Regional News

Fort Lauderdale Mulls Pension Bond Deal

BRADENTON, Fla. — Lee Feldman believes in pension obligation bonds, and has used them in previous Florida cities that he managed, North Miami and Palm Bay.

Now, more than ever, POBs make sense, according to Feldman, who currently is Fort Lauderdale's city manager.

Some residents, and at least one city commissioner, believe such a long-term obligation is too risky, especially when it is dependent on investing proceeds.

Feldman has recommended that the double-A rated city sell roughly $300 million of POBs before the fiscal 2013 budget goes into effect Oct. 1.

The sale would provide the city with about $5 million in relief in the nearly $700 million budget by removing pension contribution funds from various departments.

The bonds would also shave off $300 million of the city's $400 million in unfunded pension liabilities, and that would make the city's balance sheet look better when new accounting requirements and rating standards under consideration by Moody's Investors Service go into effect, Feldman contends.

POBs are issued as taxable securities and Feldman notes that taxable interest rates are extremely low.

"I think it's a win-win for the city, and the timing is just perfect for us," he said in an interview Tuesday.

The idea doesn't have support from the entire city commission and some segment of the public.

A final decision on whether the city will sell POBs is expected on Aug. 21.

The risks of selling pension bonds were outlined several times during a meeting with city commissioners last month by Fort Lauderdale's financial advisor, Ed Stull, a managing director at First Southwest Co.

Typically, when a municipality issues POBs it invests the proceeds in hope of achieving a rate in excess of what it is paying on the debt, in the process reducing its pension fund's unfunded liability.

"The risk to the city is if you borrow the money, say at 3.8% all in, and you invest it and you don't achieve the 3.8% then you are going to be losing money and losing ground" on the unfunded liability, Stull said.

One reason the deal could work to the city's benefit is its high credit ratings, which would provide access to the lowest interest rates, he said.

"We are filling a hole in our budget with something that's a risk," Vice Mayor Charlotte Rodstrom said while voicing her opposition to selling pension bonds at last month's meeting.

Also arguing against Fort Lauderdale issuing pension bonds at last month's meeting was her husband, Broward County Mayor John Rodstrom, who is director of national public finance for Oppenheimer & Co.

He questioned whether the city could make an adequate rate of return on investing the proceeds, particularly without investing in stocks. Other cities have filed for bankruptcy because of pension bonds, John Rodstrom told commissioners.

"It is potentially a huge nightmare," he said. "In the future after you bond, if you can't make the debt service payments you file for Chapter 9."

The claim that pension bond debt could force a city to file for Chapter 9 is "outlandish," said an analyst who asked not to be named.

In most states, pension bonds are general fund obligations, which means investors are paid with available funds, the analyst said.

Some cities that have filed for bankruptcy and have pension bonds have not adjusted their pension benefits, the analyst also pointed out, adding that some municipalities are still paying 100% of employees' pension contributions.

Any missed bond payment could push a city to file for bankrupcty, not just a pension bond issue, said Dick Larkin, director of credit analysis at Herbert J. Sims.

"If a city misses a debt payment, it would be because it already is in a cash crisis, and not repaying debt could trigger bankruptcy," Larkin said. "The POB is not going to be the reason for a bankruptcy."

Pension bonds have not driven municipal bankruptcies or fiscal emergencies, he said.

Pension funding obligations have been a cause of fiscal stress and bankruptcies, but aren't the top driver.

Fiscal mismanagement has caused municipal bankruptcies and financial emergencies, including not budgeting for reductions in spending when revenues fall during a recession, using one-shot revenue and deferring expenses to balance budgets, and mismanaging labor costs and associated benefits, according to Larkin.

On the flip side, he said issuing POBs could bring more discipline to a city because the amortization of the bonds is fixed by the due dates and maturities. Bond payments must be made on a regular schedule while pay-as-you-go pension fund contributions can be postponed.

As long as the returns on the pension bond proceeds are greater than the cost of borrowing, Larkin said a POB deal is "a smart move," though there is no guarantee that investment returns will always exceed the interest on the bonds.

"With taxable interest costs at record lows, today's market might give the city its best chance to make the POB issue a success in the long run," he said.

Feldman said the city actually began contemplating the issuance of pension bonds last fall but needed additional time to complete annual actuarial evaluations.

The city is in the process of seeking underwriters for the sale, if the POB deal is approved.

Fort Lauderdale is a 100-year-old city with 166,000 residents on Florida's southeast coast, about 32 miles north of Miami and 46 miles south of West Palm Beach.

In the last four years, the city has seen taxable assessed values decline by nearly $8 billion.

For the first time since the decline began in 2008, the tax rolls this year increased by 1.7% to $23.75 billion. Most of the increase is attributable to new construction.

The City Commission has maintained the property tax rate at 4.119 mils since 2008, and to ease the burden on the city budget the past few years the workforce has been reduced while departments have been reorganized and consolidated.

The commission also converted to defined contribution retirement plans for new hires. According to the proposed fiscal 2013 budget, the city recently established a minimum reserve level of 16.6% of the general fund. The proposed reserve for the upcoming year is $46.3 million or 17.3%.

The city has about $70 million of general obligation bonds outstanding through 2041. The debt is rated Aa1 by Moody's and AA by Standard & Poor's. About $665 million of water and sewer revenue bonds are outstanding through 2041. They are rated Aa1 by Moody's and AA-plus by S&P.

The water and sewer bond rating was raised above the city's GO rating in April by Standard & Poor's, which cited the system's "consistently strong financial profile aided by management's demonstrated willingness to adjust rates on a regular, recurring basis."




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