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South Florida Sun-Sentinel: Fort Lauderdale plans massive borrowing to cover pension costs
Monday, July 23, 2012
The risky venture raises red flags among financial analysts nationally. Similar pension borrowing recently forced the cities of Stockton and San Bernardino in California to declare bankruptcy.
Fort Lauderdale plans to borrow $297.5 million using pension obligation bonds and dump the money into the hands of the city’s pension fund trustees to invest. Officials anticipate investment returns will exceed the debt’s interest payments.
But what comes off the books in terms of projected pension shortages is turned into actual debt that has to be paid back over 30 years.
That’s not a problem if the investments do well. The bonds free up money in the city’s budget by reducing the amount of taxpayer dollars needed for the pension funds.
But if the investments perform poorly, the city’s budget will take a hit as the city is forced to cover the debt payments and pour more money into the pension funds.
“Given our current financial problems in this country, it’s hard not to be concerned about the prospects of taking out debt to make an investment,” said Florida State University assistant professor David Matkin, who wrote a report card on local government pension funds for the Leroy Collins Institute. “If our investment goes down, then we still have to pay back the borrowed money.”
City Manager Lee Feldman said the current cost to borrow is so low, there is little chance the investments won’t outperform the anticipated 3.8 percent bond interest rate.
“If the interest rate in the taxable market was at 5.5 percent, it would probably not be a good time to do it,” Feldman said. The bonds, he said, offer the city a cheaper way to pay for unfunded pension liabilities.
A 2010 report by the Center for State & Local Government Excellence said pension obligation bonds aren’t always a bad idea.
“It appears that [pension obligation bonds] have the potential to be useful tools in the hands of the right governments at the right times,” the report said. “Issuing a POB may allow well-heeled governments to gamble on the spread between interest rate costs and asset returns or to avoid raising taxes during a recession.”
Commissioners will vote on the plan Aug. 21, but the city’s proposed budget for fiscal 2013 already counts on the bonds to free up $4.3 million to cover other expenses.
A half-dozen Florida cities have borrowed using pension bonds. Two — Palm Bay and North Miami — did so while Feldman was their city manager.
Nationally, a Los Angeles Times analysis showed the amount of pension obligation bonds being taken out increased from $1.4 billion in 2009 to $3.6 billion in 2010, to $5.2 billion last year. They have been used most heavily in California and Illinois.
Feldman wanted Fort Lauderdale to take out $380 million in bonds, but commissioners said that was too much risk. Vice Mayor Charlotte Rodstrom and Commissioner Bobby DuBose still aren’t sold on the bonds.
The bonds would go into two separate pension plans, one for general city employees and the other for police and firefighters.
“The problem here is the gains go to the pension plans, the losses go to the city,” said Bob Oelke, a member of the city’s audit advisory board. “There’s a reason state law doesn’t allow cities to borrow money and invest in the stock market directly. The city couldn’t do this on its own. It has to do this through the pension plan.”
Pembroke Pines borrowed $89.8 million in 2003. The city later had to make significant changes to its retirement plans, in part because of poor returns caused by the recession.
“We had some draconian measures we had to take,” Pembroke Pines Mayor Frank Ortis said. “I think we’re on the road to a good recovery. Hopefully, the investments will come back.”
In Fort Lauderdale, actuarians estimate the city has only covered 60 percent of its future anticipated pension costs. The borrowing would raise that level to 83.5 percent.
But that funding level isn’t fixed. In Gainesville, an employee pension plan that reached 95.6 percent funding after issuing bonds in 2003 reported only a 70 percent funding level as of September.
In Pembroke Pines, the funding level of the police and firefighter plan reached 71.8 percent in 2004, but had dropped to 60.1 percent by last year.
“Your liabilities will go up and you will be underfunded again,” Matkin said. “It gives a false impression that your pension activities are sound.”
And that false impression might put pressure on future commissions to give cost-of-living-adjustments or other new benefits to retirees.
“It’s hard to know how it’s going to turn out once it’s all done,” Oelke said. “The people that are dealing with it today aren’t the ones that are going to face the consequences down the road.”
lbarszewski@tribune.com or 954-356-4556