Quick sale seen for Carmel-by-the-Sea pension obligation bonds

Thu Nov 29, 2012 5:46pm EST

* Resort town will save $4.2 million with refinancing

* Pension obligation bonds yield at around 2.9 pct

SAN FRANCISCO Nov 29 (Reuters) - Picturesque Carmel-by-the-Sea, California, will have no problem selling $6.3 million in pension obligation bonds on Friday to pay off an unfunded pension liability to the California Public Employees' Retirement Fund, according to a top city official.

The town, famous as a weekend getaway from the San Francisco Bay area and for Hollywood legend Clint Eastwood serving as its mayor in the 1980s, held its pre-pricing call on the competitive deal on Thursday morning and received offers totaling $13.9 million from 15 parties, said City Administrator Jason Stilwell.

"We got a pricing quote today at 2.94 (percent)," Stilwell added, noting that true interest cost of the bonds, which Standard & Poor's Ratings Services rates AA-plus, is 2.519 percent.

Carmel-by-the-Sea's debt to the state public employees' pension fund has a 7.5 percent interest rate. Payments pegged to the lower interest rate will help retire the debt in 10 years, compared with the 22 years remaining on the city's repayment schedule for its debt to the pension fund, Stilwell said.

He added that the city should save about $4.2 million by refinancing its debt to the pension fund, best known as Calpers.

The debt is the result of some Carmel-by-the-Sea employees being placed in 2003 in a pension account that is separate from the city's main account with Calpers.

That "side fund" includes employees from other municipalities also using Calpers to manage retirement accounts. The pool's unfunded liability effectively is a loan to its member agencies with interest pegged at Calpers' assumed rate of return on its investments, now 7.5 percent a year.

Carmel-by-the-Sea's problem with the side fund is it costs the city $500,000 a year and the city has not been able to knock down the principal on its share of unfunded liability.

Stilwell said a citizen committee including Nobel Prize winning economist William Sharpe informed the city that pension obligation bonds could help pay off the side-fund liability.

Introduced in the 1980s as an arbitrage tool, taxable pension obligation bonds have been criticized as risky tools because they allow municipalities to profit if proceeds are invested in a bull market. In Carmel's case, proceeds from pension obligation bonds will pay off the fund with Calpers.

Carmel-by-the-Sea's general fund budget is about $14 million and it is looking to reduce the share of its spending that goes to pensions in other ways. In addition to that $500,000, the city pays about $700,000 a year to its primary Calpers account.

Stilwell said the city in April implemented a recommendation by its citizens committee for a new tier of less generous pension benefits for new employees following negotiations with its labor units.

About 10 percent of Carmel-by-the-Sea's 70-person workforce has turned over since the new benefits took effect, so the city is already posting savings from them, Stilwell said.

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