On March 17 the Lompoc City Council held a special meeting to discuss the concept of restructuring the city’s Unfunded Accrued Liability (UAL) using a pension obligation bond. The UAL is largely the result of ever-increasing CalPERS (public employee retirement plan) payments.
To help reduce future costs, the Lompoc’s labor unions have worked in good faith with the city to restructure their contribution and benefit plans to help reduce costs. But while these changes are important contributions by employee groups, they will take decades to produce results.
Ninety-nine percent of the city’s UAL is attributable to mostly retired/non-active employees, and will not be impacted by the negotiated changes.
The previous City Council majority implemented something known as a “fresh start,” using a recently approved 1 percent sales tax to address the UAL issue. While it would eventually save about $20 million, it also would raise payments by the same amount for the next 15 years.
This appears to be a poorly thought-out plan, since it didn’t reduce the interest rate paid by the city, and the deal with CalPERS is irrevocable.
CalPERS UAL payments are unpredictable since they rely on a complicated formula based on CalPERS investment returns, which can vary from year to year; increases/decreases are typically delayed by two years, which adds to the unpredictability.
So, any payment reductions as a result of a stock market growth/loss are not immediate.
Now with a new council majority it was time to consider a different strategy in addition to the “fresh start.”
The city could use a Pension Obligation Bond (POB) to pay off all or part of the CalPERS UAL at a significantly lower and perhaps even half of the CalPERS interest rate. It would also restructure the annual payments into a smoother, more predictable schedule, which is a core objective of this plan.
This isn’t a new idea; about 30 other city and county governments have had great successes with POBs. The most recent 2021 transactions (Chula Vista, Orange, Downey, Monterey Park, El Cajon) obtained rates between 2.54 and 2.84 percent which is dramatically less than the CalPERS rate. But their bond ratings are better than Lompoc’s.
And since the city is only refinancing current debt into a fixed product, there is a risk the CalPERS debt decreases substantially after the refinance. In fact, the decrease could be equal to or more than the refinancing POB debt.
The result is the city would still have to pay the bond even if the CalPERS debt would have otherwise been fully extinguished from growth in the investments.
The staff advised the council that “a City Council decision to move to the next step would direct staff to commence the four-to-six-month analysis on the POBs and report back to the City Council on its detailed findings.”
Councilmembers Jeremy Ball and Gilda Cordova wanted a more detailed analysis and an analysis of several worst cases “what if” scenarios before they would be ready to make an important decision like this. That’s exactly what the staff was recommending.
Cordova made a motion to bring a cost estimate back for a “what if” exercise, the final validation process and inform that council where the funds would come from for this phase. She also wanted a little more clarity on what sort if interest rate the city could expect given the financial condition of the city. It passed on a 4-1 vote.
Councilmember Dirk Starbuck was the lone dissenter and had a legitimate concern that by the time the discovery process was complete it would be a lot harder to get a favorable interest rate.
Although he didn’t mention it, there may be a better and cheaper way to do this. Three of the utilities could use some of their reserves currently earning less than 1 percent to pay down much if not all of their portions of the debt without a POB; then use the POB only for the public safety portion of the debt.
To put this concept another way: If you owed a couple of hundred thousand dollars on your house and suddenly the interest rates went down, would you refinance the house to save a substantial sum of interest over the 15-year life of the new loan? Sure you would, because you would get a “pay raise” and have more disposable income because your payments would be lower because of the new lower rate.
Considerably more thought is needed, and that’s why government is designed to move slowly on matters like this. A decision won’t become final until several other time-consuming steps are complete; there is at least one and perhaps more public hearings and a legal process that must be completed prior to implementation by the council.
— Ron Fink, a Lompoc resident since 1975, is retired from the aerospace industry. He has been following Lompoc politics since 1992, and after serving 23 years appointed to various Lompoc commissions retired from public service. The opinions expressed are his own.