Koch claims that this new plan and bond will save the city lots of money each year and set a consistent expectation of expenses for pension payments. Quincy’s pensions and health insurance are the largest fixed costs the city has that change annually, so Mayor Koch wants these issues to be top priorities when it comes to discussing the city budget. The proposal was sent on Monday and city councilors sent it to the council’s finance committee, which has yet to schedule a hearing for the proposal.
Governor Dan McKee on Tuesday weighed in on two critical issues facing Providence: shakeups in contract negotiations with the teachers union and Mayor Jorge Elorza’s plan for a pension obligation bond to throw the city a financial lifeline.
On Elorza’s idea for a $704-million pension obligation bond to address the city’s unfunded pension liability, McKee raised skepticism, suggesting the plan is risky and that the timing isn’t right.
“I think it’s rolling the dice,” he said. “And again, I’ll reflect back to the time I was a mayor. I made sure that there was actuaries that supported any decision made in our local pensions including the police pension. I haven’t seen any actuaries that I would rely on. I’m not sure there’s time right now between now and the end of session to do that in a way that I would feel comfortable with.”
The city [Chico] has been receiving more sales tax, property tax, developer fees, and Utility Tax revenues every year as development brings more people to Chico. Instead of maintaining and improving infrastructure, Staff has poured these funds into their pension deficit, $11,500,000 this year, by 2025, $13,000,000. This money is allocated from all the department funds, at the expense of infrastructure and services.
Instead of pursuing new taxes that will hurt our local economy, council needs to switch from CalPERS’ defined benefit plan to a defined contribution plan, like 401Ks. Why should the taxpayers but never the employees bear the burden of the risks taken by CalPERS? The POB scheme, which Dowell admits is “gambling,” puts ALL the burden on the taxpayers, forever. Any new revenues will go to the pension obligation first.
In his 2022 budget address, Milwaukee Mayor Tom Barrett wrote of his city’s predicament, “We are facing an unsustainable demand driven primarily by the pensions for public safety employees. We must begin preparing now, setting aside money to blunt the impact of the massive payments coming due in just two years.”
For many local governments, making a big deposit all at once and being able to budget for more manageable payments in the future, for both debt service and annual pension payments, can feel like a relief.
But there are many reasons it’s a bad idea, and one that many municipal-finance observers find problematic.
Red flags waved as Providence Mayor Jorge Elorza proposed issuing $704 million in pension obligation bonds to deal with a pestering unfunded liability problem in Rhode Island’s capital city.
The amount exceeds the city’s annual operating budget. Bond markets often frown on such borrowing and sentiment among state officials who must sign off is uncertain. Skeptics also call the city’s fiscal management track record shaky, while memories linger of a fiasco in Woonsocket, which tried a similar move nearly 20 years ago.
Like so many local government leaders throughout Illinois, Wheaton city officials are desperate to do something about the city’s uncontrollable police and firefighter pension costs. The unfunded liabilities of the city’s public safety pension funds have jumped to $56 million over the past 15 years, and that’s despite major increases in taxpayer contributions into the funds.
Wheaton officials’ solution to the problem? Borrow more money. They’re considering a scheme using Pension Obligation Bonds, or POBs, that would let them gamble with taxpayer money in an attempt to improve pension finances. It’s simply a bad idea, especially in Illinois, where fiscal mismanagement and corruption are rampant.
Several Illinois cities have recently borrowed tens of millions via POBs, including the cities of McHenry and Freeport, and so has the Addison Fire Protection District, which took on $34 million in new debt. They’re all betting they can earn more in the financial markets than the interest costs of the loan they took out.
Official Wheaton board minutes reveal the city is also considering borrowing millions via POBs. Bankers from Baird and Marquette Associates have presented the idea, with Baird showing examples of Wheaton borrowing $56 million, equal to the city’s entire public safety pension shortfall.
If a state or local government’s public pension funds have large unfunded liabilities, those liabilities accrue at the assumed rate of return on the assets that should have been there to cover that liability.
The point is this: if it makes sense to pay down the pension unfunded liability with muni bonds, thus creating new liabilities and thus new leverage, it makes even more sense to take a “windfall” of cash and pay down the pension debt, which creates no new state/local government liabilities
One way to put a quick sheen on pension funds’ balance sheets is to issue municipal bonds at a lower rate of interest than the pension fund is expected to earn. These “pension obligation bonds” (POBs) have a long and checkered history. The first one was sold tax-exempt by the city of Oakland, Calif., in 1985. It stirred up a hornet’s nest at the IRS, which quickly realized that the lower tax-exempt interest rate was subsidized by Uncle Sam in a no-brainer for the pension fund that in theory could just invest in taxable bonds to make a profit, even without risking money in stocks. Congress was prodded to prohibit the use of tax-exempt debt where there is a profit-seeking investment “nexus,” and thus was born a thick book of IRS “arbitrage” regulations. Consequently, POBs must now be taxable, with a higher interest cost.
When interest rates are low, as they are today, the underwriters and many financial consultants come out of the woodwork to pitch their POB deals. The lure is always the same: “Over 30 years, you will save money because history shows it’s almost a certainty that stocks will outperform low bond yields,” even if they are now taxable. I’ve written extensively on the foreseeable cyclical risks of selling POBs when the stock market is trading at record high levels: The underwriters and deal-peddlers will sneak away with their fees from the deal, and public officials will be left holding the bag whenever an economic recession or stock-market plunge drives the value of their pension funds’ “new” assets below the level of their outstanding POBs. The Government Finance Officers Association (GFOA) has long opposed POBs for this reason, among others. POBs make sense to me only when they are issued in recessionary bear markets.
That hasn’t deterred governments. Nationwide, cities and states issued $6.1 billion in pension obligation bonds in 2020, more than in any year since 2008, according to data compiled by Municipal Market Analytics, a research firm. States with significant new pension borrowings last year included Arizona, Florida, Illinois, Michigan and Texas. In California, cities borrowed more than $3.7 billion to squirrel away at various public pension funds, breaking the old state record of $3.5 billion, set in 1994.
It’s a major comeback for this type of debt, said Matt Fabian, a partner at Municipal Market Analytics who has been writing about the deals for years. “They’re borrowing money and basically putting it into the market and gambling,” he said.
Mr. Fabian said his firm’s tally almost certainly missed the borrowing by municipalities that took West Covina’s approach, because those bonds used different names. Flagstaff rented its City Hall, libraries and fire stations last year to back a pension deal marketed as “certificates of participation.” In January, Tucson did the same, leasing two police helicopters, a zoo conservation center, five golf courses and the bleachers at its rodeo grounds, among other things. And a Chicago suburb, Berwyn, used “conveyed tax securitization bonds” to help fund police pensions.