PREVIOUSLY: City of Eureka Looks to Sell Bonds to Fund Pension Debt; High-Interest CABs Potentially in the Mix

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Two days ago, the Lost Coast Outpost ran a story about legal action the City of Eureka is taking to sell some $8.2 million worth of bonds in order to pay off its debt to CalPERS, the state public employees’ retirement system. The bonds themselves appear to be a smart move. They’d take the interest rate the city’s currently paying on that debt from 7.5 percent to something much lower, thereby freeing up $100,000 per year or so of the city’s budget.

But there were a couple of open questions in Wednesday’s story. One: Why, in its court papers, does the city seek authorization for additional bonds that may be issued from time to time in order to meet its pension obligations — additional bonds that may, according to the city’s own language, include the so-called “capital appreciation bonds” that have recently caused such a stir locally and statewide?

Two: How did the city come to own nearly $8 million to CalPERS to begin with?

Yesterday, your Lost Coast Outpost was able to speak with Paul Rodrigues, the city’s finance director, who very graciously called in — hands-free, he assured me — from a highway in Oregon. (See also City Manager Dave Tyson’s response in the LoCO comment section.)

My first question: Why does the city’s lawsuit — link here — seek to permission for future CABs and other exotic debt instruments, even if the city does not presently intend to issue such bonds? There’s no good reason on earth for a city to issue a capital appreciation bond. They’re fatally attractive to school districts precisely because of the debt limits the state places on school bond measures; kick repayment far enough down the road and your school can still comply with constitutional limits on how much citizens may be taxed on such bonds in any given year. So why does the city seek to keep the option open?

Rodrigues said that the language authorizing the weird bonds was placed in the document by the city’s bond attorneys. ”[It’s] some kind of standard language when you file some validation language with the local court,” he told me. The language would leave open the issuance of such bonds to future City Councils, even though there is no conceivable current motive for this council to issue them. Essentially: Why straightjacket the city in the future?

So, shady advice from big finance hucksters? Not at all, Rodrigues assured me. The city’s advisor, PFM, has always been straight-up with the city — and besides, the company is paid a straight percentage of based on the bonds issued. It doesn’t get more or less depending on the type of bond. “PFM isn’t going to get a bigger slice of the pie if they led us by the nose to these CABs,” he said.

That’s the first question. The second is a bit more difficult for mere mortals — we not blessed with a degree in accountancy — to understand, though Rodrigues gave the Lost Coast Outpost his best effort. It seems to boil down to the fact that public employee pensions come with a guaranteed benefit: An amount paid out to the retiree no matter what happens in the interim. When the markets crashed in 2007/2008, most everyone’s 401(k)s crashed along with them, but in the case of public employees and their pension it was the employers — the public — that were left holding the bag.

A while after we talked, he sent an email that attempted to further explain the reason why the city finds itself nearly $8 million in debt to the CalPERS “side fund” that acts — if I understand it correctly — operates as a sort of insurance fund against volatility in the sorts of assets  the retirement system invests in.

In all honesty, I’m still not quite certain exactly why the money is owed — my fault, no doubt, and not Rodrigues’. I look at this 2010 list of indebtedness to the side funds statewide, and there’s a wide range of both deficits and surpluses around the state. How did Eureka end up on the wrong side of that while Fortuna, say, did not?

But Rodrigues’ email follows, and wised-up readers are invited to use it to help the benighted among us figure out the answer:

In June of 2003, the CalPERS Board implemented a requirement that all plans with less than 100 active members be assigned to a risk-sharing pool with all other agencies in the State with similar benefit packages. The purpose of establishing these risk pools was to establish consistent, less volatile employer contribution rates for smaller agencies like Eureka within the collective pool. Prior to this time the City of Eureka had a stand-alone plans for its “police safety”, “fire safety”, as well as for its “miscellaneous” plan employees. As the City has less than 100 employees within each of the safety plans, it was placed in the 3 percent at 50 benefit pool with other communities.

CalPERS required that all participating agencies in the risk pool have fully funded pension liabilities; each contracting agency was given the option of contributing the unfunded liability with a single lump-sum payment or repaying the unfunded liability as a loan on an installment basis, at a 7.75 percent (equal to the CalPERS long-term investment rate of return). These side fund “loans” are paid off over time by adding the amortization to the employer’s contribution rate.

The amortized amount for these side funds in 2012-13 equates to nearly 13 percent of safety payrolls. Combined with the risk pool’s normal cost, payment on pooled amortization items and a small surcharge, the total rate assigned is nearly 40 percent of safety payrolls. By paying down these side funds the City will lower its contribution rates, which will result in a annual net savings to the City.

The City has always met its pension obligations to CalPERS and never once has “fallen” behind in its payments. The unfunded liability is a result of CalPERS actuary calculations and as you’ve pointed out is a very common among member agencies. I cannot talk specifics about your comparison of Eureka vs. Arcata only to say Eureka unlike Arcata has a Fire Department as part of the City’s retirement system, where Arcata’s fires services are provided through a Fire District.

Hope this aids to your understanding of the issue.