Red Flags Raised Again Over Milwaukee County Pension Obligation Bonds
Michael Horne at Milwaukeeworld.com, as usual, does some great writing and asks some tough questions about the Milwaukee County’s foray in to the world of pension obligation bonds.
What are pension obligation bonds? Basically it works like this: You realize you don’t have enough money in your bank account to cover this month’s $1,500 mortgage payment. You only have $1,200 right now. So you take your $1,200 to the casino and spin the one armed bandit a few times with the hopes that you can win the $300 you don’t have to cover the cost of this month’s mortgage.
But instead of $1,500, mortgage payments, and casinos we’re talking about $400,000,000, people life savings, and the stock market. Doesn’t sound like such a great idea, does it? I voiced my initial opposition to this risky plan over a year ago, and nothing has happened since to make me believe that they’re any less of a risk than they were at that time.
Horne also asks why there has been an $86 million withdrawal from the accounts the money is invested in, but can’t find any good answers.
The way you have presented it in this and the previous post, it definitely doesn’t make any sense to do. It is irresponsible and could end up putting an undue burden on the federal government to come in and save the day, either directly via a bailout of sorts or indirectly via increased entitlement / safety net spending. If this money was truly the last resort for its pensioners, I doubt they would be considering such risks.
Your analogy is a little bit out of whack. Let me take another stab at it.
You owe $1,500 on your mortgage this month. You have $500 dollars. The bank offers to give you $4,000, at a 6.25% interest rate. Instead of simply putting the money towards your payment, and keeping the rest for next month, you decide to invest it. You hope to earn more than 6.25%, say 8%, and use the profit to pay your mortgage.
Isn’t that basically what he said? All you are doing is magnifying your downside risk. It is a foolish move, especially since it’s not their money to invest.
Sort of, they have more than enough right now is the point. You’re overborrowing so that you can get what you need from the interest.
Jaramey, it is nonsense. Let’s use your example. If your investment lost only 12.5% of its value, you would be completely wiped out. If it lost any more, you would be bankrupt.
Right. In your example, it’s no different than paying off you visa bill with your mastercard. You’re borrowing to pay off money you borrowed.
Thank you for bringing attention to this matter. The county’s silence is troubling. I hope this subject gets wider attention.
Horne