FAIRFIELD — Public pensions remain a hot topic in California as cities work to balance the ledgers between what’s owed to current and former workers and what’s available to pay for retirement benefits.
Fairfield spends about $13.6 million a year in its budget to cover ongoing pension costs, primarily to the California Public Employees’ Retirement System. That includes payments on $41.75 million in public obligation bonds the city issued in 2005 to cover a large portion of its pension shortfall at the time.
The bonds were refinanced during the 2010-11 fiscal year to take advantage of lower interest rates.
Fairfield has also put into place a reduced tier of retirement for future hires, to help curb the city’s long-term pension costs. The decision to issue pension obligation bonds also saves the city some money each year because of the low interest rate on the bonds, city officials said.
Many California cities have done the same, some with similar results.
“Cities that have taken out pension obligation bonds tend to have lower contributions to CalPERS as a result,” said David White, Fairfield’s deputy city manager and director of finance.
Fairfield’s total pension obligation is approximately $508 million.
There are two ways of calculating how well a city’s pension obligation is funded: actuarial and market value. The former takes a more long-range view of finances, while the latter fluctuates based on current economic conditions.
Based on the latest information available from the CalPERS, the city’s pension obligation is funded at approximately 85.5 percent. Based on market value, the city’s pension obligation is funded at approximately 76 percent.
Pension obligation bonds are more that a local or regional phenomenon. A total of $18 billion in pension obligation bonds have been issued in California since 1990, according to the California Debt and Investment Advisory Commission. Bonds have been issued in 31 states during that time frame, and total $71 billion.
The California Debt and Investment Advisory Commission offered a webinar in October 2012 on pension obligation bonds with a tittle that indicates they are a double-edged sword.
An overview of the webinar notes that the bonds are issued for reasons that include interest rate savings, budget relief and to meet financial management objectives. The risks include the potential that there will be no interest savings, and perhaps additional interest costs for local government; and at the other extreme, an overfunded pension fund, which may cause labor groups to seek increased benefits.
Reach Glen Faison at 427-6925 or firstname.lastname@example.org. Follow him on Twitter at www.twitter.com/GlenFaison.