La Verne, California, is moving forward with plans to sell pension obligation bonds to deal with a nearly $50 million anticipated pension liability.

La Verne, a city of 33,000 33 miles east of Los Angeles, is the latest California city to pursue the strategy – even though government finance officers have advised caution.

Signage stands outside the offices of the California Public Employees' Retirement System (CalPERS) in Sacramento on Sept. 13, 2010
La Verne's pension obligation plans were driven by changes to California Public Employees' Retirement System investment assumptions. Bloomberg News

The decision was spurred by its increasing pension obligations after the California Public Employees’ Retirement System last year revised downward its expected rate of return for investments – requiring its members to pay more to make up the difference.

La Verne, which has an annual general fund budget of $11.3 million, expects its unfunded liability to grow to $49.3 million by fiscal year 2032-2033, according to a staff report delivered to its City Council in January.

“Neither the City's reserves nor the projected growth in revenues will be sufficient to handle this growing expense,” City Manager Robert Russi wrote in a staff report.

The city’s annual payment towards its unfunded liability is estimated to grow from $2.3 million to $7 million with a total cost of $125 million, according to the staff report.

The pension obligation bond will lower its costs with annual payments of $3 million at a 4.5% interest rate for a total of $90 million, the report said.

“Based on the rates right now – what we can issue bonds for – we could stabilize the annual cost and possibly save a good chunk of money over the next 30 years,” said Mark Alvarado, a certified public accountant hired by the city as a financial consultant.

The city has hired a bond finance team of Quint & Thimmig LLP as legal counsel; Hilltop Securities as underwriter; and Harrell & Company as financial advisor.

At an April meeting, the council directed city staff to pursue a bond of up to $55 million.

The financial team will determine the final amount in May with the council to take final approval in June. The bonds would be issued by the end of that month before the new fiscal year starts, under the plan approved by the council.

The Government Finance Officers Association has recommended caution for government agencies considering pension obligation bonds citing risks including potential underfunding and lack of flexibility during economic uncertainty.

Jeffrey Michael, director of the Center for Business and Policy Research at the University of Pacific in Stockton, said given the recent decision by CalPERS he said it’s not surprising that some cities are considering pension obligation bonds but he called it an “inherently risky strategy.”

“It’s certainly a bet on the market,” he said.

Investors have also seen risks with pension obligation bondholders in recent municipal bankruptcy cases in San Bernardino, Stockton and Detroit taking haircuts.

Alvarado said La Verne city officials are aware of the risk but believe the climate has changed given the CalPERS action, providing the city with a clear amount of what is owed. He also believes the market remains strong for pension bonds.
“We definitely feel there’s a demand out there for municipal bonds,” he said.

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