Why does the GFOA not recommend issuing Pension Obligation Bonds (POBs)?

The Government Finance Officers Association (GFOA) does not recommend issuing Pension Obligation Bonds (POBs) primarily because the risks associated with these bonds are too high. POBs are used by municipalities to fund their pension liabilities, allowing them to effectively borrow money to invest in the pension fund with the hope that the returns on the investments will exceed the costs of the debt incurred. However, this strategy can introduce significant financial risks.

When a locality issues POBs, it is essentially betting on favorable market conditions to generate returns that exceed the interest payments on the bonds. If the investments do not perform as expected—whether due to market downturns or poor investment management—the municipality is left with both the debt obligation and potentially underfunded pension liabilities. This dual burden can strain the financial health of the entity and create long-term fiscal challenges.

Additionally, the complexity of managing pension funds and the unpredictability of investment performance means there is considerable risk involved. The GFOA emphasizes the importance of careful planning and analysis in public finance decision-making, aligning practices with both current financial realities and long-term sustainability. This cautious approach contributes to their stance against the frequent use of POBs in funding pension liabilities.