CHICAGO — Ottawa County, Mich., is bringing $29 million of gilt-edged federally taxable bonds to market this week to pay off a chunk of its unfunded pension liability, the first of several similar deals on the horizon from local Michigan issuers.
The triple-A rated county in southwest Michigan, along Lake Michigan, plans to sell $29.3 million of limited-tax general obligation pension bonds Wednesday.
Also coming to market is Bloomfield Hills, an affluent suburb of Detroit that also enjoys triple-A ratings, which plans to float just under $16 million of pension bonds within the next two weeks, according to the city's finance director.
Macomb County, also located outside Detroit, has spent months eying a $270 million borrowing for its retiree health care costs. The city of Kalamazoo is poised to come to market with $100 million of OPEB bonds set for January, pending final approval from the city commission on Dec. 15, according to chief financial officer Thomas Skrobola.
Since 2012, Michigan governments that meet various criteria, including being rated double-A or higher, have been allowed to sell bonds to pay off either their pension or other post-employment benefits liabilities; for defined benefit pension programs, bonds can only be issued to fund them if they are closed to new hires as part of a shift to a defined-contribution retirement plan.
The legislation was originally set to expire on Dec. 31, 2014, but lawmakers have extended the sunset until 2015.
"We were going on that 2014 date, and so we were so close we said let's go ahead and get it done," said Karen Rudder, finance director and treasurer of Bloomfield Hills.
Bloomfield Township — which surrounds Bloomfield Hills — as well as West Bloomfield Township, Oakland County and Saginaw County have already issued bonds for their retirement obligations.
Ottawa, the state's eighth-most populous county with about 270,000 residents, has been planning its borrowing for months, and heads into market shortly after winning approval from the state, required for all Michigan issuers.
Even though the deal faces competition in a week when muni issuance is forecast to jump to $12.5 billion, county officials said they expect interest rates to come in under 4% based on the Aaa rating from Moody's Investors Service.
"We built in a cushion when we did our projections, and we're hoping to do better than our 4% estimates," said Karen Karasinski, fiscal service director for the county.
The county expects to save $15.8 million over the life of the debt by issuing bonds rather than continuing to make contributions, which are expected to spike in the 2020s, said Karasinski.
"We're actually paying slightly more [in the near term] under the bond than we were under the pay-as-you-go, but there's major savings in the 2020s," Karasinski said.
The county will use proceeds to pay off roughly 60% of its unfunded pension liability associated with its now-closed defined benefit pension plan. The liability is estimated at $48 million.
The bonds will mature from 2015 through 2028. The limited-tax general obligation bonds carry the county's full faith and credit pledge as well as a first-budget obligation general fund pledge.
Fifth Third Securities is the underwriter for both the Ottawa County and Bloomfield Hills deals.
Public Financial Management is Ottawa's financial advisor, and Bendzinski & Co. is Bloomfield Hills' financial advisor. Dickinson Wright PLLC is Ottawa County's bond counsel.
Kalamazoo's finance team includes Bank of America-Merrill Lynch and Hutchinson Shockey, Erley and Co. as underwriters, RW Baird and Associates as financial advisor, and Miller, Canfield, Paddock and Stone PLLC as bond counsel.
Ottawa closed its defined benefit plan in 2010 and now offers only a defined contribution plan for new employees.
The bonds will help cover the costs associated with transitioning over to the new plan, Karasinski said.
"We weren't looking for immediate budget relief; we were looking at over the long term how do we smoothly transition between the two retirement plans," she said. "It's in the 2020 years that the defined benefit plan percentage funding requirements were increasing."
Critics of pension obligation bonds, including some muni analysts, say issuers are exchanging a so-called soft debt for a hard debt, that savings might not be that great, and that the market introduces uncertainty into future payments.
"I do think there's risk — you're borrowing money to invest, so I think there's risk," Karasinski said. "But we felt the debt is appropriately sized and can be managed. Ottawa County has a long history of setting aside resources to plan for future expenditures."
In assigning a triple-A rating to the bonds, Moody's praises the county's well-managed financial operations, diverse tax base and low direct debt burden, but warns it has exposure to debt it's issued on behalf of its local governments.
In terms of risk associated with pension bonds, the issuance "creates the potential for future budgetary risk," Moody's notes in its report. "Asset returns that fall below the assumed rate of return used in determining the unfunded liability could result in growth to the unfunded liability in future years," analysts said. "In that event, the county would have to make currently unbudgeted pension payments to the plan while continuing to make debt-service payments on the limited tax bonds."
But Moody's said it expects county officials to monitor such risks going forward and notes the county's "solid record" of fully funding both its annual pension and OPEB obligations.
Moody's is the only agency that rates the Ottawa County debt.
Several issuers that had planned to float pension bonds were forced to delay the transactions after Detroit, the state's largest city, spooked investors by defaulting on its general obligation bonds and filed for bankruptcy in July 2013. The issuers, including Saginaw County, Oakland County, and Bloomfield Township, eventually were able to return to market to sell the bonds.
Ottawa's finance team does not expect to suffer any so-called contagion effect from Detroit's bankruptcy, which is on the verge of being wrapped up, according to Karasinski.
Oakland County, a triple-A rated county that borders Detroit, privately placed just under $320 million in general obligation bonds in September 2013, two months after Detroit filed, to pay off its retiree health care costs.
Saginaw County sold $52 million of taxable pension bonds in January 2014 with yields ranging from 0.4% for 2014 paper to 5.07% for 2028 paper, according to the Municipal Securities Rulemaking Board's EMMA disclosure website. In February trading, bonds with a 2024 maturity and 4.64% coupon were yielding 4.15%, according to EMMA. Bonds with a 2028 maturity and 5.07% coupon yielded $4.1% in April.
Bloomfield Township in November 2013 sold $81 million of triple-A rated LTGO taxable pension bonds with initial offering yields ranging from 0.51% for 2014 debt and to 5.37% for 2032 paper. In trading last week, paper with a 2024 maturity and 4.06% coupon yielded 2.82%, according to EMMA. A chunk of the debt with a 2032 final maturity yielded 3.4% in trading last week, down from an initial 5.37% yield in November, four months after Detroit's filing.
