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Posted on Fri, Jun 7, 2013 : 5:58 a.m.

County board: $345M bond issue to cover debt is 'cash flow management' solution

By Amy Biolchini

The Washtenaw County Board of Commissioners got a lesson in bond basics from an accounting professor at its meeting Thursday night as the body readies itself to vote on initiating a $345 million bond issue process.

The board had invited Jens Stephan from Eastern Michigan University to attend the meeting and help commissioners understand the risks involved in borrowing money to pay down its unfunded liabilities.


The Washtenaw County Board of Commissioners

Amy Biolchini | file photo

Those unfunded liabilities are estimated to be about $340 million - a combination of debt from the county’s health care and pension funds for its retirees that aren’t being profitable enough to cover costs.

Issuing limited tax bonds to fully fund both plans in a 25-year payback period would allow the county a cash flow management solution to pay down its hefty debt.

As the county is facing the task of eliminating about $7 million from its operating costs from its budget, it is looking for ways to cut expenses. The annual required contribution to its health care and pension funds has continued to increase year after year - with the county making a payment of about $20 million this year. That figure is projected to increase by millions of dollars within the next several years.

The county’s bond counsel has structured the bond payments to pay down less of the principal in the early years - about $17 million in the first year -- and to pay higher principal amounts in later years.

“You’re going to make up for it later,” Stephan said to the commissioners Thursday.

Commissioner Dan Smith, R-Northfield Township, said that he’s more interested in the ability to manage the county’s immediate cash flow issue than to end the bond payment process 25 years later with reduced expenditures.

Board Chairman Yousef Rabhi, D-Ann Arbor, echoed his sentiments by stating the county is trying to create an investment policy based on security, and that the county is trying to manage its payment and not to make money off the bonds.

The success of the bond issue relies on the return on investment being at least the same or higher than the rate at which the money was borrowed.

In the presentation of several financial models to the commissioners, Stephan calculated the probability of success of issuing bonds using the federal government’s low borrowing rate at 90 percent. Higher borrowing rates lowered the probability of success.

The $345 million bond figure the board is considering is based off of a 2011 actuary report.

Commissioners postponed their vote to start the bonding process in May so they could get a more accurate estimate from the newest actuary report. County Administrator Verna McDaniel said Thursday the actuary report would be delivered July 8 - two days before the board is set to vote July 10.

At the Thursday working session, commissioners also had the opportunity to question their bond counsel - John Axe of Axe & Ecklund and Meredith Shanle of MFCI - and their actuary, Larry Langer of Buck Consultants.

The level of understanding among the board members regarding nuance to the bond issue has risen dramatically since the item was first introduced publicly in May.

$345M bond issue

Public engagement opportunities:

  • June 15: 4-6 p.m. with Yousef Rabhi at Espresso Royale, 214 S. Main St., Ann Arbor
  • June 26: 4-6 p.m. with Yousef Rabhi at Caribou Coffee, 1423 E. Stadium Blvd., Ann Arbor
  • June 27: 11:30 a.m. county employee brown bag lunch with Verna McDaniel at the Learning Resource Center, 4135 Washtenaw Ave., Ann Arbor
  • June 27: 4:30 p.m. public meeting with Verna McDaniel at the Learning Resource Center
  • July 10: 6:45 p.m. public hearing set for regular Board of Commissioners meeting, 220 N. Main St., Ann Arbor

However, commissioners disagreed over how the county’s unfunded liabilities for both funds had become to be so large. Former Commissioner Rob Turner attended the Thursday meeting and said that the massive liabilities in the health care and pension funds were items he had tried to alert the board to during his term.

Langer said the county’s health care plan is about 30 percent funded and the pension plan is about 60 percent funded.

“I’d say you’re in reasonably good shape,” Langer said.

Ideally, Langer said the pension plan would be 100 percent funded so the assets can pay for what the retirees have accrued. At the beginning of the decade, the county’s pension plan was about 90 percent funded. The decline is likely due to the market slump, Langer said.

