LOS ANGELES - When it comes to issuing bonds to finance pension or other retirement obligations, market timing should dominate the thinking, Public Financial Management's Girard Miller said Thursday, during a panel on taxable bond market conditions at The Bond Buyer's Pension and OPEB Financing Conference here.

In his analysis, the only time it makes sense to issue pension obligation bonds or bonds for other post-employment benefits is during the point in a recession when interest rates are relatively low and equities are down.

"Any other time, I submit to you, will be a violation of the prudent person standard," Miller said.

Issue into a recovery, and you have a better than 50% chance of being underwater at the time of the next recession, he said.

Issuers considering bonds to help fund retirement obligations also need to rethink the way proceeds are used, according to Miller.

The traditional model of issuing POBs up to the full unfunded liability of a system, then turning the proceeds over to the pension system to invest is also flawed, he said.

That is because a pension fund's investment allocations will include bonds. So effectively, Miller argued, that means issuing taxable bonds to buy other taxable bonds.

Ideally, he said, such POBs should be issued to finance some sort of trust used to purchase equities; that way pension bonds, or OPEB bonds, which are arbitrage plays in any case, are actually arbitraging something.

The taxable bond market in which municipal issuers hope to participate has morphed more than once in recent years, said moderator Omar Daghestani, a Barclays Capital director.

Taxable municipals had a boomlet led by Illinois' $10 billion POB issue in 2003.

"Illinois and the ones that followed helped open up new markets to new buyers," he said. "They enjoyed excellent market access."

Issuers could place sizable issues and a variety of structures, Daghestani said.

"The problem at pricing was not finding buyers but managing the allotment process," he said.

The taxable market for muni issuers is drastically different now, he added. Large European buyers that gobbled up POB issues like Illinois' have largely vanished, and the taxable bond market is 90% domestic, Daghestani said. But advent of the taxable Build America Bond will be a boost to issuers of straight-ahead taxable munis, like pension bonds.

"What we are seeing is new buyers being added," he said.

Panelist Nat Singer, managing director of Swap Financial Group, said the business of interest rate swaps remains alive and well, despite all the recent dislocations in the muni market.

"We're doing new business, not just terminating old transactions," he said.

In the context of pension obligations, Singer offered that the spread between low London Interbank Offered Rates and relatively high taxable muni rates means swaps still can make sense for issuers, despite the high liquidity cost for variable-rate debt. He added, however, that issuers need to understand the risks of such transactions.

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