To Plug a Pension Gap, This City Rented Its Streets. To Itself.
The city of Tucson, Ariz., Decided last year to pay rent for itself on five golf courses and a zoo. In California, West Covina agreed to pay rent on its roads. And Flagstaff, in Eries. A new lease agreement includes libraries, fire stations and even city hall.
They are desperate born of a risky financial system, the balloon adopted to meet pension payments that cities can no longer afford. Roasted by the epidemic, cities are essentially using their own property as collateral to raise money to pay their workers’ pensions.
It works like this: The city creates a dummy corporation to hold the property and then leases them. The corporation then issues bonds and remits the proceeds back to the city, which sends cash to its pension fund to meet its shortfall. These bonds attract investors – who are desperate for yields in a world of almost zero interest rates – by offering a rate of return that is slightly higher than similar financial assets. In return, the pension fund invests the funds raised by bonds into other assets, which are expected to generate higher returns over time.
If they can strategize, the cities issuing these bonds can reduce their pension bills by an amount, which is the difference between what they earn and what they pay. But as with any strategy based on long-term assumptions, there is risk.
Taxpayers may still have to repay pension fund money if the investment does not yield the return they expect. However, most municipal debt is considered bulletproof because a government vows to make its creditors exhaustive by default, with bonds issued by West Covina not guaranteed.
Jessica Schwemaker, a member of the City Council of West Covina, said, “When this investment banker took $ 1.2 million from California Public Employees last year as a way to cover a monthly bill, it flashed my mind that My mind boggles. ” ‘Retirement System, or Calpar. “These are roads that have not been built in 20 years.”
Across the country, cities and cities are adopting more aggressive investment strategies as they struggle to cover funding gaps in their pension programs. Nationwide total public pension shortfall is about $ 4.7 trillion Pension tracker, A project of a public policy program at Stanford University.
Many states are trying to build their pension system, which often means asking local governments to send too much money. Some towns have just cash these days, but they can borrow it long-term from investors, with maturity so far in the future, it seems like free cash. For example, bonds in West Covina do not need to be repaid for 24 years.
When a municipality borrows money for a public project like a new road or bridge, it usually issues a general obligation bond after obtaining voter approval. These are the backbone of municipal finance, and come with strong guarantees – courts can force borrowers to pay, even if it means raising taxes.
But this is different when a municipality borrows to cover pension shortages. Typically, this is done with a pension obligation bond. These require voter approval in some states, but usually come with lower guarantees for their buyers.
It calms down when the municipality uses the approach of West Covina. Because the bond is issued by the Dummy Corporation, it is often called something else – a “lease revenue bond” in the case of West Covina – and does not necessarily require voter approval.
The results of this approach became apparent after Detroit was declared bankrupt in 2013 and could not make full payments to its creditors.
Like West Covina, Detroit used dummy corporations to borrow money to order their pension. A few years later, in bankruptcy, Detroit Tried to reject Pension lending of $ 1.4 billion, is called a sham transaction that uses dummy corporations to get around the legal lending limit. When the dust has settled Bondholders got about 14 cents on the dollar. The city’s retirees also took haircuts.
The website of the 20,000-member Government Finance Officers Association, whose mission is “Advance Excellence in Public Finance,” shouts out: “State and local governments should not issue POBs”
It has not caused any harm to governments. According to data compiled by Municipal Market Analytics, a research firm, cities and states nationwide have released $ 6.1 billion in pension obligation bonds in 2020, more than in any year since 2008. States with significant new pension borrowings last year included Arizona, Florida, Illinois, Michigan and Texas. In California, cities borrowed more than $ 3.7 billion for squirrels in various public pension funds, breaking the old state record of $ 3.5 billion established in 1994.
This is a big return for such a loan, Matt Fubian, a partner in market market analytics, who has been writing about deals for years. “They are borrowing money and basically putting it into the market and gambling,” he said.
Mr Fabian said his firm’s borrowing by the municipality almost certainly missed, which adopted West Covina’s approach, as the names of those bonds varied. Flagstaff last year hired a marketing pension to its city hall, libraries and fire stations as “certificates of participation”. In January, Tucson did the same, renting two police helicopters, a zoo conservation center, five golf courses and bleachers in its rodeo grounds, among other things. And Berwyn, a suburb of Chicago, used “communicated tax securitization bonds” to help police police pensions.
West Covina, about 20 miles east of Los Angeles is a lifetime outpost of citrus growers that are now rented, paying the dummy corporation essentially money to service the debt. By issuing that loan, the city was able to make a lump sum payment of approximately $ 200 million to CalPERS.
Like many city pension schemes that manage calipers, West Covina is only partially funded. CalPERS treated West Covina as a loan of about $ 200 million at 7 percent interest. This is an exceptional rate in today’s environment, but calipers use it because it is the return that pension system projects earn, on average, from their investments.
By paying most of its “debt” from Callopers, West Covina doesn’t have to worry about 7 percent interest, at least for now. Risk: If CalPERS misses its investment target, West Covina’s plan will be reduced again, CalPERS will treat the shortfall as new debt and the entire process will begin.
When West Covina considered the deal, the city’s investment banker, Brian Whitworth of Hilltop Securities, estimated that the city would pay 4 percent to borrow. Because the CalPERS were shooting a 7 percent return, he said, the city would save an estimated $ 45 million.
“On a bond of about $ 200 million, that’s a very good savings,” he said.
No one sought a projection of what could happen if the calipers did not achieve 7 percent. Instead, Mayor Tony Wu greets Mr. Whitworth as to why he felt that West Covina would have to pay 4 percent, when El Monte, next door, was paying just 3.8 percent.
Proposals 4 to 1 were passed, with Ms. Schwemaker voting against it because she considered the plan a gimmick to avoid putting it in front of voters, who she believed would be unlikely to approve a deal that would have taken West Will increase Covina’s debt by leaps and bounds.
Mr Wu, now a city councilor, said the city had to borrow, as it was locked into uncertain pension schemes and the calipers refused to negotiate easy terms. A longtime owner of a mortgage-lending business, he said it was “insane” for CalPERS to base everything at 7 percent when real interest rates were too low. But he said that challenging the CalPERS would be a waste of time.
“It seems very logical, but it’s not going to happen, because those who have the power don’t want to lose it,” he said. “They are going to fight us big time. They are going to sue us in hell. Their lawyers will go laughing in the bank.”