“We’ve never not made our actuarial contributions to these funds,” said Commissioner Conan Smith, D-Ann Arbor.

Commissioner Ronnie Peterson, D-Ypsilanti, didn’t see it that way.

“We failed to monitor this debt. We need to correct our behavior,” Peterson said.

He called for the board to examine itself and overhaul the budget process.

“You cannot erase a mistake of $345 million,” Peterson said.

Should the county choose to issue the bonds, the borrowed money would have to be placed in an intermediary trust for a financial advisor to invest.

Axe, the county’s bond counsel, advised the board that his job was the simple one in the whole process and that the real challenge lays on the county board to select a competent financial advisor who can invest the money wisely.

“The investment side is the critical piece,” Axe said.

McDaniel said the county would select the financial advisor through the request for proposals process. A board will also have to be created to oversee the trust fund and financer’s operations.

Rabhi said he’s now focused on creating a good financial policy to guide the county’s future advisor.

“Can we structure the trust in a way that we trust?” Rabhi said. “We need a policy that puts a premium on defensive investments. The goal isn’t to make money on the deal; the goal is to create financial stability.”

The county board will vote twice to initiate the $345 million bond issue at its next meeting July 10 - first in the Ways and Means and then for a final vote in the following regular meeting that night.

The vote will be to issue a notice of intent to issue the bond, which begins a 45-day referendum period during which the issue could be forced to a ballot if residents collect the necessary amount of signatures.

A second public hearing will also be conducted July 10 on the bond issue during the regular meeting.

Amy Biolchini covers Washtenaw County, health and environmental issues for Reach her at (734) 623-2552, or on Twitter.



Sat, Jun 8, 2013 : 1:18 a.m.

Last year we paid $20M. The annual bond payment is $17.5M. Keep paying $20M to build a cushion. No more delaying payments to funds "extras" in the operating budget. If we hit a deficit use the "deficit elimination" clause with the State at that point. Or, then bond the remaining, much smaller, remaining balance. Bottom line - do we have to eat this massive $MMM expense today? No.

Jay Thomas

Fri, Jun 7, 2013 : 4:38 p.m.

Someone correct me if I'm wrong but when there was some talk about putting social security money into the stock market some years back didn't the democrats go ballistic? Where are those democrats today...

Jay Thomas

Sat, Jun 8, 2013 : 6:31 a.m.

I don't think that was spelled out; it was very nebulous. It was also never put into legislation so it could be understood, debated and voted upon. Meanwhile, they are looking to push this through FOR REAL, and if it goes wrong... KA-BOOM!!

Silent Majority

Sat, Jun 8, 2013 : 12:09 a.m.

They did. And rightly so. You don't understand the bonding concept. They are looking to bond and use the proceeds to pay off their obligations to retirees. The County, but not the retirees would be taking the market risk. Bush's plan put retirees at risk.


Fri, Jun 7, 2013 : 4:15 p.m.

hmm interesting.


Fri, Jun 7, 2013 : 4 p.m.

As long as the current bozos making these decisions get their gold plated benefits, the heck with everyone else in the future. Kicking the can down the road is not the solution. Future payments will escalate. Good luck with that scenario. It worked out so well for the mortgage industry with their ARMs.


Fri, Jun 7, 2013 : 3:56 p.m.

"We failed to monitor this debt. We need to correct our behavior," Peterson said. He called for the board do examine itself and overhaul the budget process. "You cannot erase a mistake of $345 million," Peterson said. HUH? Who are these people? A MISTAKE of $345 million? They knew exactly what they were doing. Spending like no tomorrow and the bill comes due. Toss them all out. These people are incompetent. ______________________________ "...the board DO examine itself..." This makes no sense. Please proofread before publishing.


Fri, Jun 7, 2013 : 3:35 p.m.

