BRADENTON, Fla. — Florida's most-populous city may tap revenue from its own utility system to help close the gap on a $1.68 billion unfunded pension liability.
The idea isn't going over well with the head of the utility.
The Jacksonville Police and Fire Pension Fund is currently funded at about 40%. Mayor Alvin Brown wants to close much of the liability by requiring greater contributions from the nonprofit JEA, a combined municipal water and electric system.
Brown recently proposed that JEA, formerly called the Jacksonville Electric Authority, increase its contribution rate to the city by another $40 million a year over 14 years, for a total of $560 million, or until an 80% funding level is achieved in the police and firefighter's fund.
The $40 million-a-year figure hit JEA Board Chairman Mike Hightower like a bombshell, he said.
He knew discussions occurred between city and utility staff members about involving JEA in the pension liability solution, but was unaware how much the mayor wants.
"Nobody heard $40 million until it was dropped in the newspaper [and] my response was I never heard that number," said Hightower, who added he's concerned about the perception it conveys to Wall Street and rating agencies. "I don't think we've got $40 million for 14 years, and if we had, we would pay down debt."
Rating agencies are already watching the city to see how it solves the looming pension problem, and have warned that dragging JEA into the mix could have a deleterious impact on the utility's credit.
Moody's Investors Service placed Jacksonville's Aa1 general obligation rating on review for possible downgrade along with 123 other issuers Jan. 15 in conjunction with its updated rating methodology placing greater weight on pension liabilities because of their potential to "constrict a local government's financial flexibility."
In an earlier review of the top 50 local governments' adjusted net pension liabilities, Moody's said Jacksonville has "a high net pension liability not because of contribution underfunding but because of other factors such as asset performance and benefit accruals."
Fitch Ratings has also signaled concern about the city's liability, and revised the outlook on all of its securities to negative from stable in August citing uncertainty about how Jacksonville would resolve its large unfunded pension liability and rapidly rising pension contributions.
Fitch rates the city's GO bonds AA. Standard & Poor's rates the bonds AA, and continues to maintain a stable outlook on the city's credit.
In a November Morningstar report on pension plans in the nation's 25 largest cities, only Chicago and Philadelphia had lower funding ratios than Jacksonville's.
"A downgrade in [Moody's] credit rating would not only hurt our city prestige but also hurt taxpayers," Brown told a pension reform task force Jan. 21 when he unveiled his plan to have the liability underwritten by JEA, the nation's seventh largest public power utility with more than 417,000 customers, according to the American Public Power Association.
Brown said the city must finish pension reform "as soon as possible so that taxpayers, city employees, and the ratings agencies know that Jacksonville means business."
Brown proposed changes to the pension fund's structure and committing the city to doubling the funded status of the police and fire pension system to 80% from 40% "as soon as fiscally prudent."
"We can accelerate the payment of the unfunded liability through partnership," he said. "As you know, the Jacksonville Electrical Authority, JEA, is the city's largest financial partner.
"I am confident that we will find a way to partner that supports the JEA's bottom line and provides the city with a funding source to accelerate the payment of our unfunded liability," he said.
The mayor's reform plan "assumes that we can reach agreement with JEA to increase our contribution by an additional $40 million annually until the Police and Fire Pension Fund is 80% funded."
Such a move would save the city's general fund $2.75 billion over 35 years, stabilize annual contributions to the Police and Fire Pension Fund, and raise its level of funding, he added.
Brown has not released details on how JEA could increase its contribution, or what effect it might have on electric and water consumers. The mayor's office did not respond to a request for comment for this story.
In a review of JEA's AA-rated electric system revenue bonds for a refunding issue in January, Fitch noted that the utility's contributions to the city will be renegotiated in 2016. The amount transferred for fiscal 2014 was $233 million, according to JEA.
"While the annual transfer amount has thus far been manageable for JEA, any meaningful escalation beyond 2016 resulting from the mounting pressure to address the city's large unfunded pension liability would be viewed negatively," Fitch analyst Christopher Hessenthaler said.
Moody's rates JEA's senior electric revenue bonds Aa2 with a stable outlook, while S&P assigns its AA-minus ratings to the debt.
Analysts have noted that the utility's projections of rising costs and stable base rates will lead to lower coverage.
JEA has $5 billion of combined electric and water revenue bonds outstanding. The authority has not issued new debt in the last two years, and has concentrated on debt reduction measures, including refundings, and other cost cutting strategies.
It also has seen a fundamental shift in underlying metrics and lower sales due, in part, to the recession, conservation efforts, and weather-related events that prompt lower usage.
Before the recession, JEA had an average annual revenue growth of 3% a year. Now it is experiencing less than 1% growth, according to Hightower.
"We don't see, unfortunately, a quick turn-around in the near future," he said.
Last year, the authority introduced an incentive program offering employees bonuses if they came up with ways to save the utility money. They suggested $32 million in cost-reduction measures, and were rewarded nearly $2 million in bonuses.
JEA also faces unknown expenses in June 2015 when the Environmental Protection Agency institutes new regulations for power plants to cut carbon pollution to combat climate change. The new regulations could cost the authority as much as $1 billion for reengineering its plants, Hightower said.
"That's what we're budgeting because we've got so much fossil fuel," he said.
Ratepayers are also questioning how much more they will pay for the mayor's plan, which has not been formally presented to JEA's board, said Hightower.
He believes rating agencies will view an additional transfer of $40 million over 14 years to solve pension problems of other agencies as a disproportionate share of pension contributions.
"If rating agencies say they have a concern about what's going on in Jacksonville to me this is no-brainer and we should be concerned," he said. "They have raised the red flag."
Hightower said he wrote to the mayor on Jan. 31 asking him to submit a formal proposal as soon as possible so JEA can begin "objective due diligence" on it.
While city officials believe there are ways the utility can afford $40 million, "We just respectfully disagree," Hightower said.