A third of $125 million in pension bonds disappeared when the stock market crashed in 2008

[NNN0LHI]

What do they mean when they say it disappeared? It went somewhere didn't it? Where did it go? Anyone know?

http://www.recordnet.com/apps/pbcs.dll/article?AID=/20120402/A_NEWS/204020317/-1/NEWSMAP

State's pension system elephant in room

By Staff and wire reports

April 02, 2012 12:00 AM

Struggling to pay employee pensions, local governments are increasingly borrowing money to cover their obligations - exploiting a loophole in federal law that allows them to issue taxable bonds without seeking voter approval.

Stockton is California's latest municipal poster child for the problems associated with issuing pension bonds.

The city issued $125 million in pension bonds in 2007, a third of which promptly disappeared when the stock market crashed in 2008. But Stockton is still on the hook for the annual interest payments, about $6 million.

In late February, City Hall announced it was moving toward mediation - if not bankruptcy itself - after determining it was unable to make the payments on these and other bonds.

[banned from Kos]

1. they probably mean the VALUE of the bonds

That is what a depression does - depresses the value of everything, homes, equities, commodities, bonds, wages and so on.

[FreeJoe]

2. It dropped in value

When you own something, be it a house, a share of stock, a bond, or an ounce of gold, it has two values. It has the value of its use and the value determined by what other people will pay you for it. Let's take the example of a house. You buy a house for $100,000. You get to live in the house. It provides that value to you. You can also sell the house. The selling price is determined by what others are willing to pay. If the housing market goes down, they might only be willing to pay $80,000. In that case, you lost $20,000 in the market value of your house.

When pensions own stock, that stock has two values. On one hand, the stock entitles the pension fund to a share of the company. They get a share of the profits in the form of dividends. On the other hand, the stock is worth what other people are willing to pay for it. If people are less willing to buy stocks, as happened in 2008, the value of their stock went down. That's where the money went.

[EC]

3. I know the school board here bought

into those poison mortgages and lost everything...they did sue and get a pay off, but I'm sure that's how many lost funds.

[mathematic]

4. It's a poorly written article

Issuing bonds means borrowing money. Stockton is "still on the hook" because they haven't paid back the money they borrowed. The interest rate they borrowed at appears to be about 4.8%.

If Stockton borrowed this money to invest in the stock market then the "disappeared" might refer to the value of the funds decreasing. The stock market has recovered since then so I don't know how that would be a problem now. Besides, the strategy of borrowing low and investing high (i.e. issuing 4.8% bonds and investing the funds in the stock market) is a long term strategy. If Stockton needed that money to pay the bills over the last few years then they should not have invested it in the stock market.

At the very least Stockton's bond issuance should be profitable. Here's why: they sold the bonds at a high price (when they had a good credit rating) and they can buy back the bonds right now at a low price (since their credit rating is in the dumps). The fact that they have no money to do this doesn't diminish the positive value they gained from the bond issuance. It just means they have a serious revenue or spending problem.

To summarize:
-They were smart to borrow money
-They were stupid to spend money
-Their lenders (i.e. the bondholders) were stupid to loan money