By Nick Kipley
The Finance Committee met this past Monday in City Hall to discuss repayment on $122.5 million dollars’ worth of Pension Obligation Bonds that are coming due in May of this year. POBs are bonds issued by a municipality in order to generate enough capital to pay the pension obligations of retired city employees. When the bonds come into maturity they can either be refunded so that the city can make annual payments on them, or they can be paid off all at once if the city has raised the money in the time it took the bond to mature.
These specific types of bonds have become notorious in recent years for very rapidly bankrupting large California cities such as Oakland, San Bernardino, and Stockton. Critics of using bonds to pay off debt claim that POB’s offer a short-term fix to a long-term problem given it allows politicians to take financial risks based on what the speculate future tax revenues will be.
Bonds can be a great tool—like a credit card—if used properly. They allow a city to make large-scale investments in big civic projects. However, critics of POBs claim that when city officials float bonds to pay for pensions, they’re often taking a major gamble with bankruptcy.
For instance, when a municipality issues bonds to build a hydroelectric dam or sports arena, the municipality is making a calculated bet given that borrowing against the estimated fee revenue generated by a hydroelectric dam or sports arena, the city has a fair shot of making their money back without having to raise taxes.
On the other hand, when issuing a bond on debt, the debt in question merely compounds.
According to the agenda for the meeting, “[Pasadena] has had an obligation to fund the Fire and Police Retirement System under the terms of the Contribution Agreement entered into by the City and the System. In 1999, 2004, and 2012 the City issued $101.9 million, $40.7 million, and $47.44 million of pension obligation bonds (POBs), respectively, in order to fund the City’s obligations in respect to the Contribution Agreement. … Approximately $123 million of the bonds are maturing (in the case of the 2004 bonds) or are subject to mandatory tender on May 15, 2015.”
As a result, the Finance Committee worked on Monday to begin the issuance of $123 million dollars’ worth of 2015A and 2015B bonds in order to pay down and then restructure the $123 million dollars in debt from the bonds set to mature on the 15th of May.
Councilmember Gene Masuda asked the obvious question of the committee, “What if we don’t do this?”
“Unless you’re prepared to write a check, I don’t think we have any alternatives,” responded Terry Tornek, head of the Finance Committee. “We need to pay off almost a hundred and twenty three million dollars’ worth of bonds on May 15th.”
After a pause, Torneck directly addressed Masuda again, “You know you’re right. This is the worst kind of bonding to do. Pension obligation bonds are in a lot of ways sort of an undesirable and painful exercise. But we have no alternative. The funding has been undertaken, we owe the money to the system, and we need to pay off these bonds.”
But Masuda was puzzled. He asked, “Somehow I remember that this issue of dealing with this was going to be way down the line? What has changed?”
“No, no, no,” said Torneck, “The due date was not a surprise. These bonds were scheduled to come due in May of 2015.”
Restructured, the annual debt service on these bonds would grow from $5 million to $7.5 million. Urban Futures, a firm whose top members include Jeff Busch, the man responsible for helping San Bernardino legitimize its bankruptcy claims, was chosen to be the financial advisor for the deal. There was no competitive bidding for the position due to what the City Charter 1002(F) claims makes them a professional or unique service.