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.

 


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SLOBIRD

How could anyone expect anything different from this City Council and the management for the City. They are so many ways to come at this ridiculous issue but to consider the suggestion of someone walking in off the street, talks to an “interim” finance director about a “side” fund that wants to protect public safety employees without consideration for the general unit (water, sewer, parks, streets, trees, clerical, technological, administrative employees) already smells rotten.


There is no easy, cheap, affordable way out of this mess. Ask Stockton, Fresno, Oakland, San Bernardino, Monorovia, Atwater, Hercules, and about 10 other cities in California that are willing to admit it and then look at cities like San Luis Obispo that have not admitted their financial woes. The cities gave away the store in early 2000 and now the piper needs to get paid. That is the truth and borrowing is not the solution…


hijinks

There’s the usual confusion in this reporter’s reporting.


The “pension obligation” dollar figures sound scarier than they actually are. That’s because a “pension obligation” isn’t something due today. It’s what’s eventually due 50 or more years from now (which means pensions for people who aren’t even born yet, let alone working for the city), to fund what’s due by then then. It’s a hypothetical number. Some of that money will come from employer and employee contributions, but much if not most will come from accumulated investment income from those contributions. It’s the long-term multiplier effect of investing in the free market that funds the bulk of pension obligations. There is lots of time to make up the difference — it doesn’t have to all be done today, unless you flunked Econ 101 or just WANT to believe otherwise. In fact, pension funds that are 75% funded are regarded as in really good shape. Typically, they’re not 100% funded because there’s always new investment income coming into an active pension fund, so they don’t need to be 100% funded through contributions.


A “side fund” is something the city manages and controls. It’s not CalPERS.


“CalPERS investment returns do not match expectations.” This unattributed statement made up by the reporter is without merit. CalPERS has really great investment returns — they far exceed in the long term anything an individual investor can get. Sure they lose big when the economy tanks, but what happened to your 401k when the economy tanked? A big pension fund has the resources to ride out rough spots, we as individuals usually don’t.


hijinks

Disregard point 2 above. In this case it appears the city has finagled a way to persuade CalPers to manage its side fund — that’s really weird, though, because no way will CalPERS stand behind money that’s not theirs and put the cops’ pension interest ahead of that of its own members. Some sorta weird deal, probably riskier than the city makes out.


godislanguage

One word!


ENSLAVEMENT!


r0y

I’m surprised Ted isn’t here telling us about Moloch and the modern sacrifice of our children (debt and enslavement). Would be interesting to hear about Hitler’s idol (to quote Churchill’s book, The Gathering Storm (1948), the first volume of Winston Churchill’s history of World War II, Churchill describes Hitler’s triumph at the moment he finally achieved total power in 1933):

“He had called from the depths of defeat the dark and savage furies latent in the most numerous, most serviceable, ruthless, contradictory and ill-starred race in Europe. He had conjured up the fearful idol of an all-devouring Moloch of which he was the priest and incarnation.”


Grrr

Let’s see. The idea of putting the debt into a new debt scheme is just a shell game. How have the big companies handled losses such as CalPERS managed to do? Most business entities in such dire situations file bankruptcy.


hijinks

CalPers was never close to bankruptcy. You are very misinformed.


BeenThereDoneThat

No you are the one misinformed our little CCN troll.


http://wsws.org/en/articles/2009/01/calp-j30.html


r0y

OUCH! Poor hijinks…


brettmx

Not again. Last time staff thought the City was going to “make” money on the spread until they found out there is no free lunch. http://www.slocity.org/cityclerk/agendas/2010/090710/c3issuancepensionobligationbond.pdf


hijinks

That’s a pretty funny staff report! Well characterized by the commenter. Bottom line, it’s cheaper to put close to a million $$ a year into the fund than go through all the bond hocus pocus.


hijinks

Still wondering, why would anybody buy these bonds? The very fact they exists suggests overcommitment by the issuer.


Jorge Estrada

This bond sounds like one of the refinance scams that allowed many home owners to become financially upside down. Where are all the smart people, retired in another state while suckling this state?????


hijinks

Actually it’s not at all like “refinance.” It’s initial debt, in other words “finance,” a way to spread costs over a longer period — sorta like when you buy a house and don’t have $500,000 to hand over, you spread the payments over a number of years and pay interest to the guys who provide the money to you. Nonetheless, you raise a good point questioning its wisdom. Since it’s no cheaper than just paying as they go, it really makes no sense.


BeenThereDoneThat

HELLO!!??? Hmm isn’t this what the state and Cal-Pers did? Invested heavy in markent and then when market went to shit four years ago went upside down? And now SLO in their BRILLIANCE want to emulate the same formula?


Insanity: doing the same thing over and over again and expecting different results.


kayaknut

Insanity: Electing the same people to office election after election and expecting a different result


hijinks

Insanity: repeating the same untruths over and over again.


Mike

So these clowns want a cash advance from their Visa card to pay off their Mastercard? Brilliant.


tomsquawk

can we vote for that bond?


TheInsider

No, this would be an internal refinancing.


tomsquawk

internall re-financing. normally i pay for that…oh yes, not that , we all will. thought you meant something else. how ugly has this become?


hijinks

Yes, you can refuse to buy it. If enough people refuse to buy it, it will fail. That’s how the free market works.


r0y

…until the Federal Reserve starts buying their own debit via bonds – then there is no free market whatsoever. But I digress…