Wow, what an election. I got most of what I wanted out of it – Prop 15 is dead, Prop 22 won. Doug won. It still looks good for Don. Locally, I have mixed feelings. It’s good to get rid of the liberal majority on council, but no, I’m not glad about a conservative Super-Majority, cause that means we are going to get that Pension Obligation Bond. Hmmm. Pretty sure we were going to get it anyway – the only vocal opposition was Stone, and he has been retired.
So, despite conservative promises that we will get less crime, a cleaner park, and better streets, here’s the thing – if they float that POB, the General Fund belongs to CalPERS and the POB holders. Our streets will continue to degrade, crime will go up, and we’ll never get the park back.
This article, from “Governing,” gives us some historical perspective on POB’s in California. It says what the consultants made very clear to the city Finance Committee – these bonds are risky, even in a good market.
https://www.governing.com/topics/finance/gov-pension-obligation-bonds-risky-or-smart.html
“POBs are a financing maneuver that allows state and local governments to “wipe out” unfunded pension liabilities by borrowing against future tax revenue, then investing the proceeds in equities or other high-yield investments. The idea is that the investments will produce a higher return than the interest rate on the bond, earning money for the pension fund. It’s a gamble, but one that a lot of governments are willing to take when pension portfolio returns plummet, causing unfunded liabilities to run dark and deep.“
Yes, Chico’s Unfunded Pension Liability runs very dark and deep. Just recently, the head of our finance department revealed that we not only have a $140 million UAL, but we owe another $140 million in interest. All this because of unrealistically low contributions by employees, compounded by poor investment returns from CalPERS. Chico employees pay, at most, 15% of pensions that run from 70 – 90% percent of highest year’s salary. Management, the highest salaried individuals in Chico, pay less than 10%, even while boasting that they pay 3% of the city’s share.
Here’s a good credit card analogy – this is like always paying the minimum payment on your credit card, never making extra payments, and then going over your credit limit regularly. In the case of the City of Chico and CalPERS, the city has gone over limit with crazy-generous salaries and benefits, and then ladled on some more trouble by creating three new management positions with $100,000+ salaries in the last year.
Over the last few years, the city finance team has arranged to make extra “catch up” payments, creating a “Pension Stabilization Fund”. The PST takes a percentage of every department payroll, and uses it to make that extra payment to CalPERS – this year growing to $11 million. And you probably wondered why the street in front of your house looks like a section of Downtown Tijuana. Silly you! You need to pay more attention.
This is maddening – our “extra” payments have gone up, up, up – meaning, the taxpayers are paying more, while getting less service. All the while, employee contributions are not going up, just employee expenses. And the UAL recently reported by the city finance man is about $17 million more than what he reported last year – $123 million. In one year, the UAL went up that much. Not including interest. Ever think to yourself, “how the hell did that happen?”
A popular analogy for POB’s is that the city would be paying their Master Card by taking out a new VISA. That is exactly right. Worse – they are investing the money they take from their Visa, hoping to be able to get enough returns to pay off both cards. Like BC said – that’s like taking your credit card to the casino.
This scheme became popular as far back as 1985. At first it seemed to be a good idea, but times changed. “When Oakland, Calif., launched the first pension obligation bond in 1985, it appeared to be a reasonable strategy. It qualified as a tax-free bond that could be issued at the lower municipal bond rates. A state or city could then pivot and invest the funds in safe securities — a corporate bond, for instance — at a slightly higher rate. ‘That was classic arbitrage,’ Cleary (Oregon Pension System Chief) says. ‘You were locking down the difference between nontaxable bonds and taxable bonds.’”
What is “arbitrage”? “Arbitrage occurs when prices for the same product differ between two markets, allowing a nimble player to exploit the difference. ‘Real arbitrage is free money,’ says Andrew Biggs, a scholar at the American Enterprise Institute. ‘But it doesn’t hang around very long.’”
In fact, it ended quite abruptly with The Tax Reform Act of 1986, which prohibited state and local governments from reinvesting for profit the money from tax-free bonds. But the scheme didn’t go away. “When the concept resurfaced, the strategy called for states or localities to issue a taxable bond and leverage the higher interest rate of that bond against higher return but riskier equity market plays. So long as markets boomed, the new tactic seemed savvy. ‘Some people call this arbitrage, but it’s not,’ Cleary says of post-1986 POBs. ‘It’s really an investment gamble.’”
Nonetheless, in the early 2000’s, POB’s became the strategy du jour for cities struggling with pension debt – rather than reform their pensions, they just dug themselves in deeper. Fast forward to 2013 when two California cities, Stockton and San Bernardino, went bankrupt. “Generous pensions awkwardly propped up with ill-timed POBs contributed to both debacles.”
“Over the years, returns on POBs have often fallen below the interest rate the state or locality paid to borrow the money, digging the liability hole even deeper. Nonetheless, they remain popular with politicians in a revenue pinch. Politically, it is easier to borrow money to pay for pension costs than it is to squeeze an already-stressed budget. While many economists and policy analysts view them as risky gimmicks and question the high market growth assumptions that make them seem viable, POBs have defenders who believe that with careful timing they can pay off.“
I don’t think that the proponents of this scam believe it will pay off. Chico City Manager Mark Orme and his Hemet side-kick Chris Constantin know exactly how risky this is. Constantin, in presentations to various city commissions, repeatedly predicts a downturn in the stock market. The consultants who gave the presentation remarked several times that CalTRANS isn’t expected to hit their investment target, not by a long shot – why should POB investments fare any better? I don’t think either Orme or Constantin really care – both of them are nearing retirement, I believe they just want to prop up the pensions for another 5 or 10 years.
For another thing, now that council has a conservative Super Majority, they can put Orme’s sales tax measure on the ballot, thus insuring a taxpayer supported revenue stream to help pay off the POB.
So, now is the time to contact your new council majority and start telling them what you think of this insane scheme to get YOU to pay STAFF’S pension deficit. Do you really think that’s YOUR responsibility? Did you negotiate these contracts? No, you weren’t even allowed in the building when they negotiated contracts this past six months.
Start with Sean Morgan, who voted as a Finance Committee member to forward this crap to the full council. That’s sean.morgan@chicoca.gov
Here’s the real bad news – the county is also looking at a POB!
That’s next time, on “How to Take on a Shit Storm with a Tennis Racket”.
Tags: Butte County considering Pension Obligation Bond, City of Chico considers Pension Obligation Bond, Should taxpayers shoulder CalPERS UAL burden?
