Will SLO issue a pension obligation bond?

April 17, 2014

pension1By JOSH FRIEDMAN

Chances are growing that the city of San Luis Obispo will issue a pension obligation bond to gain control of its unfunded retirement plan liabilities, which have soared past $100 million.

The city currently has a total of about $123 million of unfunded liabilities in its California Public Employees Retirement System (CalPERS) pension plans, according to a recent city staff report. Unfunded liabilities accrue when city retirement plan payments combined with CalPERS investments total less than the projected amount of money owed to retirees.

Only one member of the city council supports paying down a sizable portion of the pension debt, and city staff has increasingly discussed floating a bond to address the problem. While some cities have used pension bonds to successfully pay down their debt, others have spiraled into bankruptcy after issuing them.

On Tuesday, the council met in a special afternoon session to discuss paying down its unfunded liabilities to CalPERS, as well as to a state legal insurance pool to which the city belongs. The council had previously budgeted $3 million toward paying down the pension and/or legal insurance debt. It opted Tuesday to use $2.065 million to fully pay off its legal liabilities and give the remaining $935,000 to CalPERS.

The council discussed tapping additional funds to make a larger payment to CalPERS, but only Councilman Dan Carpenter advocated paying down more of the debt. City staff recommended against allocating any money for paying down pension debt until CalPERs adopts a new methodology for calculating payments.

San Luis Obispo currently pays CalPERS about $10 million annually. The annual contribution has increased steadily for years, though, and continues to rise. The city is still playing catch-up from the downturn in the stock market during the recent recession, as well as from a council decision in the late 1990s to forego making pension payments when the city had no debt in its retirement plans.

On Tuesday, finance director Wayne Padilla presented the council with two alternatives to a business as usual approach to making CalPERS payments. One option was to make the $935,000 payment.

Padilla’s other alternative was to issue a pension obligation bond to pay down debt the city has in its retirement plan for public safety employees.

In 2007, San Luis Obispo joined other agencies in a pool of public safety retirement plans. At the time, the city had an unfunded liability in its public safety plan, so CalPERS created a standalone debt, known as a side fund, which the city has still not paid down. The San Luis Obispo side fund currently has $24.5 million of unfunded liabilities.

A pension obligation bond or bonds could fully retire the side fund liabilities but would create a new debt with interest that the city would likely pay off over three decades. The average pension obligation bond has an interest rate of 4 percent, according to Padilla’s staff report.

“At sometimes it may make sense to issue a pension obligation bond,” Padilla said Tuesday. “Issuing a pension obligation bond has never been anybody’s preference.”

Padilla’s report indicates that the city would spend $3.2 million more over the next 30 years, if it opts for a bond over making its usual CalPERS payments. If CalPERS changes its compensation formula, though, the bond would cost the city $12 million less over 30 years than the adjusted CalPERS payments would, according to Padilla’s report.

At an upcoming board meeting, CalPERS will consider changing its payment formula from one computed using percentages of agencies’ payrolls to one that consists of fixed annual contributions.

If CalPERS makes the change, the long-term debt, including interest, in the city’s side fund will increase by more than $15 million, according to the staff report.

CalPERS actuary Barbara Mann, however, said the formula change would make very little difference in the amount the city owes.

During Tuesday’s meeting, Carpenter said the city should do what it can to pay down the side fund.

“I would be in favor of putting as much in as possible now and let us ride out this favorable market,” Carpenter said.

Due to an increase in stock prices over the last year, CalPERS investment returns have spiked. When returns are high, extra payments to CalPERS generate more funding in retirement plans than they do when the market is down.

Additionally, contributions to CalPERS that exceed minimum payments reduce the amount of interest agencies pay over time.

Still, no council member other than Carpenter supported using city reserves to pay down unfunded pension liabilities.

Councilman John Ashbaugh said he would like the city to relieve itself of the shadow of its unfunded liabilities. Ashbaugh, though, made the motion to make the $935,000 payment to CalPERS, saying that he trusted it would provide the most bang for the buck.

