The West Hartford Town Council voted Tuesday night to adopt a strategic financing plan to significantly reduce pension costs.
By Ronni Newton
The West Hartford Town Council voted 7-2 Tuesday night to adopt two ordinances – one which authorizes the sale of $365 million in Pension Obligation Bonds, and the other which establishes a reserve fund intended to mitigate the risk of economic downturn – a combination of measures to reduce the town’s legacy pension costs.
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.
All six Democrats – Mayor Shari Cantor, Deputy Mayor Leon Davidoff, and councilors Carol Blanks, Beth Kerrigan, Liam Sweeney, and Ben Wenograd – along with Republican Lee Gold, the minority leader, voted in favor of issuing the POBs and establishing the reserve fund. Republicans Chris Williams and Mary Fay voted against the measures.
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, 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 is an exciting and unique opportunity to save West Hartford a significant amount of money over the next few decades,” Hart said.
With interest rates at historic lows, now is the time to do it, Cantor said. “It was a bit of stops and starts … now we believe it is the right time,” Cantor said Tuesday at a public hearing which preceded the vote.
The pension liability continues to grow, and has been the largest driver of budget increases, and tax increases to residents, over the past 20 years, Cantor said. The actuarially determined employer contribution (ADEC) to the pension plan was $1.2 million in 2003, and is now $27 million, but with the combination of historically low interest rates and the innovative plan to establish a reserve fund, the town has the opportunity to save signifiant money while providing a “unique and financially sound” element through the reserve fund.
”This isn’t something we have to do, it’s something we want to do because it makes sense,” Cantor said.
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.
Town employees hired more recently participate in a hybrid plan more closely resembling benefit plans found in the private sector. The hybrid plan reduces the town’s cost of future retirement benefits, but the town is contractually obligated to maintain pension benefits for legacy employees.
Despite measures taken by the town to address its unfunded liabilities, the funded ratio has declined and is currently 40.6%, said Peter Privitera, the town’s chief financial officer. The ratio has dropped despite the town’s continuing to increase its actual dollar contribution. “If we do nothing we are looking at a $2 million increase annually,” he said. “It’s one of the town’s most significant cost drivers.”
The funding ratio is one of the metrics that rating agencies to use to measure a town’s fiscal health, and while there is a small chance that the sale of POBs could result in a downgrade by one of the companies that has continued to give West Hartford triple-A bond ratings year-after-year, Privitera said he is confident that overall the cost savings will far outweigh the potential impact.
POBs will create an obligation for the town – a hard liability – as opposed to the soft liability of just paying ADEC, because the town has no contractual obligation to fund its pension liability at any set level. The rating agencies, however, also look at the funding ratio.
In addition, if the town does have a downgrade in its rating, Privitera said that is not a permanent action.
Privitera said he is confident that the town’s “conservative process” and approach of combining the sale of POBs during a time of historically low interest rates, investing proceeds using dollar cost averaging over the next six to eight quarters, and establishing the pension bond reserve fund to guard against future economic downtown, will be well-received by the rating agencies.
“No one has ever seen that attached to a pension bond ordinance,” Privitera said of the reserve fund.
The unfunded liability today totals roughly $315 million assuming a discount rate of 6.99%, Hart said. The town’s financial consultants have advised the use of a discount rate of 6.25%, which would make the unfunded liability closer to $365 million – the amount of the bond sale.
POBs can only be used to fund past pension liabilities, Privitera said.
Bond repayment is made in arrears, but rather than skipping a payment in FY21, the town will use $26.9 million that would have been the 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.
As part of the town’s consideration of the plan, the town’s consulting actuary, Becky Sielman of Milliman, performed a stochastic analysis of 10,000 different scenarios. Sielman said last week during a virtual meeting of the Council’s Finance and Administration Committee that the reserve fund will be adequate to mitigate any potential significant increases in future pension contributions in at least 97% of possible cases.
Sweeney said the town really did its work and prepared before making this decision. “Today we stand here looking to get rid of one of the largest costs to the town,” he said prior to voting in favor of issuing POBs.
“This is the right move for us, this is the right time,” Sweeney said, and this is a great example of the “patience of this financial team waiting for the right time to make this move.”