There is no guarantee that this borrowed money will be enough to cover the unfunded pension and healthcare liabilities. We may find that we have to borrow even more money down the road. Unless the unions accept a cap on future benefits in exchange for this scheme, this is a bad idea.

Vivienne Armentrout

Fri, Jun 7, 2013 : 3:27 p.m.

While we are debating this, a drama goes on in Jefferson County, Alabama (location of the city of Birmingham). The county is declaring bankruptcy after a failed bonding scheme. Not exactly equivalent but a cautionary tale.

Nicholas Urfe

Fri, Jun 7, 2013 : 2:45 p.m.

I am still shocked that the attorney for the county has his daughter doing the financial advising. That should never be allowed when public interests, and millions, are stake.


Fri, Jun 7, 2013 : 3:57 p.m.

A bunch of amateurs. Fire all of them and hire professionals.

Chester Drawers

Fri, Jun 7, 2013 : 2:21 p.m.

The word "principal" in the sixth paragraph should be spelled "principle" (twice). I believe that the AAPS hold the local monopoly for paying "higher principal amounts".

Vivienne Armentrout

Fri, Jun 7, 2013 : 3:18 p.m.

Actually, "principal" was correct. "Principle" is an abstract concept, as in "I object as a matter of principle". "Principal" doesn't only refer to a school official, but is also a financial term as used here. Look it up.

Amy Biolchini

Fri, Jun 7, 2013 : 3:05 p.m.

Thanks for pointing that out. It's been corrected.


Fri, Jun 7, 2013 : 1:43 p.m.

Have the penmsion plans that caused all this been terminated? In other words, are NEW emplyees still going to be getting plans that caused this problem? I have seen NO info in any of these stories stating that they have gotten rid of what caused the trouble in the first place. Can someone get the official word on this? PLEASE.


Sat, Jun 8, 2013 : 5:49 p.m.

They had given it up before, and then got it back in the last contract. So will they get it back again when the contract is up? Standby to see...


Fri, Jun 7, 2013 : 5:21 p.m.

Thank you very much. I am relieved to know this, and appreciate your response

Amy Biolchini

Fri, Jun 7, 2013 : 3:06 p.m.

The county is able to pursue the bond issue to pay off the liabilities because both the health care and pension plans will be closed to new employees after Jan. 1, 2014 -- that happened because of concessions the union gave up in exchange for the 10-year contract with the county this spring.

Alan Goldsmith

Fri, Jun 7, 2013 : 1:39 p.m.

The ten year negotiated contracts with County employees has ZERO to do with this issue. To claim otherwise is just smoke and misinformation from folks who haven't done their homework.


Thu, Jun 13, 2013 : 3:37 p.m.

So, Alan who is to say that a 2 year or 5 year contract would not of done the same thing! So, yes a 10 year contract is a current problem.


Sat, Jun 8, 2013 : 5:48 p.m.

Mr Goldsmith - Oh, it is closed huh? It was closed, and then the county board in their wisdom, re-opened it with the contract before this one....making the hole even deeper. Now they will close it on the 1st of January, but anyone hired before then is in the retirement system. The contract should have closed it when it was signed to any new hire. It should have taken anyone with less than 10 years and converted them to a defined contribution program. It should have made minimum retirement age equal to social security retirement age. It did none of these. So it has ZERO to do with the issue? LOL!!!


Fri, Jun 7, 2013 : 5:40 p.m.

Existing employees will continue in the pension and retiree health-care plans until December 31, 2023. Because of the ten year contracts, it is not possible to shift these employees into a 457 (401k-like) plan. The hole won't get any deeper (employees hired after January 1 won't have a pension), but there is no means right now to fill in the already deep hole. If there weren't already ten year contracts in place, it might be possible to negotiate a transition out of pensions for current employees; if not today, then in two years with the next contract. The ten year contracts have limited the available alternatives, as well as enabling an alternative (bonding) few seem to like.

