In the early days of our beloved City, bonds were issued to finance the infrastructure of this city.
They were called Estero Bonds. They were paid for by the residents as an assessment onto their property tax bills. A few years ago, Foster City achieved a milestone by paying off those Estero Bonds. Essentially, the City was debt free!
Or were we?
At a recent budget study session there was some discussion about our employees’ pensions and how were we going to pay for them.
CalPERS administers pension benefits for California employees. Each City contributes to the CalPERS fund based on the number of employees, their salaries, and the assumed rate CalPERS expects to earn on the pension assets.
The rate of earnings, which is based on the current assumed rate of 7.75 percent, is also the rate of interest that the City pays on its unfunded pension benefit obligations.
Foster City pays around $1.247 million in interest to CalPERS for unfunded pension obligations, which total around $21 million. This is a debt that we still owe.
One of the issues I raised during my campaign was to take advantage of my finance and marketing background and use that experience to try to solve our structural budget deficit.
During the discussion at the study session, staff presented several interesting options that I have studied carefully. Putting my “finance” hat on, here are the options:
The basic idea was to reduce that $1.247 million dollar payment by paying off the $21 million obligation in full to CalPERS. But how could we pay off that enormous amount?
There were three options that were presented and will be discussed at greater length in upcoming council meetings.
The first option was to borrow the full amount of the obligation with a combination of short-term borrowing (loans and lines of credit) and paying a significantly lower payment then the $1.247 million. This would be similar to a homeowner refinancing his or her mortgage as the current interest rate environment is ideal for reducing the interest rate on the loan.
Since the loans would be short-term, the City would need to repay them using funds that are expected to become available through the sale of the 15-acre site. The City could then choose to replenish the principal over time if it wished.
The second option was to pay off the unfunded pension obligation through longer-term Pension Obligation Bonds. Again, the current interest rate environment is suitable for this option, as the interest rates will be around 4 percent or a payment to bondholders of around $800,000. The City could save an estimated $640,000 per year in all funds with this option.
The final option was to use the sales proceeds of the 15-acre parcel to pay off the entire pension obligation.
The Council was interested in learning more about how we could use some of these tools to reduce the annual cost for pension obligations, thus reducing the deficit.
Each option will be explored by staff and the Council in future meetings.
If this is a topic that is of interest, then I would really like to hear from you. Please call me at 650-286-3501 or e-mail me at email@example.com.