When the city of Stockton, Calif., filed for bankruptcy, it blamed its problems in part on pension bond debt.
‘‘They’re assuming the bond proceeds will be invested and earn a healthy rate of return, and that creates savings for them in their budget,’’ said Tim Blake, managing director in Moody’s public finance ratings group. ‘‘But our view would be that those savings are subject to risk.’’
Illinois, which has one of the lowest state credit ratings, is by far the largest issuer of pension bonds, with more than $17 billion. Much of that was used to keep up with required contributions to pension funds. Illinois issued the bonds in 2003, 2010 and 2011 but will not use the strategy again, said John Sinsheimer, the state’s director of capital markets.
Kansas, New Jersey and Oregon are among the other states that have borrowed to keep up with public employee pension costs.
In Kentucky, the Pew Center on the States recommended issuing pension bonds along with other reforms to cover an ever-growing unfunded liability that now stands at about $33 billion.
Yet a legislative task force studying the state’s pension crisis rejected that recommendation in November and instead embraced other recommendations, such as repealing cost-of-living increases for new retirees and moving workers to a hybrid plan that blends defined benefits with defined contributions.
Other governments continue to take the plunge. Fort Lauderdale approved borrowing up to $340 million in pension obligation bonds to cover much of the city’s $400 million in unfunded pension liabilities at an estimated 3.9 percent interest rate.
Last month, officials in Baltimore County, Md., sold $256 million in pension bonds, projecting the move will save $343 million over 30 years.
‘‘Given that interest rates are at historic lows and Baltimore County’s superb bond rating, I have every confidence that this pension bond sale will benefit taxpayers over the years,’’ Councilman Tom Quirk said.
Associated Press writers Roger Alford in Frankfort, Ky., and Sara Burnett in Chicago contributed to this report.