Sacramento County bond debt highest in state

Take a wild guess as to the culprit…
Timer bomb isolated on white background 3D
Sacramento Bee: The so-called Big Build – the expansion of the Sacramento International Airport – was the biggest public works project in local history at a cost of $1 billion. Yet the debt for the new terminal is not Sacramento County’s biggest.
The county has assumed an estimated $2 billion in debt to try to shore up its underfunded employee pension fund.
Pension and airport financing combined have given Sacramento County the highest bond debt out of California’s 58 counties, The Sacramento Bee found in an analysis of data collected from the counties by the state controller’s office. At the end of June 2014, Sacramento County owed $1.84 billion in bond payments, not including interest, more than half of which came from pension obligation bonds.
In January, the Government Finance Officers Association recommended that state and local governments not issue pension obligation bonds. Bond proceeds are invested in the stock market, and the investment returns might not exceed interest rates for the bonds themselves, the association says in its advisory, which characterizes the bonds as “risky” and “complex.”
California municipal finance expert Michael Coleman agrees with the association’s recommendation. “We’ve got enough problems with pension programs; we don’t need to add to them,” he said. “Pension costs should be paid as benefits are earned, not put off into the future.”
Pension obligation bonds allow local governments to borrow against future tax revenue to make sure they have enough money available to pay present and future pension obligations. The idea is that the borrowed money can be invested and earn a return higher than the interest rate on the bonds – an income stream for the pension fund.
In practice, pension obligation bonds have contributed to deep financial distress in some California cities, Coleman said. San Bernardino and Stockton, both of which filed for bankruptcy, have issued the bonds. According to the state database, 25 counties and 65 cities have outstanding debt for pension obligation bonds.
Sacramento County’s pension bond debt started with a $538 million bond issued in 1995. A staff report recommended that county supervisors approve the bond because the pension plan was underfunded by about the same amount as the bond. In 2004, the county issued another pension bond worth $426 million. A staff report said the money was needed to pay for an increase in pension benefits given to employees the year before.
Don Nottoli, the only current member of the Board of Supervisors to vote on the bonds, defends the decision to issue them. He said they were necessary to fully fund retirement benefits. “We took on a mortgage of sorts to maintain our responsibility to our employees,” he said. “The payback is sizable, and we need to keep a keen eye on the bonds and be financially responsible.”
Each year, local governments are expected to make payments to retirement funds with the goal of covering the expected benefits for current and future retirees. Those payments come on top of the bond payments. In the current fiscal year, Sacramento County expects to pay $195 million to the pension fund, and another $123 million to the pension bond debt.
Pension-change advocate Marcia Fritz said the recent battering of the investment market shows the foolishness of using bonds to pay for retirement funds. “It’s like borrowing on your home to invest in the stock market,” she said. “I’m very apprehensive about the county’s ability to provide any level of service in the future.”
Sacramento County owes $974 million on its pension bonds, not counting interest. In 2011, the county estimated it would pay $1.2 billion in interest on $1 billion in bond principal. The county largely uses its general fund to pay off the pension bonds, while the airport expansion bonds are paid by user fees and other airport revenues. The question is whether the pension bond investments will earn more than the interest rates by 2030, when the county is expected to pay them off.
A 2014 report by the Center for State and Local Government Excellence looked at whether pension bonds met the expectations of governments issuing them. The Government Finance Officers Association based its recommendation against pension bonds in part on the report.
The study concluded that the success of the bonds depended on when they were issued: Those coming out toward the end of the market run-up of the 1990s and around the market crash of 2007 were not successful, while others have generally produced positive returns.
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MA in MO

The cartoon is oh so funny and so very very true!

Dr. Eowyn

Great post, DCG. The 2 graphic images are perfect editorial commentaries!


Put in more familiar terms…comment image

Auntie Lulu
Auntie Lulu

It is little wonder that Californians are fleeing and moving up to Oregon (although I doubt that we are far behind California in our debt accumulation.) When will it end — it is truly frightening!