MANTECA CAN WORK TO REDUCE PENSION DEBT
Manteca executives may consider taking on debt to reduce pension debt.
It’s a strategy some California cities are adopting to reduce the rising cost of accumulated unfunded debt (UAL) – the gap between projected pension payments and what a city pays into California’s public employee retirement system. and what this fund generates from its investments.
In Manteca’s case, CalPERS UAL’s shortfall is $132 million.
If that $132 million were covered by bond issuance or debt financing, for every percent the interest rate is lower than 6.8% at the time the bonds are issued, the city would save about $16 million dollars over an 18-year period. This would mean that if the rate was 5.3% when the bonds were issued, the city over 18 years would reduce its retirement costs by $24 million.
Even with a savings of $16 million, this frees up an average of $900,000 per year for other general fund expenses such as public safety staffing and street repairs.
City Council tonight could take the first step toward implementing such a strategy by issuing a request for proposals for City Financial Advisory Services at its 7 p.m. meeting in the Civic Center Council Chambers.
Whatever company the city gets will assess the city’s finances and prepare for future bond issues, including debt financing of retirement costs. The company that the city is terminating is not paid unless the city decides to issue bonds at a later time.
Chula Vista is an example of a town using bonds to cover retirement debt.
Chula Vista in February 2021 issued $350 million in retirement bonds to repay its unfunded liability for employee retirement benefits with CalPERS.
They were able to get a bond rate of 2.54%.
In doing so, they swapped what was 7% UAL debt with CalPERS for 2.54% debt via repo bonds.
The strategy is expected to save Chula Vista about $175 million in interest by refinancing CalPERS debt over 15 years, or about $14 million per year.
Chula Vista employs a strategy in which a portion of their savings through refinancing is paid into a reserve fund that could be used to pay off debt obligations even sooner to save taxpayers even more money and free up funds for other services.
The work that such a company that the city is looking for will do can also be used for bonding sewer and water projects or borrowed funds from marriage with growth fees and grants to undertake large improvement projects capital assets outside of the city’s corporate funds which include solid waste, sewage and water. .
Borrowing money through bonds typically saves cities significantly by leveraging growth and other fees today with the gap filled by future growth fees that would pay off the bonds. Such a strategy prevents construction costs from eating away at the city’s purchasing power while it waits to accumulate cash to pay 100% of a project upfront.
The city currently has no general fund bond debt. The bonds they have are secured by corporate and other accounts, including water and sewage, where the ratepayers guarantee the bonds and not the general fund.
“The city funds major capital improvement projects, major equipment purchases and other long-term liabilities in a variety of ways,” Chief Financial Officer Bret Harmon noted in a report prepared for council. “One way is to set aside funds over several years to pay for major projects or equipment all at once. Another tool is to combine tax revenues with subsidies, where appropriate. Yet another way is to use debt financing.
Harmon notes that debt financing has long-term costs for the city.
“Managing the city’s debt level and ensuring the city has the most favorable terms possible is a critical part of being a wise steward of the city’s resources,” Harmon wrote. “City Financial Advisors are professionals with the expertise, qualifications and credentials to advise cities on their debt management practices and debt issuance. Staff do not have the credentials, expertise or connections in all aspects of the debt market to enable them to take full advantage of debt financing opportunities.
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