The Municipal Advisor’s Role in Helping Manage Pension Liabilities

By Vanessa Gonzales posted 05-11-2021 07:39 AM


Most public agencies in California are weathering the storm caused by the impacts of COVID-19, but even as we all adjust to our “new normal,” concerns over rising pension and retiree medical costs continue to remain at the forefront.

For many special districts, addressing unfunded pension liabilities is one of the most significant financial challenges to be faced. Rising pension costs are daunting, and the issues are complex and nuanced. Often, special districts are without the staff resources or financial expertise needed to develop a comprehensive pension management plan.

Lacking in-house expertise, one option special districts have is to hire a municipal advisor. A number of firms with pension expertise are ready and willing to assist. However, special district managers who have only limited experience with pensions or bond issuance, or who have not hired a financial advisor before, will want to consider some important guidelines when deciding who to turn to for help. 

The Role of the Municipal Advisor

Municipal advisors are financial professionals who assist public agencies with the issuance of bonds, as well as financial analysis, modeling, planning, and forecasting associated with funding capital improvements. Municipal advisors are regulated by the Securities and Exchange Commission under the Dodd-Frank Wall Street and Consumer Protection Act. 

Municipal advisors are required to pass the Series 50 exam, a qualifying exam developed by the Municipal Securities Rulemaking Board (MSRB). They must register their firm and the advisors who work for the firm with the MSRB. In addition, municipal advisors are required to follow certain standards of conduct, as defined under MSRB Rule G-42, including regulatory compliance, licensing, and continuing education requirements.

Most importantly, municipal advisors are obligated to serve in a fiduciary capacity to their clients and act in their best interest.

Duty of Care, Duty of Loyalty

Special districts and other public agencies are protected by a set of rules established by the MSRB. The MSRB Rule G-42 outlines very specific requirements and standards of conduct that the municipal advisor must follow.

For example, the municipal advisor must act with what the MSRB terms as a “Duty of Care” when performing advisory activities. This means the municipal advisor must possess the degree of knowledge and expertise needed to provide informed advice; make a reasonable inquiry as to the facts that form the basis for any advice; and have a reasonable basis for any advice provided.

The MSRB also requires the municipal advisor, as fiduciary of their client, act with a “Duty of Loyalty.” According to the MSRB, “The duty of loyalty requires a municipal advisor to deal honestly and with the utmost good faith and act in the client’s best interests without regard to the financial or other interests of the municipal advisor.”

Conflict of Interest

In keeping with the duty of loyalty, the municipal advisor is required to disclose material conflicts of interest in writing. This includes any fee-splitting or third-party arrangements, or relationships with any affiliate that provides a service or advice directly related to the municipal advisor’s activities on behalf of their client. 

Conflicts of interest are a major focus of the Dodd-Frank Act. A bond offering is a coordinated effort among various finance professionals, each serving a distinct role. Municipal advisors are prohibited from serving as underwriters (on the same transaction), and bond counsel firms are generally discouraged from providing financial advice. 

Special districts should be cautious when a single firm offers to play more than one of the major roles in a financial transaction (i.e., bond and disclosure counsel, municipal advisor, and/or underwriter).

Comprehensive Approach to Pension Liabilities

Pension liabilities are a complex topic, with many moving parts and inter-related factors. Special districts should look to CSDA and other organizations for education and resources to help them gain a better of understanding of the options available. 

A municipal advisor will also act as a resource, helping evaluate alternative options, modeling various scenarios, adopting pension funding policies, and developing a long-term comprehensive funding plan. 

While pension obligation bonds (POBs) can provide a viable solution, they are not the only answer. Special districts can also address their pension liabilities by using alternative funding strategies, such as tax-exempt exchange, leverage refunding, and making additional discretionary payments (ADPs).

A municipal advisor should be able to clearly explain the benefits and risks associated with issuing POBs and provide strategies to mitigate them, as well as offering alternative strategies to POBs.  

New Endorsed Affiliate for Pension Advisory Services

CSDA has partnered with Urban Futures, Inc (UFI) to assist members in addressing their pension liabilities. UFI takes a comprehensive approach with each client, developing a customized pension model and evaluating funding strategies to assist you in developing a long-term pension management plan. UFI then conducts workshops/study sessions to educate your board and communicate with bargaining units/stakeholders.

CSDA has negotiated special rates for UFI’s pension advisory services.  For more information on this member benefit, visit or contact Member Services.


For more information on the role of the Municipal Advisor, please see the links below.

MSRB: What to Expect from Your Municipal Advisor

MSRB: Financing Team

GFOA: Selecting and Managing Municipal Advisors