The council voted 4-1, with Carpenter dissenting, to make the $935,000 payment toward the city’s public safety side fund.

Following the payment, the city’s side fund will have $23.6 million remaining in unfunded liabilities. An additional $32.9 million of unfunded liabilities exist in the city’s pool portion of its public safety plan. The unfunded liabilities in the retirement plan for all other employees total $65.6 million.

San Luis Obispo currently has approximately 20 retirees with pensions above $100,000. Each retiree receives a yearly 3.25 percent cost of living increase.

 


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Paso_Guy

Remember the debt incurred to finance WWI? It is still outstandanding. Where do you think SLO is headed


womanwhohasbeenthere

I attended this meeting. I was appalled that with all the money we have in the bank, close to $90 million, we aren’t paying down the massive pension obligation but instead considering issuing MORE DEBT. At the same time the Council wants to give RAISES to top administrators and themselves, and put a sales tax on the ballot for even more money in defiance of the city’s own charter. Enough already.


achillesheal

It’s the government way. It’s all monopoly money to them as it is not earned.


achillesheal

How about some better planning before promising to pay salaries to people who are no longer working for the rest of their lives.


SamLouis

The responsible thing to do would be for the city council to materially reduce it’s current personnel expenses by releasing unneeded individuals from employment (a 15-20% cut would do it, beginning from the top down) and by changing the city’s pension plan.


Obviously that’s not going to happen but it would be the responsible and right thing to do with taxpayer dollars.


slo Fact Finder

Pension Obligation Bonds have historically created added debt for municipalities while taking many years to achieve the desired results and is extremely risky !


What is so complicated to understand about paying down our city’s enormous CALPERS credit line based on the current interest rate of 7.5 % compounded interest (way more than the .30% interest rate the city is currently realizing on its almost $ 89 million in overall savings accounts) reduces a long term financial liability for the City of SLO which frees up additional resources for such worthwhile things as local capital improvements.


What does Mr. Carpenter and many local citizens know that the majority of the present SLO City Council do not understand? The question may be asked “Is more municipal debt better than less municipal debt in our present era of limited resources & low interest rates?


Perhaps more qualified city council members with a bit more business experience would go a long way in addressing our current major unfunded pension liability mess. Remember that our city can not avoid addressing our long term pension obligations even in bankruptcy……


shelworth

Shouldn’t the cost of living increases be tied to the inflation rate?


slowtime

Yes it should. Inflation is much more than CALPERS

pays.


shelworth

The offical US government inflation rate average for the last 10 years is 1.71%. Just so you know.


hijinks

Real CalPers retirees don’t get that sort of cost of living increase — I know I sure don’t! This is some gold-plated plan the city cooked up. Their employees aren’t actual CalPers members — the city contracts with CalPers to manage ITs retirement plan.


slowtime

What is it? I think it is like max 2% annual COLA based on your benefit at time of retirement (not compounded). I have never heard of the reported 3.5%.


Rambunctious

“San Luis Obispo will issue a pension obligation bond to gain control of its unfunded retirement plan liabilities”



kayaknut

One word for the voters, “NO”


scoopone

We are starting to see the error of many past City Councils…….paying large salaries

means hefty pension payments down the road. Borrowing to pay pension

liability really doesn’t make much sense. Hiring city employees at pay rates

comparable to local wages should have been the rule; instead, the happiest &

friendliest city in the country will probably face bankruptcy at some point in the

future.



As a former human resources manager, local wage/benefit surveys would bring city

salaries down to where they should be. Hire local people, stop paying huge salaries to

attract “the best people” and promote from within the ranks. Over time, this will help to

reduce the city’s pension problem. We don’t need the best and brightest to manage our

town!!



Of course, what do I know…..we’re dealing with out-of-towners who are now getting

blue-sky wages.


SamLouis

Especially when the so-called “best and brightest” often end-up being the “incompetent and nefarious.”


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