SLO considering a pension obligation bond

June 11, 2013

city sloBy JOSH FRIEDMAN

The city of San Luis Obispo may turn to debt financing to address its growing pension liabilities.

During a two-year budgeting meeting Monday, interim finance director Wayne Padilla said city management is considering recommending that the council approve the issuance of a pension obligation bond. If approved, the pension obligation bond would help pay down the debt in the retirement plan for San Luis Obispo police officers and firefighters.

As of July 2011, San Luis Obispo had accumulated $107 million in unfunded pension liabilities, about $50 million of which come from its police officer and firefighter plan, known as its safety plan. The California Public Employees Retirement System (CalPERS), which manages the city’s pension plans, expects San Luis Obispo to pay off its debt in entirety over the next 30 years.

Padilla said Monday that a financial adviser had approached him about the possibility of the city using a pension obligation bond to pay off a specific portion of the city’s safety plan, known as the side fund. San Luis Obispo belongs to a pool of public safety pension plans from different municipalities, but it also has a side fund, which consists only of the city’s employees. As of July 2011, the side fund accounted for about $24.3 million at the end of the city’s unfunded liability.

“There apparently is a financial adviser that has had some success in establishing pension obligation bonds specifically directed to retire that side fund,” Padilla said. “That’s something we want to look at.”

Padilla said he is approaching a potential pension obligation bond with skepticism.

Pension obligation bonds involve significant risk because agencies that use them do so hoping that investment returns in their pension plans exceed the interest they pay on the bonds. Often, CalPERS investment returns do not match expectations.

Some cities have succeeded in paying down large amounts of debt through the issuance of pension obligation bonds, while others, like Stockton, have spiraled into bankruptcy following large market losses.

Padilla raised the possibility of a pension obligation bond Monday after Councilman Dan Carpenter said the city’s proposed 2013-2015 budget does “nothing” to address long term unfunded pension liability.

Following a CalCoastNews report last week on the funding status of the city’s pension plans, Padilla and City Manager Katie Lichtig announced in a council memorandum that the city would impose upon itself 1 and 2 percent increases on its annual contributions to CalPERS in 2014-2015 and 2015-2016 respectively.

Carpenter said the proposed increases would help increase the funding levels of the city’s plans in the short term, but would not prevent unfunded liabilities from lingering 50 years into the future.

Councilman John Ashbaugh said the idea of the city increasing its CalPERS contributions by more than the 1 and 2 percent hikes suggested by staff is worth considering.

The council will meet again Tuesday and Wednesday evenings at 5 p.m. to continue its two-year budgeting meetings. Tuesday’s meeting will cover the city’s capital improvement plan, and Wednesday the council will decide whether to approve staff’s recommendation of increasing water and sewer rates for the eighth consecutive year.

Staff expects the council to adopt the budget on either June 17 or June 25. The council currently has only four members, however, so a two-two split could delay adoption.

 


39 Comments

  1. Maxfusion says:

    THE TAXPAYERS GUIDE TO GOOBERSPEAK:

    1. Your building permit process will be completed in two weeks.
    Decoded in the Goober enigma machine this translates: Despite you paying excessive fees you’ll never see the day we approve your, in our narrative, hideous project.

    2. We need more money to improve student test scores: This decodes as: We’re hiring two more superintendents of schools to oversee the six students in the towns of Cow Pie and Gooberville.

    3. We need more money for employee educational conferences: We’re off to Vegas to party with our comrades from the IRS, GSA, and the EPA.

    4. We’re working diligently with the legislature to insure a fair and balanced tax plan: We’re doing everything possible to overturn Proposition 13.

    5. We’re “saving the planet”: We’re saving our asses.

    6. We’re upgrading our vehicles to meet CARB standards. We’re installing new Alpine steros in our Toyota PissAnts.

    7. Your project is at the top of our list. Your stupid endeavor hit the circular file a month ago.

    8. It’s for the children. It’s for us.

    This guide was not approved by CDF&F (The California Dept. of Fairness and Feeeeeelings.)

    Like or Dislike: Thumb up 13 Thumb down 0

  2. Maxfusion says:

    Let’s be clear, the GooberCrats will stop at nothing to fleece productive people. Ever wonder why these miscreants vote the democrat ticket? Ever wonder why their unions donate exclusively to the democrat party. It’s a circle, and at the radius point are the productive who finance there lavish salaries, benefits, and retirement. The GooberCrat will claim he or she, or whatever sexual transition they may be involved in at the time, pays taxes too. They don’t, because their inflated salaries (financed by the producers) covers any tax obligation they pretend to pay. Next up on the chain of nepotism, the GooberSpawn who will, coached by their GooberCrat breeders, continue the cycle.

    Like or Dislike: Thumb up 10 Thumb down 1

  3. Are YOU kidding me?? The San Luis Obispo Property and Business Owners Association has been warning the public of this possibility for many years! Just another pile of unnecessary debt to inherit long after the current city council are long gone with their respective pensions & associated benefits. Not good!!

    Like or Dislike: Thumb up 30 Thumb down 0

  4. SLOthinker says:

    The only way for the city to rework the current retiree and long term employee plans is to go bankrupt.

    This should speed up that process.

