agreement covers libraries, fire stations and even City Hall.

They are risky financial arrangements born of desperation, adopted to fulfill ballooning pension payments that the cities can no longer afford. Starved of cash by the pandemic, cities are essentially using their own property as collateral of sorts to raise money to pay for their workers’ pensions.

It works like this: The city creates a dummy corporation to hold assets and then rents them. The corporation then issues bonds and sends the proceeds back to the city, which sends the cash to its pension fund to cover its shortfall. These bonds attract investors — who are desperate for yield in a world of near-zero interest rates — by offering a rate of return that’s slightly higher than similar financial assets. In turn, the pension fund invests the money raised by those bonds in other assets that are expected to generate a higher return over time.

This is the municipal-government version of that jackass who took out a big bank loan to buy GameStop shares that tanked: borrowing money to purchase assets in the blind hope that your returns will exceed your borrowing costs. Given public-pension managers’ long history of making astoundingly optimistic — dishonestly optimistic — estimates of returns, we must be less than entirely confident in their ability to execute this scheme.

There are two good alternatives to these kinds of shenanigans: (1) fund pensions responsibly; (2) cut pensions benefits down to what you are willing to fund. In the long run, those are the only real choices — everything else is a sham.

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