Alan Goldsmith

Fri, Jun 7, 2013 : 4:24 p.m.

Since the health care and retirement will be closed to new employees, something other organizations did years ago, and concessions were given up with the new ten year contract, the contract has zero to do with this past liability. It impacts the County's long term debt in a positive way and makes the debt lower in the long run. The arguement being make here,that this timebomb is the result of the new ten year contract is a false one and has zero to do with the long term liability except to lower it for future employees. To say the two care linked in a negative way is false. The real problem was past member of the Board (Leah Gunn, Conan Smith, and others) failed to plan ahead and shift workers to a 401K type retirement plan years ago.

Amy Biolchini

Fri, Jun 7, 2013 : 3:04 p.m.

I'm interested in your argument here, Alan. As I understand it, the county is able to pursue the bond issue to pay off the liabilities because both the health care and pension plans were closed to new employees after Jan. 1, 2014 -- that happened because of concessions the union gave up in exchange for the 10-year contract with the county this spring. The county began pursing the bond issue after the state law passed in Oct. 2012 making it possible. It was not made public until after the county had gone through its union contract talks because the closing of the two plans were a concession in the negotiations.


Fri, Jun 7, 2013 : 2:45 p.m.

Alan Goldsmith, Please explain why ten year negotiated contracts with County employees has ZERO to do with this issue. Isn't the being the health care and pension funds are for most if not all the union employees.


Fri, Jun 7, 2013 : 1:33 p.m.

Last year I pointed out that the Sheriff's secretary was collecting double her salary with overtime. plus she was banking huge amounts of comp time. The Board and Verna McDaniels did not respond. That is the kind of waste that you will find throughout the budget if you look closely. Why is it that the Board doesn't look for budget cuts before it decides how much money it needs to borrow.

Shawn Letwin

Fri, Jun 7, 2013 : 1:14 p.m.

Let's borrow today to pay for tomorrows bills. Really? Since when has any government solution for fiscal responsibility in addressing today's insufficient funding issues ever resulted in not making it a bigger problem for future generations? Of course the current regime of government officials and employees want their future retirement and benefit liabilities fully funded at the expense of the taxpayer so that they can ensure reaping their protected benefits when they retire. Then another cadre of those elected to serve the people (sic) will have to address the problems cause by those who used the government to serve themselves (and the vicious cycle repeats itself at the cost of the taxpayers and true revenue generators). The tail wagging the dog. No matter what accounting machinations are concocted, the real thing missing in the accounting game in government is ACCOUNTABILITY. .


Fri, Jun 7, 2013 : 1:13 p.m.

I remember all the out cry by people against right to work and how Andy LaBarre pushed for the 10 year contracts. I have not heard much from Andy LaBarre about this issue have you?. I was at that Washtenaw County Board of Commissioners meeting and my husband spoke against the 10 year union contracts. Well, 10 year contracts for the unions was passed by the dems now we have this problem. Well, thanks dems for looking out for the Washtenaw County tax payers.

Vivienne Armentrout

Fri, Jun 7, 2013 : 1:11 p.m.

The really chilling idea here (among several outstanding chilling ideas) is that the county would hire a financial advisor and turn over management of this borrowed money to him/her. Further - selected by RFP? Who will make that decision? There is tremendous opportunity here for a financial firm or person to make huge fees without guaranteeing success. There is so much history in recent years of this phenomenon that it stuns me to think it is even under consideration. All investment options, especially those which must yield a fixed income, are extremely risky right now. For this scheme to succeed, the advisor must secure what are essentially above-market rates - and the income then will be used to pay interest! I hope that the BOC will not be rushed into this decision but will simply hold tight into next year, spend reserves if necessary, and budget very carefully while examining all possible options. (Apparently part of the rush is to take advantage of a Michigan law that expires at the end of 2014 - still lots of time.)

Vivienne Armentrout

Fri, Jun 7, 2013 : 3:24 p.m.

