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This ‘Insanity’ May Be the Muni-Bond Market's Next Big Thing

It’s a "considerable risk," a "bad idea," or, as one expert put it, "insanity." And it may be the next big pitch Wall Street bond underwriters make to states and cities desperate to cover ballooning health-care costs.

Dearborn, Michigan, the 94,000-resident city that’s home to Ford Motor Co., tested the waters this week by selling $35 million of bonds to chip away at the $161 million it needs to cover the medical bills of workers who will retire in the years ahead. The city is betting that by investing the proceeds it will earn more than it will pay in interest, with the profits helping to cover health-care expenses.

Dearborn paid yields of 4.6 percent or less on the bonds it issued this week, well below the 7 percent or more that pension funds typically expect to earn each year on their investments. The injection of cash will bolster a health-care plan that was already about 29 percent funded as of fiscal 2016, bond documents say. That’s higher than the statewide average for localities that offer such benefits, James O’Connor, director of finance and treasurer for the city, said in an email.

"Unlike most municipalities in the state, the city of Dearborn has been prefunding its OPEB Trust Fund for some time," he said. The bond sale is part of an effort to reduce the liability that includes closing the plan to new hires, he said.

Municipal Market Analytics said in a report this month that it’s possible that more cities could follow Dearborn, in part because Wall Street underwriters will be looking for ways to drum up business given the lackluster pace of bond sales.

But the company said that -- like pension bonds -- they’re "a bad idea, maybe worse."

Tim Holler