Pension Obligation Bond (POB)
A bond issued by a city to make a lump-sum payment into its underfunded pension system, betting that investment returns will exceed the bond's interest rate.
How It Works
POBs are one of the most controversial tools in municipal finance. The strategy works if pension fund investments earn more than the bond's interest rate — but if investments underperform, the city has added new debt without solving the pension problem. Many financial advisors and the GFOA recommend against POBs. Several cities that issued POBs before 2008 saw disastrous results when the financial crisis cratered pension fund investments while the bond debt remained.
Related Terms
- Unfunded Liability — The difference between a pension plan's projected liabilities (what it owes to current and future retirees) and its current assets. Also called the unfunded actuarial accrued liability (UAAL).
- Funded Ratio — The percentage of a pension plan's projected liabilities that are covered by current assets. A plan with $80 in assets for every $100 in liabilities has an 80% funded ratio.
- Municipal Bond — A debt security issued by a city, county, state, or other government entity to finance capital expenditures. Interest income is generally exempt from federal income tax.
About This Definition
This definition is part of the CitySpend Municipal Finance Glossary — 59 terms explaining how city governments fund and manage public services. All definitions are written in plain language for taxpayers, journalists, students, and municipal bond investors.