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Bad News Bear Sarah Harney | November 2003
Here they go again: Nine years after a borrow-and-invest scheme backfired and plunged Orange County into bankruptcy, officials in the California county are once more talking about borrowing to invest. This time around, however, it won t be a matter of leveraging investment funds to plow into high-risk derivatives, as in the early 1990s. The current proposal is to go to the bond market, raise money at low interest rates to pay down the pension system s unfunded liabilities and then let pension officials invest the money to generate a profit.
This mechanism is called a pension obligation bond, and Orange County is far from alone in experimenting with one. Over the past decade, more than 60 municipalities have taken pension bonds to market borrowing money to pay pension contributions or build up pension assets. This year, however, localities aren t the only ones eyeing pension bonds. States are, too.