The four-year budget process is also a concern. I think this may lead them into a number of errors based on incorrect assumptions (or assumptions about predictions they can't make). I think they need to retain the flexibility they have had with the two-year budget and certainly should not rush into something like this long-term obligation to squeeze into the four-year budget format.

Amy Biolchini

Fri, Jun 7, 2013 : 3 p.m.

In addition to the sunset of the law, the commissioners have expressed interest in passing the bond issue and getting it approved by the Michigan Department of Treasury before the end of this year in order to secure the schedule of low principal payments on the bond in the county's four-year budget process. The county needs to cut $7 million by Dec. 31.


Fri, Jun 7, 2013 : 1:29 p.m.

If you listened to the meeting last night you heard that Conan Smith and some others were ready to vote to approve this last night and not even wait for the July meeting. The selection of a financial manager will be corrupt. It will go to some crony of the Board who will make millions and contribute heavily to political campaigns. That is the way Michigan politics works.


Fri, Jun 7, 2013 : 12:54 p.m.

The decline is likely due to the market slump, Langer said. I thought the stock market has been record breaking over the last couple of years, we are currently hanging around the 15K mark and we are in a slump? No wonder you guys have no clue what your doing.

Vivienne Armentrout

Fri, Jun 7, 2013 : 1:12 p.m.

He was talking about the entire last decade. Remember 2008?


Fri, Jun 7, 2013 : 12:52 p.m.

"Summertime and the livin' is easy." These days of lavish retirement benefits are over, and Washtenaw County should try to renegotiate its unfunded liabilities, instead of kicking the can down the road with a staggering $345 million bond issue. This should be a lesson in reality for current county employees approaching retirement. What investor their right mind would buy these bonds?


Fri, Jun 7, 2013 : 2:52 p.m.

What is the motivation for a retiree or future retiree to give up benefits, unless it is to threat of declaring bankruptcy which will put all pension benefits at risk of elimination.


Fri, Jun 7, 2013 : 12:50 p.m.

The solution is to elect financially knowledgeable WCB commissioners. Hey, first they gave a sweetheart deal to their union "overlords" and now they want us to insure that those undeserved benefits are guaranteed. Responsible governments should rarely use debt to pay for anything. Responsible governments should live on the tax money given to them and never approve benefits that cannot be sustained within that budget. Further, responsible government should be saving money for a "rainy day" so that financial surprises like the recession do not impact services. The existing board fails on all counts.


Fri, Jun 7, 2013 : 1:25 p.m.

I'm with you except for one thing. Governments should borrow money in order to pay for revenue enhancing improvements, like roads, water, sewer, etc., when they can show with reasonable certainty that the increased revenue from the improvements will pay for the bonds. For example, I'm all for the CIty of Ann Arbor expanding the sewage treatment plant with bonds, because added sewer and water capacity will increase the city's future property tax revenue. A pension contribution is NOT an appropriate bond expenditure. This is a "Hail Mary" play, further leveraging the county's finances and increasing future risk so the county commissioners can gamble the financial markets will outperform the bonds. That's not responsible government.


Fri, Jun 7, 2013 : 12:39 p.m.

This is just the beginning of the unfunded liability elephant that has been sitting in the closet and not talked about. This will happen at every level of government where they have given out pensions like Halloween candy with total disregard on how they will pay for them (except to dump on taxpayers) with unrealistic expectations on stock market returns. This is sad because many of these people had planned on that for their retirement and haven't put anything else away.

Alan Goldsmith

Fri, Jun 7, 2013 : 12:14 p.m.

So congrats to everyone who has continued to reelect Conan Smith to the Board over the past several years. This fiasco and underfunding of the retiree costs is the price you pay for incompetent leadership. Lucky for Mr. Smith this isn't his personal debt but a debt every tax payer in Washtenaw County is now responsibly for. It's sort of Bob Ficano Management 101 learned no doubt with his time as a member of the Fab Five of Metro Detroit area 'leadership'.


