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A Nobel laureate’s video on Sonoma County’s pension problem

During his talk about pensions before county, city and labor leaders in Petaluma on Thursday, former Assemblyman Joe Nation showed a satirical video concerning the county’s pension obligation bonds. It involved a mock TV interview between a Larry King-type personality and someone representing Sonoma County. The subject was the county’s $400 million shortfall on pensions and its decision to issue bonds – pension obligation bonds – to deal with that debt.

It was difficult to hear the video that morning in the large hall at the Sheraton Sonoma County, but it clearly left a few county employees grumbling.

When county Administrator Veronica Ferguson got up to talk during the last session of the conference, she said she wished Nation had stuck around so she could talk to him about the video. (Nation left after his talk and Q&A session)

So who made this video? Nation had mentioned casually to me that day that it was put together by a Bill Sharpe. When I contacted Nation this week to get a link to the video, I asked for more background on the guy.

His answer: “Bill Sharpe is a Stanford Graduate School of Business professor emeritus. He won the Nobel Prize in Economics in 1990,” Nation wrote in an e-mail. “ A very ‘sharp’ guy who is obviously interested in the pension issue. We trade periodic emails on the state of public finance and pensions, in particular.”

Oh, that Bill Sharpe. I guess he has credibility.

- Paul Gullixson





15 Responses to “A Nobel laureate’s video on Sonoma County’s pension problem”

  1. Ricardo Sorentino says:

    RE: Tom Drumm – “We generally don’t give up completely on institutions that fail us once. If we did, there would be no Wall Street, Republican Party, or, for that matter, Democratic Party.”

    That must also explain why we don’t give up on our failed city, state and federal governments…

  2. Investor says:

    I know it is a complicated issue. Are any of you investing in these bonds? Have you done more that look at a list and see where they rate? I see an investment that pays a fixed rate with a long track record of exceeding the expected rate of return, which exceeds the cost of the bonds. Sounds like they will be making money of rthe fund and meeting their investor and pension obligations.

    Sure, the market could tank again, and depending on exposer, the pension fund could take another hit. That’s why it is called investing and not a savings account.

  3. In Rod We Trust says:

    @ Tom Drumm

    Maybe they aren’t wrong about everything….I just wonder if the rating agencies should decide to downgrade Sonoma County’s Credit Rating, will they be wrong then?

  4. Tom Drumm says:

    Point re: credit rating agencies taken. However, I don’t think their failure with respect to mortgage backed securities makes them wrong about everything; the reasoning layed out in the agencies statements does, for the most part, stand regardless of who presents it. I assume that they have been chastened by their mortgage-backed securities experience.

    We generally don’t give up completely on institutions that fail us once. If we did, there would be no Wall Street, Republican Party, or, for that matter, Democratic Party.

  5. In Rod We Trust says:

    @ Tom Drumm

    Didn’t the Credit Rating Agencies you just mentioned give AAA ratings to pools of mortgages that collapsed Bear Stearns, Lehman Bros, and AIG which then almost caused the entire global financial system to collapse?

  6. Tom Drumm says:

    Apparently the credit rating agencies have not gotten the word regarding the evil inherent in POB’s:

    B. Credit Ratings/Borrowing Capacity

    Because POBs replace existing pension obligations, they are not generally viewed as
    adding to the debt burden of the state or local government issuer (much like a
    conventional refunding).4 To quote the rating agencies:

    “Moody’s believes the issuance of pension obligation bonds (POBs) is one
    effective way of addressing an unfunded liability. Since POBs reduce the
    cost of funding an unfunded liability, their issuance is not by itself a credit
    weakness. However, the planning and analysis conducted by a local
    government as part of the decision to grant expanded benefits, the
    government’s plan for funding any unfunded pension liability, and its ability
    and willingness to budget appropriately for any attendant higher costs, are
    reflective of the quality of the government’s overall financial management.
    These factors, therefore, will be considered in our assessment of a
    government’s general credit quality.”

