6 BARRON’S July 12, 2021
Chinese large-cap technology stocks.
Lower bond yields aren’t bullish if
they’re accompanied by wider spreads,
they point out. The PBOC moves would
seem to ameliorate that credit distress,
which also has hit Chinese real estate (see
the Emerging Markets column on page
M4).
On either side of the globe, central
banks and interest rates remain key to
markets.
B
obby Bonilla Day just passed,
an annual occurrence that lives in
infamy for many Mets fans. Every
July 1, from 2011 through 2035,
the former outfielder gets a check for about
$1.19 million, under the deal he made with
the team in 2000—a year after he’d batted
.160—to buy out his contract. That Bonilla
will receive a total of $29.8 million for not
playing, to satisfy the $5.9 million owed
him two decades ago, is especially galling.
This story is annual fodder for the
sports pages, but what’s it doing in Bar-
ron’s? It helps demonstrate the most basic
concept of finance—the time value of
money—and how the Bonilla deal relates
to the nation’s public pensions.
To start off, the Mets faithful’s con-
tempt for Bonilla’s deal isn’t entirely de-
served. He’s also getting $500,000 a year
from the Baltimore Orioles under a simi-
lar deal. But more basically, most baseball
fans, for all their devotion to increasingly
abstruse statistics, don’t understand the
time value of money.
That term describes the difference
between the value of a dollar today and a
dollar in the future, based on the interest
rate that can be earned on that money.
Assuming a rate of 10%, $1 received in one
year has a present value of 91 cents. A dol-
lar in two years discounted at 10% has a
present value of 83 cents, and so on.
Given this, it takes fewer dollars today
to meet future obligations if they can be
invested at a higher rate of return. In Bo-
nilla’s case, at 8%, he was able to get more
than five times as much by waiting, rather
than getting paid upfront. That was reason-
able in 2000, when 8% was what invest-
ment-grade corporate bonds were yielding.
In a current example of the magic con-
jured by the time value of money, Connecti-
cut has begun to award $3,200 in “baby
bonds” to children born to mothers covered
by Medicaid, with the estimable aim of
narrowing the generational wealth gap.
When the kids turn 18, the bonds will be
worth about $11,000, which can be used
for education, buying a home, or starting a
business in the state. The bonds’ yield will
be the same assumed return as Connecti-
cut’s pension fund, 6.9%.
But that 6.9% projection now far exceeds
yields on corporate bonds, pension funds’
traditional mainstay investment. The
iShares iBoxx $ Investment Grade Cor-
porate Bond exchange-traded fund (ticker:
LQD) yields 2.19%, while its counterpart,
the iShares iBoxx $ High Yield Corpo-
rate Bond ETF (HYG), scarcely lives up to
its name, with a mere 3.33% yield.
The good news is that the 100 largest
public pension plans, boosted by last year’s
huge stock market recovery, were 79%
funded at the end of the first quarter, ac-
cording to Milliman, a benefits consultancy.
That was up from 78.6% on Dec. 31 and just
66% at the end of 2020’s second quarter,
following the market’s pandemic plunge.
But those aggregate numbers include
wide variances. According to data from the
Center for Retirement Research at Boston
College cited by the Municipal Market
Analytics newsletter, the top third of pub-
lic plans are 93% funded and improving,
the middle third is 74% funded and hold-
ing steady, and the bottom third is at 54%
and deteriorating.
Investment returns play a huge role for
retirees, given that they account for about
61% of the revenue that the funds pay out,
according to the National Association of
State Retirement Administrators, or
Nasra. “The investment return assump-
tion is the single most consequential of
all actuarial assumptions in terms of its
effects on a pension plan’s finances. The
sustained period of low interest rates
since 2009, combined with lower pro-
jected returns for most asset classes, has
caused many public pension plans to re-
duce their long-term expected investment
returns,” a report by the group says.
The median assumed return currently is
7%, according to Nasra, which is above the
median investment return of 6.70% over the
20 years ended in 2020. With bond yields
at historic lows and stock prices at record
highs, the chances are that future returns
will be lower. According to a report from
the American Legislative Exchange Council,
those unfunded liabilities for state-run pen-
sion plans total $5.82 trillion, an average of
$17,748 per person across the nation. Lower
returns would widen that huge gap.
As for Mets fans, all they have to worry
about is their team once again blowing its
lead in the National League East as it heads
into the baseball season’s second half.B
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Up & Down Wall Street (continued)
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