Fri, Jun 7, 2013 : 11:58 a.m.

Was Alicia Ping @ the meeting? Did Alicia Ping contribute to the conversation? Did Alicia Ping comprehend this issue? Saline deserves better representation on the County Commission.


Fri, Jun 7, 2013 : 1:20 p.m.

Amy Thank you for the follow up. How many meetings has Ms Ping missed? Placing an "R" next to her name is a joke. She is not a Republican. Ms Ping is part of the A2 liberal crowd. Boy, could we use Wes Prater now a practical Democrat who actually understands and comprehends the issues on the table.

Amy Biolchini

Fri, Jun 7, 2013 : 1:01 p.m.

Alicia Ping, R-Saline, was absent from the meeting last night.


Fri, Jun 7, 2013 : 11:53 a.m.

Let's see the board: 1) Did not fully fund the retirement and health care accounts 2) They did not realize how deep the hole was 3) The closed and then reopened the retirement program adding to the size of the hole 4) They signed a new 10 year agreement with the unions that is unaffordable adding more to the size of the hole 5) They are unwilling to make the cuts needed to fund the debt further increasing the hole 6) They are hiring like crazy to beat the closing of the program at the end of the year, to grandfather in new hires before it changes digging it deeper 7) They have brought in a firm to help them fill in the hole that has a financial interest (PROFIT) in getting them to take one specific kind of action adding to the cost of filling the hole 8) They will have 2 days to absorb the new reports on the actual debt - meaning no one will fully understand the impact of the action Do you really believe they will make a good decision and that our children will not regret it in 25 years? This is BAD, very bad... Playing roulette with your tax dollars. Betting they can invest and make more money than the bond costs, while continuing to avoid actually putting the right amount into the retirement funds and overspending. Eventually they will find an EM sitting in their place. Not at all what I want to see. Back up and think please.


Fri, Jun 7, 2013 : 12:44 p.m.

Eventually we will find EM's at every level of government to fix this mess because we keep electing incompetents who can't make it in the real world, it's just a matter of who's first. Government retirees should be very wary and careful because they are about to get the shaft.

Steve Bean

Fri, Jun 7, 2013 : 11:48 a.m.

"We've never not made our actuarial contributions to these funds," said Commissioner Conan Smith, D-Ann Arbor. Not knowing the context of that statement, I'll not give Conan a hard time about it. But the commissioners need to face the reality that what's done is done, and there is no longer an easy way out. We will all have to pay for past choices and decisions. The question is will we pay what's currently owed or even more than that? There is no realistic scenario where returns on held funds could be higher than interest costs. As Stephen Ranzini noted above, that window closed several years ago. The next several years will see extensive deflation of all financial assets. It's unavoidable and it has begun.


Sat, Jun 8, 2013 : 3:15 p.m.

Steve, I said earlier that I was not referring just to equities when I referred to the "market". No, a well-built portfolio has a range of investment options and they will vary over time. My last answer was in specific reply to Stephen's comments on the return on stocks.

Steve Bean

Sat, Jun 8, 2013 : 2:29 p.m.

snark12, you do realize that there are alternatives to the stock market? Why stay in for a 50% drop if it appears imminent?


Sat, Jun 8, 2013 : 2:50 a.m.

