In 2005, the City issued $60 million in Pension Obligation Bonds (POBs) to reduce the cost of meeting our unfunded pension obligation with the California Public Employees Retirement System (PERS) for non-safety City employees. The rate available on that transaction was substantially better than the rate used by PERS to amortize the City’s obligation for unfunded pension costs. The proceeds of that bond issuance were all deposited with PERS, reducing both the obligation with PERS and the corresponding rates assessed annually by PERS on the City and employees thereafter.
Half of the bonds issued in 2005 were issued as variable rate debt with the interest rate reset on a periodic basis. The $30 million of variable rate “Series B” debt currently exists in the form of a 1-year bond anticipation note, maturing annually and currently being ”rate” reset in one-year increments. The annual renewal is NOT new debt, but simply a renewal of the variable-rate debt originally issued in 2005 (to answer the question at the “headline” of this blog- no, we did not enter into new Pension Obligation Bonds recently).
For cost saving reasons, the $30 million of fixed rate debt (Series A) is being repaid first and when that is paid off, the lower cost variable rate debt will then be paid. The entire $60 million matures over a 20 year period as originally planned for in 2005 when it was first issued. In 2025 the City will no longer have that continuing obligation and will have “paid down” the obligation to PERS in a manner that will have saved $10’s of millions of dollars over the 20 year period. PERS would have amortized our obligation if POBs hadn’t been issued at 7.75%. On only this $30 million variable portion, we’re paying a rate of 0.75% for 2012/13, or 7 full percentage points less…that’s over $2 million in savings in this year alone on that one amount. Given all of the financial advantages of this approach, I think we can see that the Council acted in very thoughtful manner in 2005- and it’s our goal to continue to be thoughtful and prudent in our financial transactions here at the City.
Thanks for reading, Riverside!