Due to Financial Uncertainty, Springfield, MA Pulls Plug on $755M in Pension Obligation Bonds

Due to Financial Uncertainty, Springfield, MA Pulls Plug on $755M in Pension Obligation Bonds

Officials in Springfield, Massachusetts were poised to borrow hundreds of millions to bail out their city’s underfunded municipal pension fund.

Now, they are pulling the plug on the plan due to rising interest rates, a plummeting stock market and the threats of a recession.

Providence Mayor Jorge Elorza and Providence City Council President John Igliozzi have been shepherding a similar financing scheme for the City of Providence to borrow $515 million in pension obligation bonds.

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Two weeks ago, 4% of registered voters Providence voters turned out and voted to approve the borrowing, and legislation to allow the borrowing is now working its way through the Rhode Island State House.

According to the state legislation that authorizes the city to move forward with the pension obligation bonds, the interest rate for the borrowing must be 4.9% or lower. The instability of the financial markets is threatening that borrowing rate.

 

Springfield About Face

The Springfield City Council voted to curtail the plan this week. The city was poised to issue $755 million in bonds.

 

According to WMAC Public radio:

Springfield City Councilor Tim Allen, a member of a City Hall working group on the city’s pension fund, provided colleagues this week with an update.

“The pension bond project itself is dormant at this point because the economic conditions are not favorable for that at this point,” Allen said.

Selling pension obligation bonds was discussed as a possible solution to Springfield’s biggest financial challenge – shoring up its employee retirement system that is the most underfunded in the state.

“What we are looking to do is put an infusion of funds into the retirement system that will then pay down that unfunded liability that we have now that would in turn reduce our yearly appropriation payment and safe the taxpayers money,” said City Comptroller Patrick Burns in a report to Councilors in May.

“Is there risk with it? Yes, there is,” Burns said.

A sharp downtown in the stock market, where the pension funds are invested, and rising interest rates could make the sale of bonds too risky.

Springfield’s Chief Administration and Finance Officer T.J. Plante assured Councilors that the city would not go to the bond market if the city’s finance team and a group of outside advisors don’t think it’s a smart play.

“I can tell you if the numbers don’t tie out, we’re not doing it,” Plante told Councilors in April.

 

Elorza Administration Is Racing Forward

According to multiple Providence City Hall sources, the Elorza administration has ordered underwriters to move quickly.

Local and national municipal financial officers are warning about the dangers of this form of financing.

"Pension Obligation Bonds carry significant risks, that is why the Government Finance Officers Association recommends state and local governments exercise caution before authorizing them," said Gary Sasse, the former head of the Rhode Island Public Expenditure Council and founding director of the Hassenfeld Institute at Bryant University.

"It is my understanding that Providence pension obligation bonds [POBs] are being proposed because the City has no politically viable option. This does not make them any less than a riverboat gamble," added Sasse.

Even more critical is the guidance of the Government Finance Officers Association (GFOA), which has issued an alert recommending that state and local governments do not issue POBs for the following reasons:

- The invested POB proceeds might fail to earn more than the interest rate owed over the term of the bonds, leading to increased overall liabilities for the government.

- POBs are complex instruments that carry considerable risk. POB structures may incorporate the use of guaranteed investment contracts, swaps, or derivatives, which must be intensively scrutinized as these embedded products can introduce counterparty risk, credit risk and interest rate risk.

- Issuing taxable debt to fund the pension liability increases the jurisdiction’s bonded debt burden and potentially uses up debt capacity that could be used for other purposes.  

- In addition, taxable debt is typically issued without call options or with "make-whole" calls, which can make it more difficult and costly to refund or restructure than traditional tax-exempt debt.

- POBs are frequently structured in a manner that defers the principal payments or extends repayment over a period longer than the actuarial amortization period, thereby increasing the sponsor’s overall costs.

- Rating agencies may not view the proposed issuance of POBs as credit positive, particularly if the issuance is not part of a more comprehensive plan to address pension funding shortfalls.