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Town of West Hartford Completes Historic Sale of Pension Obligation Bonds

West Hartford Town Hall. Photo credit: Ronni Newton

The Town of West Hartford’s top Aaa/AAA ratings from Moody’s Investor Services and Standard & Poor’s Financial Services were reaffirmed in advance of the sale of $324.3 million in bonds.

By Ronni Newton

The Town of West Hartford has received an even more favorable rate than anticipated on the sale of Pension Obligation Bonds last week, and received a reaffirmation of the town’s top rating from Moody’s Investor Services and Standard & Poor’s Financial Services, and officials are optimistic that even greater savings than estimated will be achieved by the town from the historic and strategic move to eliminate unfunded pension liability.

“The results of the bond sale affirm high investor confidence in West Hartford,” Mayor Shari Cantor said in a statement. “I am more certain than ever that West Hartford will come out of the pandemic stronger than before. We have budgeted responsibly while continuing to make strategic investments in the things that make West Hartford so special – our top-rated school system, beautiful neighborhoods, well-maintained infrastructure, and community services.”

The Town Council voted in January to authorize the sale of up to $365 million in Pension Obligation Bonds, taking advantage of record-low interest rates, and at the same time approved establishment of a reserve fund intended as a fiscal buffer to mitigate the risk of economic downturn – a combination of measures to reduce the town’s legacy pension costs.

Interest rates have continued to decline, and according to the detail provided by the town Wednesday, $324.3 million in pension bonds were sold at a 2.539% All-in True Interest Cost (AIC), which is 46 basis points less than the town’s anticipated target rate of 3%.

Officials said the town’s pension fund has experienced “excellent performance” over the past fiscal year, and although up to $365 million was authorized, only $324.3 million was required to fully fund the pension liability.

As of July 1, the town’s pension plan will be 100% funded for the first time in nearly 20 years. Proceeds from the bond sale will be deposited into the town’s pension fund and gradually invested in higher-yielding assets using dollar cost averaging over the next six to eight quarters, according to Peter Privitera, the town’s chief financial officer.

Bond repayment is made in arrears, but rather than skipping a payment in FY21, the town budgeted to use the $26.9 million that would have been the actuarially determined employer contribution (ADEC) to establish the reserve fund, which will be invested and used to mitigate any economic downturns impacting the payment of the normal costs of funding pension obligations.

The POBs will virtually eliminate the town’s existing unfunded pension liability, funding it at 100% while also leveling annual payments for the next 30 years, with a projection by the town’s consulting actuary of more than $140 million in savings, in net present value, over the course of the next 30 years. In addition, an estimated $60 million is expected to remain as the balance in the reserve fund in 30 years, which at that time can be used by the town to address other liabilities.

Cantor said the successful outcome reflects positively on the town’s plan of finance and economic outlook.

Mayor Shari Cantor brought the concept of using POBs as a way of dealing with unfunded pension liabilities to town staff several years ago, Town Manager Matt Hart said when the Town Council voted on the measure, and the idea has been extensively studied, researched, and vetted by staff as well as the town’s financial advisors, actuaries, and the bond attorney.

“This strategic initiative will significantly improve West Hartford’s fiscal position for future generations,” Hart said Wednesday in an announcement of the sale. “It upholds our promises to retirees while reducing a significant long term liability for taxpayers.”

Privitera said he was pleased with the outcome of the sale of POBs.

“Investor interest was significant with over 60 investors participating in this sale. We received over $1 billion in bond orders or over three times more orders than the $324.3 million in bonds sold. This very strong response affirms our position that the significant amount of planning, analysis, and due diligence on our part was recognized. The successful execution of this bond sale places the town in a position of fully funding its pension liability as well as providing future tax relief.”

Both Moody’s Investors Service and Standard & Poor’s Financial Services, the nation’s largest bond rating agencies, reviewed the town in advance of the sale, and assigned Aaa/AAA – the top ratings – on June 17, 2021, in advance of the sale of Town of West Hartford General Obligation Bonds, Series 2021B, allowing the town to secure the best possible interest rate because the bonds are considered low risk.

An excerpt from the Moody’s report states: “The Aaa rating reflects the Town’s large and growing tax base with strong income indicators. The tax base has grown in each of the last ten years and, despite the economic impact of COVID, is poised to continue to expand. Much of this growth is attributable to a robust local housing market that benefits from being equidistant from New York City and Boston. Residents from each of those cities have helped to drive up housing prices by approximately 11% on 16% higher sales volume.”

An excerpt from the S&P report states: “West Hartford has a very strong set of financial policies and controls that are institutionalized and embedded into its overall financial management, which, in our view, is a key factor contributing to its ability to sustain budgetary balance, even through a period of economic uncertainty due to the pandemic. Moreover, the Town will likely maintain a steady pace of modest economic growth as construction-related development has been largely unaffected by the pandemic, and the level of economic deterioration in the county is less severe than the national base-case forecasts. The rating also factors the Town’s steady operations and proactive management team that has been able to navigate the challenges related to the pandemic and address long-term challenges in a proactive manner.”

Cantor previously called the plan to sell POBs a “very important, strategic, and I think transformational decision on the future of our town.”

The town’s unfunded pension liability is not a new situation, but rather the result of traditional defined-benefit pension plans that for years were provided to town employees (non-public safety employees, and non-certified employees of West Hartford Public Schools) – and which due to a combination of economic factors and decisions by past councils were not adequately funded. Unfunded pension liability had become a major driver of budget increases.

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