    Like or Dislike: Thumb up 28 Thumb down 2

    • NorCoMod says:

      Municipal bankruptcy does not affect retiree payments. Public employees under a defined benefit bprogram have a binding contract with the taxpayer. If their retirement fund earns enough interest to keep up with payments as they come due, life is good and we never hear a thing. If their retirement fund does not earn enough interest to keep up with payments, we (the taxpayer) are required to make up the difference. Simple as that.

      Pension Obligation Bonds are designed to do three things:
      1. Spread the current unfunded liability out over many years into the future.
      2. Push the unfunded liability discussion out of the limelight ( like tax withholding out of sight out of mind).
      3. Enrichen the municipal bond brokers and insurance companies.

      Pension obligation bonds without a true restructuring of the public employee retirement morass cures nothing in the long term. It is a selfish shortsighted sleight of hand move that pushes our mess to another generation to figure out. Our grandchildren will not speak kindly of us.

      Like or Dislike: Thumb up 12 Thumb down 0

      • SLOthinker says:

        Not nearly so cut and dry. State law protects the pension plans but federal bankruptcy laws do not. Bankruptcies are handled in federal court. The judges will give difference to state laws protecting pensions as long as there is viable way to settle the debt. Simply raising taxes is not usually considered a valid way. It is generally assumed that municipalities has already done all they can with respect to revenues. If the judge determines that salaries or benefits are excessive or even in the top tier, reducing them, even if their is a collective bargaining agreement, is often attractive target.

        Like or Dislike: Thumb up 5 Thumb down 0

        • msminiver says:

          SLOthinker,

          The one thing that most people miss, is that judges are part of a pension system and there is no way that they will ever open the door to re-evaluating pension plans whether they are federal, state or local. If they open up the possibiity of a bankruptcy proceeding changing members pensions that may someday be their own pension plan under the gavel in federal bankruptcy court.

          Like or Dislike: Thumb up 4 Thumb down 0

  5. cooperdog says:

    Government: if you think the problem is bad, wait to you see our solution.

    Like or Dislike: Thumb up 29 Thumb down 0

  6. hijinks2 says:

    How many years was this disaster in the making?

    If memory serves me right, employees voted in to change their pension from 2.0 at 55 to 2.7 at 55 back in 2001 roughly. Thus, if you had 30 years at the city in 2001 your pension would be 2.0 times 30 years for 60% of your highest year’s pay. For example, let’s say you were at $100,000 a year upon retirement and at this pension formula you would get a maximum of $60,000 a year, but in January 2002 this changed to 2.7 at 55, thus if you had 30 years at the City on this date you would get $81,000 a year if you highest year of pay was $100,000. Thus, a 21 percent increase in your pension over night or actually nearly 3% at the stroke of a pen. Slick move and what most don’t realize is that employee pension contributions up until January 2002 were based upon a much lower contribution rate based upon the 2.0 at 55 formula, thus the funding gap was created.

    Fast forward ten years and amazingly a $100,000,000.00 unfunded liability exist, big surprise. I think all pensions should be ratcheted back for all those employees there who got the free ride, including the retirees. This was pension spiking on a large scale and a well contrived fleecing of the community. This is no different then what happened in the City of Bell and Vernon in Southern California. Now that would be a good start to financial sustainability and fiscal accountability. They didn’t pay for it and thus they don’t deserve it.

    And now we just gave that idiot city attorney a raise with a funding gap of $100,000,000,00, just brilliant council.

    Well-loved. Like or Dislike: Thumb up 38 Thumb down 1

  7. r0y says:

    I can’t even read the crap about the City/County/State/Country anymore. Is this their new tactic? Completely NUMB us to the fact that they suck at everything they attempt?!

    And we thought it a good idea to let them into our Health Care? Into our Phone records? Into our e-mail? Into our lives? Really? Is there anyone left who thinks the government can make things better? (hint: if you DO think gov. can make things better, please remove your head from your posterior – just temporarily – and look around).

    Like or Dislike: Thumb up 32 Thumb down 0

  8. flytrap says:

    Yes, it makes perfect sense that when you fail at prudent budgeting and mismanage your money with outlandish pension promises and ridiculous salaries, that you then roll the dice and gamble that you will be lucky and win enough to cover up your mistakes.

    Like or Dislike: Thumb up 23 Thumb down 1

  9. NorCoMod says:

    Not an uncommon move, the County of SLO did that same thing several years back. I suppose the city will also follow the county’s lead by not showing the bond interest obligation as a liability on next year’s balance sheet.
    Following that, you can expect much crowing about a city in good fiscal condition during the next election. It’s the new normal for municipal accounting taken straight from the Wall Street business model.
    Another 10 years down the road and they’ll be sending in the auditors to bayonet the wounded.

    Like or Dislike: Thumb up 25 Thumb down 1

    • r0y says:

      The reality is more like: how can we limp along just enough so I can retire early and cash out?

      THAT is the problem with the public sector at large.

      Like or Dislike: Thumb up 29 Thumb down 1

      • SLOBIRD says:

        This I what the State is doing! They probably have a handbook for government agencies on “How to Hide Your Debt, Give More to the Employee’s, and Balance Your Budget”.

        Like or Dislike: Thumb up 23 Thumb down 1

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