    “Standard & Poor’s factors the effects of a pension obligation bond strategy
    into the long-term rating of the sponsor. Standard & Poor’s has viewed
    POBs as a strategy for savings on carrying charges as long as the transaction
    was structured conservatively and the assumptions were reasonable and
    attainable. This requires a clear financing plan including reasonable
    assumptions and manageable leverage. Prudent expectations for investment
    returns and the cautious use of resultant savings help insure a POB’s success.
    Another positive factor for a POB is, of course, to be fortunate enough to
    sell the bonds in a low interest rate environment, thereby increasing the
    spread between interest costs and investment return expectations and
    lowering the risk of underperformance.”

    “Fitch believes that POBs, if used moderately and in conjunction with a
    prudent approach to investing the proceeds and other pension assets, can be
    a useful tool in asset-liability management. However, a failure to follow
    balanced and prudent investment practices with respect to POB proceeds
    could expose the sponsor to market losses.
    Because a sponsor’s unfunded pension liability is already factored into the
    rating, the issuance of POBs simply moves the obligation from one part of
    the balance sheet to another. However, Fitch notes that POBs create a true
    debt, one which must be paid on time and in full, rather than a softer
    pension liability that can be deferred or rescheduled from time to time
    during periods of fiscal stress. Consequently, POBs can have a significant
    effect on financial flexibility over time.”

    The actual ratings on the POBs will depend primarily on legal structure. General
    obligation bonds and annual appropriation POBs should be rated the same as the
    issuer’s other general obligation or annual appropriation debt. Obligations imposed by
    law POBs are generally rated in between: a notch below the issuer’s general obligation
    bond rating and a notch above its lease or other annual appropriation debt.

  7. Juvenal says:

    Tune in next week when Joey and the Professor take on 30 year fixed mortgages…!

  8. Tom Drumm says:

    Satirical? Sir, I have read Jonathan Swift and you are no Jonathan Swift…

  9. Gary Cline says:

    Pension Obligation Bonds (POBs) are a problem. Government should not be in the business of borrowing at a low interest rate and investing in the stock market in the hopes of getting a better return. Any costs savings is simply an opinion that you think you’ll get better returns. Bill Sharpe’s video says there’s a risk you won’t. He’s right.

    The practice of “booking” an estimate of the “gain” is poor financial planning. It’s a paper profit made by fancy balance sheet foot work.

    Why does the Press Democrat make a point of highlighting that Bill Sharpe has credibility? Did someone say Bill doesn’t have credibility?

    No. They said Joe Nation doesn’t have credibility.

    Pension plans are a useful and needed benefit. They are not a Ponzi scheme, which is what Joe Nation said and why he loses credibility. I think the Press Democrat confuses who the public views as having zero credibility.

    For a history of POBs, see http://www.orrick.com/practices/public_finance/pension.asp
    Interesting how Sonoma County “led the way” with the resurgence of POBs.

  10. NOTUTOO says:

    Read this post in a computer generated voice…

    Really? That video was created by a Bill Sharpe, a Nobel Prise winner and distributed by a ex-assemblyman Joe Nation? Are you sure it wasn’t a school project made by Billy Sharpe, a Junior High school student? I thought there was a pension problem in Sonoma County. Either there isn’t a problem or the creators of that ridiculous video are so arrogant and place themselves on a level so superior to the rest of us that they thought only a crudely made 1.22 minute long video is all that we could grasp.

  11. some ideas says:

    Rod Dole should be honored to be satired by a Nobel Laureate of Economics. Prof. Sharpe received his PHD 50 years ago in 1961; his expertise is in risk, and no doubt he agrees with many that Rod’s $300,000,000 in new bonds on top of the $300,000,000 issued is very poor public policy.

  12. Ray M. says:

    President Obama has a Nobel Prize. Being a Nobel laureate is not a measure of intelligence.

  13. In Rod We Trust says:

    Last year Rod Dole was able to convince the Board of Supervises to issue what may have been the largest bond in Sonoma County history of $290 million. Before he retires, can he let us taxpayers know when the County will need to issue more pension obligation bonds?

  14. sonoma says:

    Shortfall. IT is temporary and the pension fund does quite well without involvement from bonds. I know as I am due to receive one. The temp setback few years ago and now is due to market fluctuations, and noted. The board has some of the best money managers going. Better than the state and other counties. Leave it alone.