Fixing the unfunded pension liability
The town council will discuss and likely approve the structure of the bonds to be issued to fund the town’s PSPRS liability at tonight’s council meeting. The resolution pending approval authorizes the Mayor, Town Manager and Chief Financial Officer to move forward with negotiating, finalizing and issuing the bonds this July. The total amount of the borrowing is not to exceed $18.13 million
That is $1.33 million greater than the $17 million payment the town will make from these borrowings to the PSPRS. We suspect that this additional amount represents fees paid the financial advisor, Stifel Nicolas and Company, and others to register (with the SEC) and syndicate the bonds.
The bond will be in denominations of $5,000
The bonds will not be sold directly to the public. Rather, the town will engage an underwriter who will likely sell the bonds to institutional investors. A bond issue of this size is very small and should be easy to place, especially give the town’s excellent credit rating. Some portion of the bonds will mature each year, on a schedule starting as early as 2022. Per the resolution, the total borrowing must be repaid by 2039.
These are taxable revenue bonds, secured by the town’s unencumbered sales tax revenues and fees
This feature allows the town to seek the most favorable interest rates on the market. The resolution also gives the town finance director the option of purchasing insurance that would guarantee interest payments. This option is rarely executed in today’s markets.
The interest on these bonds will be taxable. This is because the activity of using the funds to pay for pension shortfalls does not meet IRS requirements to be a non taxable bond. To an extent, the taxable status broadens the market for selling the bonds by making the bonds more appealing to investors who can’t take advantage of tax free interest. For example, a University endowment may be interested in these bonds.
Other Arizona governing entities doing the same
The practice of issuing taxable bonds to pay for pension shortfalls came into being when the State of Illinois did so in 2010 to cover its massive pension shortfall. This now seems to be the “standard method” in Arizona. Three examples are Cottonwood, Pinal County and Kingman. Flagstaff is also working to reduce its pension liability by selling and leasing back municipal facilities.
Issuing these bonds is a major step in reducing the town’s unfunded pension liability.
