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Pension bonds new tool for financing retirement

Managing current and future financial obligations is an ongoing challenge for the growing city of Franklin, despite continued economic prosperity in the region.

 
After several months of rigorous examination into options regarding future employee retirement payouts, officials are preparing to issue Pension Obligation Bonds (P.O.B.) later this month.
 
Franklin’s Board of Mayor and Aldermen voted late last month on a resolution to enter into this new type of investment strategy following summer meetings of the city’s Employee Pension Committee.
 
As it stands now, a $10 million P.O.B. could be issued to cover a funding gap that has persisted in the city’s growing employee pension account.
 
At issue for the city is a significant change in the government accounting standards that requires greater disclosure of unfunded liabilities on the city’s balance sheet.
 
The existence of the unfunded obligation could potentially have a negative impact on the city’s ability to finance large capital projects, which until now have been easily obtained through the municipal bond market.
 
Franklin’s AAA bond rating has been a source of pride, and city leaders are mindful of continuing that designation.
“Going forward, aren’t these rating agencies not looking hard at unfunded liability on pension plans,” asked Mayor Ken Moore during August deliberations of the city’s Employee Pension Committee.
 
The city’s financial advisor The PFM Group, which has a Memphis office representing the city, answered questions. 
Lauren Lowe, of PFM, replied saying “unfortunately, in the headlines everyday rating agencies are turning their focus to unfunded pension plans.” 
 
She later added that issuing P.O.B.’s was just “an option and a tool. It could pose positive outcomes if the market should cooperate.” 
 
On the heels of passage of a $58 million operating budget for fiscal year 2014, aldermen began discussing this less immediate, but still important future financial concern several weeks ago.
 
“The community has so many needs due to the growth we are experiencing,” City Administrator Eric Stuckey said at a September board meeting called specifically to discuss the Capital Improvements Plan or CIP that drives much of the large ticket projects related to infrastructure and services.
 
P.O.B.s are a relatively new financing instrument, dating back to 1985, when they were first initiated by the city of Oakland, Calif.
 
Much like a large family, trying to plan for every child’s future college tuition, while still trying to fund the construction of a much needed home, the city is also in the juggling business.
 
These bonds are taxable instruments, just as any other municipal bond issued.
 
There has been no property tax increase in the city of Franklin in recent years.
 
While the city continues to keep a healthy financial reserve on hand, just under $29 million, the reality of trying to create new revenue sources that do not involve raising taxes is a constant consideration.
 
Old paradigms of bond issuance are now being reconsidered in light of future needs.
 
With high-ticket expenditures looming such as an overhaul of the water and wastewater treatment system and the real possibility of moving forward on a new city hall building, leaders are grappling with these decisions. 
 
The current city hall was built in the 1970s and originally designed as a retail mall for a much smaller community.
The price tag for a new facility is expected to be around $25 million.
 
Ultimately, how national financial rating agencies, like Moody’s, views the city’s management and current budget operations makes a huge difference in city planning options.
 
The story Franklin must be able to share with rating agencies, Stuckey said, is one that says the governing board of the city has a plan and is working toward that plan with consensus among its leaders.
 
“The City of Franklin is thriving and managing its growth. That’s not a bad problem to have,” he told aldermen.
 
A recent September sales tax report indicates that collections are on track with forecasted estimates. They are actually up 5.5 percent over the same month last year, according to Assistant City Administrator and Finance Director Russ Truell. 
A steady gain since 2009, from just $1.65 million in collections at this same time to $2.11 million in this latest state sales tax report, is one factor in the economic rebound officials have hoped for.
 
October is traditionally the designated period when local governments send legal representatives to the bond market where issuance takes place on a broad scale.
 
During the Employee Pension Committee meeting this summer,Truell noted the advantages to moving forward to shore up the $10 million shortfall.
 
“What makes it attractive for borrowing is the AAA bond rating for the city and the interest rates are as low as they’ve been for a century,” Truell said.
 
“The whole key to pension obligation funds is what can you buy the money for,” he added. “We think we can buy this money for a little over 3.9 percent…our earnings will be 5-8 percent. We are fixing our pension costs.”
 
At that same meeting, Stuckey told committee members “this is a process, but we’ve got to do this within a window of this year.” 
 
Later in the pension meeting, when asked how the city would be viewed by financial rating agencies if the unfunded balance is not dealt with Lowe replied.
 
“It will count against you when a rating agency looks at you,” she said, speaking of capital outlay notes that the city may need to issue in the future.
 

Posted on: 10/10/2013

 
 

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