SLO considering a pension obligation bond
June 11, 2013
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.