Bonds May Cover Part of Piedmont Pension Obligation
Scrutiny of Piedmont finances leads to consideration of bonds to pay off CalPERS “Side Fund” pension obligation.
After Detroit’s fiscal crisis, Time magazine and the Wall Street Journal mention Oakland, Philadelphia and Chicago as cities facing large fiscal challenges. The cover of the August 5 issue of Time asks, “Is Your City Next?” The lead article warns:
“Though nearly everyone agrees that Detroit is in particularly bad shape, many of its underlying issues — crushing debt and unfunded and unsustainable retiree benefits — are not unique. And those legacy costs are at the heart of what many experts believe is a coming municipal-finance crisis in the U.S. …Battles are already under way to decide if bankruptcy will let Detroit escape its pension commitments and turn away creditors. Promises, it must be said, will be broken; the questions now are which ones and how badly.”
According to the July 21 Wall Street Journal article, “After Detroit, Who’s Next?“:
“Take Oakland, which is Detroit’s doppelganger on the West Coast. The run-down Bay Area city, which has the highest crime rate in California, recently laid off more than 100 police to fund retirement benefits and pension-obligation bonds. Murders and robberies shot up by nearly 25% last year. To avert steeper cuts, the city borrowed an additional $210 million to finance pensions.”
Early in 2013 it appeared that paying off Piedmont’s CalPERS $8 million Side Fund obligation by refinancing it at a lower interest rate through a bond issuance would offer pension cost savings. The Budget Advisory and Financial Planning Committee investigated refinancing options and heard presentations by two investment banking firms with experience refinancing CalPERS Side Funds.
For pension obligation bonds expected to be issued on June 30, 2014, Piedmont’s Finance Director, Erick Cheung, recommended that the City Council approve agreements with the law firm of Orrick, Herrington & Sutcliffe for ballot language and bond counsel in an amount not to exceed $40,000, and, if required, validation action** not to exceed $10.000. The investment banking firm Cheung recommended is Brandis Tallman, to be paid an amount not to exceed $40,000 for a private placement or 1% of the par amount of a public offering of bonds. At its July 1 meeting the City Council approved agreements with Brandis Tallman and Orrick, Herrington & Sutcliffe on these terms.
At the June 17 City Council meeting, Brandis Tallman stated that interest rates had risen and the annual savings for Piedmont would be $82,000 at current rates. Presentations on May 8 by investment bankers Raymond James had estimated an annual savings of $210,000 assuming the 7.50% CalPERS interest cost were replaced with 2.89% interest cost.
*The Side Fund obligation of $8M was created by CalPERS in 2003 when it merged all agencies (including cities) with fewer than 100 employees into pools with shared risk. Each member of a pool was assigned a share of the unfunded liability in its pool.
** If the refinancing were approved in a Piedmont election by a majority vote falling short of 2/3, a validation action is filed with the State to confirm that the refinancing fits an exception to the State requirement of a 2/3 vote approving multi-year indebtedness. Orrick, Herrington & Sutcliffe suggested the action would add at least 45 days and perhaps six months delay to the refinancing. Issues related to Piedmont’s City Charter have yet to be resolved.
SECTION 4.14 BONDED DEBT LIMIT
The City shall not incur an indebtedness evidenced by obligation bonds which shall in the aggregate exceed the sum of twenty (20) percent of total assessed valuation for purposes of City taxation, of all the real and personal property within the City, exclusive of any indebtedness that has been or may hereafter be incurred for the purposes of acquiring, constructing, extending or maintaining municipal utilities, for which purpose a further indebtedness may be incurred by the issuance of bonds, subject only to the provisions of the State Constitution and of this Charter.No bonded indebtedness which shall constitute a general obligation of the City may be created unless authorized by the affirmative votes of a majority of the electors voting on such proposition at any election at which the question is submitted to the electors and unless in full compliance with the provisions of the State Constitution, other State laws and this Charter.
Unless Refinancing the Pension Side Fund is accompanied with re-negotiation of employee pension sharing, there will be no taxpayer savings. The Piedmont Budget Advisory and Financial Projections Committee (“BAFPC”) delivered its report to City Council June 3, 2013. Contained in that report:
“If the Side Fund were refinanced, the CalPERS rate would drop for the upcoming year to 28% and thus would be below the sharing cap. As a result, the City would be obligated for Side Fund payments and the employees would not provide any payment towards the CalPERS pension. As a result, without a contract change in the mechanics of the cap, the refinancing of the Side Fund would save the employees substantial money but actually cost the City more money.”