City to issue pension obligation bonds

The El Cajon City Council last week unanimously approved the issuance of $205 million in pension obligation bonds to help the city pay down money it owes employees through the state’s pension system.

Finance Director Clay Schoen told the City Council that as of June 30, 2019, the city had paid nearly $372 million toward the nearly $579 million it owes the California Public Employees’ Retirement System, and still had more than $207 million in unfunded liability.

An unfunded liability is the gap between how much is needed to pay retiree benefits and the amount of assets a jurisdiction has with CalPERS.

The City Council in September had already agreed to award a contract for underwriting services for the bonds to Bank of America, which will sell the bonds to investors. BofA will be paid through the proceeds of the bond sale; underwriter fees are estimated at $2.22 per bond.

Schoen said that a number of factors will affect the final results of issuing pension obligation bonds but “based on reasonable assumptions, projected savings are calculated to total $90.2 million” over the next 24 years.

Schoen presented a chart that showed how much pension costs have risen since 2011, when the city’s liabilities were nearly $402 million, with $126 million of that unfunded. Pension costs are expected to continue to increase into the foreseeable future.

Comparing the bond program to a person refinancing a home mortgage to take advantage of lower interest rates, pension obligation bonds are taxable bonds that can help cities pay down their pension costs but come at some risk if the investment portfolio chosen does not perform as anticipated.

The city had a rating agency presentation on Nov. 12 and expects to receive a bond rating and the posting of a preliminary official statement at the end of this month.

In a report, City Manager Graham Mitchell noted that city staff “felt it was prudent to wait to determine the outcome of the election and general market sentiment to make the final decision regarding time and amount.”