The City of Tucson, Ariz., decided last year to pay rent on five golf courses and a zoo — to itself. In California, West Covina agreed to pay rent on its own streets. And in Flagstaff, Ariz., a new lease agreement covers libraries, fire stations and even City Hall. They are risky financial arrangements born of desperation, adopted to fulfill ballooning pension payments that the cities can no longer afford, the New York Times reported. Starved of cash by the pandemic, cities are essentially using their own property as collateral of sorts to raise money to pay for their workers’ pensions. It works like this: The city creates a dummy corporation to hold assets and then rents them. The corporation then issues bonds and sends the proceeds back to the city, which sends the cash to its pension fund to cover its shortfall. These bonds attract investors — who are desperate for yield in a world of near-zero interest rates — by offering a rate of return that’s slightly higher than similar financial assets. In turn, the pension fund invests the money raised by those bonds in other assets that are expected to generate a higher return over time. If they can pull off the strategy, cities issuing these bonds can reduce their pension bills by an amount that’s the difference between what they earn and what they pay out. But as with any strategy based on long-term assumptions, there is risk. Taxpayers can still owe the pension fund money if the investments don’t get the return they expect. And although most municipal debt is considered bulletproof because a government pledges to make its creditors whole in the event of a default, bonds like the ones West Covina issued don’t have that guarantee.
