Contra Costa's largest fire district plans to ask county supervisors this summer to issue $120 million in bonds to cut down spiraling pension costs.
The move would allow the Contra Costa Consolidated Fire District to refinance its retirement shortfall at a lower interest rate, saving $2 million annually. That's about one-eighth of the district's retirement costs for the fiscal year beginning July 1.
"I think the bonds make a lot of sense right now while interest rates are still low," said Chief Keith Richter.
Government leaders from San Diego to Sonoma have increasingly turned to bonds to beat back bulging retirement costs that soak money from public safety and social services.
The shifts may smooth cash flow, but they're no cause for celebration, said Steven Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College. Bonds, he said, can't mask the fact that elected officials approved benefits they can't afford.
"The two winners here are the politicians, who sidestep political responsibility, and the public employees, who are the beneficiaries of the largess," he said. "The taxpayer still has to pay off the entire amount."
Contra Costa County and district leaders plan to present their proposal to supervisors later this month.
If approved, the Board of Supervisors should ensure a portion of the savings from the bonds goes into an account to cover future fiscal shortfalls, Richter said. The district provides fire protection from Lafayette and Walnut Creek north to the county line and east to Oakley, as well as San Pablo and El Sobrante.
Like most of California's public employers, the district is struggling to pay booming pension, workers compensation and health care bills. Con Fire's salaries and benefits costs have increased 64 percent since fiscal year 2001-02. That's more than double the rate of the district's property tax intake, which represents 98 percent of its revenues.
Richter is proposing to spend $5 million in reserves next year, about one-quarter of the district's savings, to balance the budget. Property taxes still exceed salaries and benefits, but they fall short of paying for department supplies and capital improvements, Richter said.
The pension bonds, he said, would reduce that shortfall.
"To me the bonds are a good business move, and I hope the board agrees."
Relatively low interest rates make similar restructuring plans attractive to public employers statewide, said Steve Keil, a legislative coordinator for the California State Association of Counties.
"Generally, there are mostly upsides to the approach," he said. "Public employers save money."
San Diego County has issued more than $1.5 billion in "pension obligation bonds" since 1994. Contra Costa has refinanced more than $600 million in pension debt over the same period.
The county is the largest member of the Contra Costa Employees' Retirement System, which also includes Con Fire and 16 other special districts. A recent county study pegged the system's shortfalls on retirement board policies, court decisions allowing retirees to inflate their pensions and enhanced benefits approved in 2002.
Con Fire is on the hook to pay the $120 million plus 7.9 percent annual interest back to the retirement system over 18 years. Those payments contribute to the district's mushrooming pension tab.
If the refinancing goes as planned, fire officials would be able to pay the bonds back at around 5 percent, depending on what rate they can secure on the bond market. The lower rate would translate into about a $2 million savings.
This would be the first time Con Fire has issued bonds, said Jason Crapo, who oversees Contra Costa's debt management. Financial advisers have reassured the county that the bond debt would not hurt the district's credit rating, he said.
The bond plan doesn't pay down the shortfall, however. Instead, it bumps the liability from the employer's pension obligation to its general debt service. Herein lies a potential problem, said Don Steuer, San Diego County's chief financial officer.
The transfer makes the retirement system look artificially healthy, a phenomenon unions could use to lobby for more lucrative pensions, Steuer said.
"A well-funded system heightens the prospect of granting new benefits, even when the liability on the employer's balance sheet hasn't changed," he said.
In addition, pension bonds ultimately expose employers to all the risks and rewards of investing. Proceeds from the bond sale infuse the pension fund with cash that will either grow or shrink with the market, said Sonoma County Treasurer Thomas Ford.
Poor returns would create new shortfalls and accompanying costs that could offset fiscal benefits from the bonds.
"There is no financial transaction that has no risks," Ford said. "If there are no risks, there are no rewards."
Peter Felsenfeld covers Contra Costa County. Reach him at 925-977-8506.
The Contra Costa Fire Protection District wants county supervisors to issue $120 million in pension obligation bonds to lower pension costs.
The move would carry risks and possible rewards. Here are some of the factors to consider.
Rewards:
Refinancing. If successful, the bonds enable public employers to pay off their long-term pension obligations at a lower interest rate. Con Fire has racked up a $120 million pension shortfall. Currently, the district must pay that amount back to the county's retirement system with 7.9 percent annual interest.
District officials are confident they can eliminate that debt by selling bonds with interest rates fixed at between 5 percent and 5.5 percent. The lower rate would reduce district costs by about $2 million annually.
Risks:
New benefits. The bonds, in effect, transfer the shortfall from the retirement system to the district's debt services. That makes the pension system look artificially healthy, even though the district's liability remains the same. Unions may point to the flush pension system as justification for demanding more lucrative benefits.
Market factors. The bond proceeds pump money into Contra Costa's pension fund. That lump sum will fluctuate with the market. Losses could generate liabilities that increase employer contribution rates.
Distributed by the Associated Press