Fay said she has worked in the finance industry for decades, and while she appreciated the work of the team in preparing models and responses to her questions, she expressed concern with the “risk profile” and said she is “not sure this is the best mechanism now.” Fay said that this approach looks at the asset size, but she believes the pension liability is still going to grow and will put the town at risk.
In voting against the measure, Fay said she would like to see a more holistic approach to looking at the pensions to “drive that liability down.”
“I will be supporting this resolution this evening as this is a strategic approach to address the town’s unfunded pension liability while at the same time meeting the best interest of the town and its taxpayers,” Davidoff said.
The process has included extensive work, education, and due diligence, Davidoff said, praising Cantor for her “strong leadership and perseverance” in pursuing POBs as a strategy.
“After learning, listening and being engaged in the discussion, I have reached the conclusion this is a thoughtful and innovative approach that will help keep West Hartford on solid financial footing,” Davidoff said.
Williams said while he appreciates the attention to an issue “that has been an albatross for our budget,” he maintained concerns about turning a soft liability in to a hard liability.
Williams said he had “reservations that the move toward pension obligation bonds will result in a savings,” but even if that did happen, he said he has concerns that the town’s budget remains fundamentally unsustainable and doesn’t want future councils to fail to address other issues.
Williams also said the town needs to get out of the model of offering pensions, and feared unintended consequences with collective bargaining units in the future if POBs are considered a solution.
The legacy pension debt already exists, and Wenograd said that whether or not you like pensions, “there’s an obligation to fund them.” While there has been a tendency of politicians to take a short term gain, Wenograd said, “We’re taking a long term view.”
Creating hard liabilities means the town will actually pay its debt, “and we should pay it back,” Wenograd said.
Responding to Williams’ comments, Wenograd said it’s better for the town to put its fiscal house in order and while the unions will try to use the move to their advantage, it’s still better to work for and live in a well-run town. “I think we’re doing the safe thing and it will put us in better shape,” he said.
Kerrigan said West Hartford is tackling a problem that every town and every state is facing, and after speaking with many professionals, believes “this is a conservative risk.”
She said she takes a lot of comfort in knowing that the town will have a strong reserve, and that the strategy had been so well vetted. Thanking Cantor for her leadership, Kerrigan said, “I believe this is one of those times that this is going to work,” and added that she thinks other towns will follow West Hartford’s lead.
Gold said he has been interested in POBs since he was elected to the Council, and hoped the town would move in that direction.
“If we do nothing … the pension contributions will continue to increase annually at an alarming rate,” said Gold. “We can’t just stand by and watch this happen … we’re really now at a crossroads.”
The combination of interest rates at an all time low and the reserve fund – which is essentially a lock box – will lead to significant savings and Gold said he believes moving forward with the POBs is a sound financial decision. He added that the town should not rely just on this solution, however, but should take a good look at the pension plan and other retirement plan options.
“I’m excited for this to allow town to have more flexibility,” Gold said, which can “make our town more affordable for years to come.”
Blanks gave “huge kudos” to the team for presenting this strategy. The pension liabilities have ballooned and to do nothing would be irresponsible, she said.
“I really think it’s brave that we’re bringing this issue to the forefront,” Blanks said.
Just one resident offered testimony about POBs at the public hearing prior to the Council meeting Tuesday night.
“I think this is the most important and impactful financial decision this town is facing this century and possibly much longer,” John Lyons said. He said he thought the town was being very conservative in its estimates of investment income from the proceeds, and strongly encouraged unanimous approval of the ordinances.
Resident Jeffrey Mitchell submitted written comments as testimony to the Council, expressing concerns about POBs based on guidance from the Government Finance Officers Association. Privitera said “times have changed and investments have changed” since those comments by the GFOA were issued.
The FAQs provided as a PDF below were prepared by the Town of West Hartford and offer more details about the strategy, and how it affects the town’s overall risk. The ordinance to authorize the sale of Pension Obligation Bonds can be found here, and the ordinance to establish the reserve fund can be found here.
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Without the ‘complicated talk’, here is an explanation of how this is going to work. WeHa has a current bill they need to pay. So they borrow money, gamble it in the market, and hope to beat their interest costs. This rarely works out well. I hope this is the exception, but history shows that it probably is not.