NEW YORK (AP) It sounds like a quick fix for underfunded pension plans: Raise cash by selling bonds and plow that money back into the plans to cover the shortfall.
But that only solves part of the problem. Now they have to decide how to invest this new money and make enough off it to not only generate ample returns for the plans themselves, but also to cover the interest and principal associated with the bonds.
Any bad investments could be a double whammy.
''You don't want to invest in the market and lose your shirt, when you still have a lot to pay back,'' said Chris Struve, a credit analyst at Fitch Ratings in Chicago.
Corporate and public pension funds have fallen on tough times in recent years. Low interest rates and stock-market declines have left many plans underfunded, with obligations exceeding assets.
To get back to required funding levels, the plans are turning to debt offerings for an infusion of cash that can be directed right into pensions.
Among the most noteworthy in recent months have been a $13 billion bond sale by General Motors and a $10 billion deal by the state of Illinois. A handful of counties in California have also participated in similar, yet smaller offerings.
With that money in hand, the challenge is figuring out how to carefully divide it up among investments to have better chances of locking in solid returns.
One thing is for sure: No one wants to see previous mistakes made again. Too many pension funds overinvested in risky stocks during the market boom and lost big when it went bust.
''You have to make a choice in your investments. Do you think the future looks like the last three years or the last 20 years?'' Struve said.
Worries over that, in fact, have been the behind some recent rumblings in Illinois between the state's pension funds and the governor's budget director, who has been pressing for proceeds from the bond sale to be invested more conservatively than the current pension assets.
Under the terms of the deal, Illinois has to pay off the bonds over the next three decades at an annual average interest rate of just over 5 percent. That requires the pension assets to return at least that much to cover the costs of the deal.
Over the last 20 years, the funds have earned an average of more than 9 percent.
''The primary risk is that you do not achieve a high enough investment return to cover the POB (pension obligation bond) debt service cost or the actuarial investment return assumption,'' said Parry Young, a credit analyst at Standard & Poor's.
The not-so-distant past shows what can happen when you bet wrong.
In 1997, New Jersey borrowed $2.8 billion against its pension funds, at an interest rate of about 7.6 percent on a 30-year loan.
During the booming stock market in the late 1990s, the funds performed well. But they have lost more than $20 billion in value since the economy and Wall Street started to decline in 2000. In recent years, they have earned on average about 5.5 percent.
Payments to retirees have not been threatened by the investment drain, but the losses may mean taxpayers will be called upon to help meet reserve requirements. In an attempt to recoup some of its losses, New Jersey is now suing some companies that its pension funds invested in, claiming fraud, mismanagement or other wrongdoing caused stocks to lose value.
GM, meanwhile, will eschew a more conservative approach to its bond money in favor of the same stock-heavy investment mix used for the rest of its pension assets about 30 percent in U.S. stocks, 20 percent in foreign stocks, 35 percent in bonds and the remaining 15 percent in other investments like real estate.
The automaker's average return in recent years has been 9 percent. That's above the interest rate of about 7.5 percent on its recent bond deal.
''You don't want to start making radical changes to your asset allocation because of a few bad years in the stock market,'' said GM spokesman Jerry Dubrowski.
Only time will tell whether that's a smart move. It can't afford not to be, though.
Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org
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