ALAMEDA, Calif. — Officials in Beverly Hills, Calif., were concerned about the city’s growing liability for the future health care costs of its current employees.
Their response: offer to buy out those vested benefits, financing the buyout with municipal bonds.
“They basically wanted to help control or contain some of those costs long term,” said John Kim, principal at De La Rosa & Co., the city’s bond underwriter.
The buyout is being financed with $20 million in taxable bonds, sold as part of a $62 million lease-revenue deal from the Beverly Hills Public Financing Authority that priced July 28.
So far, about 30% of eligible employees have signed up for the “alternative retiree medical program,” according to Scott Miller, Beverly Hills’ chief financial officer.
The deadline for employees to accept the offer is in November.
“It allows you, if you’re a vested employee, to receive a one-time payment equal to the present value of those vested benefits,” Kim said.
“It limits the city’s long-term liabilities for medical health, by trading in for a net present value of cash today,” Miller said. “It takes all the guesswork out of what costs will be in the future.”
Employees who elect to join the plan will put 20% of the total they receive into a tax-sheltered retirement health savings account.
They can place the remainder of the funds in other tax-advantaged savings accounts, such as 457 and 401(k) plans, or take a taxable lump-sum payment.
All told, the city priced $28.9 million in fully taxable bonds last week.
In addition to the health care buyouts and issuance costs, the taxable 2010 Series B also provides $8.5 million to finance the purchase of an office building at a location where the city is planning to build a parking structure.
At the same time, Beverly Hills also priced $13.7 million of tax-exempt bonds and $19.9 million of taxable Build America Bonds to finance an underground parking garage.
Miller predicts that employee payouts will use up about two-thirds of the $20 million.
If there is a balance left, he said, it will be applied to the city’s accrued other post-employment benefits, or OPEB, liability.
Assuming 35% of eligible employees participate, the city projects that it will save $16.6 million over 50 years, with a present-value savings of $6.3 million.
The lease-revenue bonds are secured by the lease of an existing city-owned parking garage on Rodeo Drive.
Moody’s Investors Service assigned a rating of Aa2 to the issue, while Standard & Poor’s and Fitch Ratings each assigned AA-plus ratings. All three agencies assign Beverly Hills a triple-A issuer rating.
“While parking garages are not ordinarily considered essential assets, in Beverly Hills they are a critical component supporting the dense, high-end shopping activity upon which the city rests its reputation,” the Moody’s rating report said.
Beverly Hills had looked at using a bank loan to finance the retiree health-care payout program, to the point of securing a $20 million credit line from City National Bank, at 199 basis points above 10-year Treasuries.
The choice came down to simple math.
“It was just the total cost,” Miller said. “The total cost of issuing the bonds, at the end of the 11-year [amortization] period, was significantly less.”
The taxable Series B bonds priced with yields from 0.79% for 2011 maturities to 5.898% for a 2025 term bond.
Miller said he had never heard of a city using municipal debt for such a payout program, but he admitted that Beverly Hills has some built-in advantages in accomplishing such a deal.
“The city has a natural triple-A rating, and we’re really well-known,” he said
The bond structure is unusual in that it is one of the few California lease transactions without a reserve fund, Kim said.
“We believe the city’s very strong fund balance allows management adequate flexibility to allocate resources from the general fund if unexpected needs arise,” according to the Standard & Poor’s rating report.
Beverly Hills has already modified the medical benefit program for current employee, to contain costs, and established a lower tier of retiree health care benefits for employees hired starting this year.
Those workers receive a defined contribution that goes into a tax-advantaged health savings account, but aren’t guaranteed any defined health care benefit.
Jones Hall served as bond counsel and disclosure counsel on the deal, Public Resources Advisory Group was financial adviser, and Stradling Yocca Carlson & Rauth was underwriter’s counsel.