BRADENTON, Fla. — The Fort Lauderdale City Commission late Wednesday night approved issuing $340 million of taxable pension obligation bonds to pay 75% of the Florida city’s unfunded liability.
Some members of the public and two commissioners said the deal is too risky, though the majority of commissioners and others said the transaction makes sense because of current low market rates.
Had the offering priced Tuesday, it could have brought an all-in interest cost of 3.9%, said the city’s financial adviser Ed Stull, a managing director at First Southwest Co.
That’s lower than what union money managers achieved with the investment of pension funds, city officials said.
Typically, when a municipality issues POBs it invests the proceeds in hope of achieving returns in excess of debt service payments.
Fort Lauderdale resident Robert Walsh urged the commission to consider lowering the amount of borrowing because investments are going to be made in stocks, which are unpredictable.
Vice Mayor Charlotte Rodstrom, who voted against the deal, said she supported the position of pension bond critics who argue that such risky deals are done by municipalities that are “borrowing and betting on the stock market through their pension fund.”
Pension funds are already being invested in the financial markets, said Commissioner Romney Rogers, who called his decision to support the deal “weighty” but also based on a logical and reasonable financial analysis.
Rogers said that while Fort Lauderdale will continue working on pension reform, it has a liability that continues to grow and there are far more benefits for the city in issuing the bonds rather than not going forward.
Over the 20-year life of the bond issue, the city expects to achieve present-value savings of $83 million that “we won’t have to pay from the general fund,” Rogers said. “This money shouldn’t be spent on any new benefits. That’s obviously why we put the covenants in there.”
The offering includes a covenant stating that the city cannot increase benefits unless the present value of the cost is fully funded, and the increased benefit is approved by at least four of five commission members.
Dick Larkin, director of credit analysis who follows pension bonds at Herbert J. Sims, said he has never heard of a covenant similar to what Fort Lauderdale plans, and it should benefit bondholders because the city will be less likely to extend benefits that it cannot afford to pay.
It should also protect bondholders from situations like those in California where bankrupt Stockton and San Bernardino are considering large haircuts for pension obligation bondholders even though the bonds were not the cause of their financial problems, according to Larkin. The cities sold pension bonds to fund what they owed to the California Public Employees’ Retirement System, and both have suggested that they will pay CalPERS in full but not POB investors, he said.
“I think the covenant Fort Lauderdale is putting in is good because maybe it will convince bondholders that if they invest in Fort Lauderdale’s pension obligation bonds they won’t get screwed,” he said.
The transaction is scheduled to price Sept. 19 with Citi as senior manager and book-runner. Ratings for the deal should be released soon. The city’s general obligation bonds are rated Aa1 by Moody’s Investors Service and AA by Standard & Poor’s.
