Interest rate lows spur new interest in pension financing.

Sonoma County issue success has others eyeing market

"A new wave of pension financing is likely," according to credit analysts who rate California municipal bonds for New York-based Moody's Investors Service. Analyst David Brodsly predicts by year-end $1 billion in California pension bonds will have come to market in 1994.

Both the county and city of Los Angeles are considering such transactions, spurred by the recent success of Sonoma County in covering its unfunded pension liabilities. Sonoma, backed by an A1 Moody's rating, raised $97 million in an Oct. 21 bond sale to cover $13 million in current payments and $84 million in projected future payments.

By issuing the bonds, the county has achieved, said Moody's, "net present value savings of approximately $9,565,622." That's a projected savings of almost 10 percent.

Gerry Miller, who oversees bond issuance for the City of Los Angeles, said his office began looking into financing unfunded pension liabilities about four weeks ago. "It's doable now," he noted, "because taxable interest rates are very low."

In fact, Moody's stated, these interest rates are even lower than the amortization rates used by actuaries who set the municipalities' annual contribution to the pension funds.

To calculate contributions, actuaries make certain assumptions regarding the average retirement age, mortality rates and wage growth for employees and the pension fund's return on investment. They then add-up and amortize the future payments to determine how much the municipality must set aside each year to cover its obligations.

Brodsly describes the unfunded portion of pension liabilities as a "catch-up amount" -- the difference between how much was put away based on past calculations of what was owed vs. newer calculations of what is owed.

Traditionally, this catch-up sum was paid for through additional annual contributions. Few California municipalities financed the unfunded liabilities because it was not considered cost effective.

The City of Los Angeles, said Miller, projects $3.5 billion in unfunded pension liabilities from its City Employees Retirement System and Fire and Police Pension System.

"If we decide to move forward," he added, "we would ask for council and mayoral authority to structure the transaction before the end of the month."

L.A. County Treasurer Sharon Yonashiro said her office has been considering pension funding since 1986, when it issued a tax-exempt bond for these purposes. Recently, she said, her office -- in conjunction with the chief administrator's office and county counsel -- wrote to the county Board of Supervisors about funding these liabilities, which were estimated at more than $1.9 billion, according to a June 30, 1992, actuarial report.

The letter, said county Budget Director Gerald Roos, stopped short of recommending or nixing a bond issue, but urged the board to position itself in case the county administrative staff decides to advise financing the unfunded pension liabilities.

Specifically, Roos noted, it advised the board that it would need a state Superior Court ruling which states that the county has the authority to do this kind of financing, since it is not specifically authorized in state codes.

"This step alone may take as long as 90 days to complete," said Roos noting that getting court approval was one of many steps needed to "position ourselves should we decide to go forward with the actual issuance of the bonds."

Meanwhile, the trend toward pension obligation bonds should last at least through the first quarter of next year, according to Richard Dixon, the former chief administrative officer for the county. He advised Sonoma County and now serves as a consultant to the Los Angeles County Employees' Retirement Association, among others.

"While interest rates may permit it to last longer, the farther you move into the future, the harder it is to be sure that the rates will be favorable," he said. "My advice, therefore, is to position yourself so that you can sell into the market when you see a favorable rate environment."

Dixon said he expects rates to turn around by next summer.