@Stephen, I'm not sure what your data source is. From 1898 to 2012 (115 years), the S&P 500 had an annualized return of 9.7% (6.3% when adjusted for inflation). Maybe you were looking at ALL stocks and/or you were not including dividend? $1 invested then would be worth $40,324 today. Ouch! Since 1940, the S&P 500 has had only two 10-year-periods with negative total return (those were the periods ending in 2008 and 2009), and the worst one was an average -1% over that period. There are no negative 15-year-periods. The worst 25-year-period was an average 7.94% return ending in 1981. Note that your money would have increased in value more than six-fold during that 25-year-period. The current market may well be over-valued but historical measures are not clear on that. The long-term average P/E ratio for the S&P is about 16 and it was 13.68 as of March. It's definitely a little higher now. The market may well go down in the short term but, personally, I see no evidence it's 50% over-valued. BUT let's suppose you're right. If you invested in the market today and it dropped 50% in the next year (even though the worst result in modern history was 2008's 37% drop) but then returned to an average 6% annual return for the following 24 years, then your result for all 25 years, including that first horrible year, would be to nearly double your money over that period. Also, every time the market has a major down period, it has always been followed by a corresponding recovery so you would likely do much better than 6% per year. (Even Elliott Wave Theory forecasts a big bounce-back rally.) My point: short term investing (and forecasting) is fraught with uncertainty. Longer term, the trends are very consistent.

Stephen Lange Ranzini

Sat, Jun 8, 2013 : 2:08 a.m.

@Snark12: The long run return from stocks over the past 115 years has averaged 4.6% per annum. However, we are starting from 45-50% over valued, so the returns for the next 10 years might average zero.


Fri, Jun 7, 2013 : 10:13 p.m.

"History and random probability" is how we understand the world around us, so I'm quite comfortable with it. Prechter's theories are good for book sales but they do not count as a predictive model, and no one should take it seriously. I can't tell you anything useful about the market over the next few years. You shouldn't trust anyone who says they can. But many people understand the general dynamics for market behavior over the decades.

Steve Bean

Fri, Jun 7, 2013 : 8:57 p.m.

"I know you feel that way, and I think it is non-mathematical pessimism." It's not a feeling, it's a thought based on years of research. I'm not a pessimist; I love reality. What's realistic about the rising market(s) scenario? Yes, the outcome would be realistic *given the assumption*. On what do you base the premise other than vague references to history and random probability? I pointed to two relevant bodies of work—several books that I've read and re-read by a worldwide expert and a web site that I've read consistently for years. I've watched the S&P 500 closely for more than six months, and the EWP has held up. To ignore it would be optimistic, which is how we got to the top. The tide has turned, and that mass optimism (just look at recent headlines) is now flipping to pessimism. Real pessimism. (That's the arbitrariness—among other shortcomings—of a society that operates on exchange and money use.) The period since 2000 has been a triple top of high degree, ending the sequence of waves going back more than a century. In other terms, it's the most massive credit bubble in history. The down and sideways correction from here will likely last years to decades, in which case average returns simply won't hold up. The 'long term' will be generations, not 2+ years.


Fri, Jun 7, 2013 : 5:10 p.m.

Steve, the "realistic scenario" is that the "market" goes up and down, bumps along, some years doing well, some years doing horribly, and that over the long term it averages the same 5-8% it always has. Lower interest rates make that more likely, higher rates make it less likely, and those rates vary over time. I would expect them to be higher in future years, but the math still supports the conclusion. And by "market," I don't just mean the stock market, I mean the whole range of investment options available to a portfolio. If you do a stochastic model of expected returns, for instance, over a 30 year period, and you start model in mid 2007, March 2009, or even right now, the end results are not substantially different. Sure, you'd rather put your money in in March 2009, but for a long-term investor, it just doesn't make that much difference. Yes, herd mentality certainly plays a role in the market over the short term. As Buffett says, in the short term the market is a voting machine. In the long term it's a weighing machine. And there has always been some doom-and-gloom prophecy that foretells the end of capitalism. It's always wrong. I know you feel that way, and I think it is non-mathematical pessimism.

Steve Bean

Fri, Jun 7, 2013 : 4:50 p.m.

snark12, feel free to spell out any and all realistic scenarios to that effect. The great majority of the economic world are humans with emotions that herd. Until one is aware of that reality, one is likely to follow them. That's also the mechanism that turns a downturn into a panic and a crash, followed by a depression. I have been looking for evidence that this won't happen in coming years, and all I keep finding is more evidence to the contrary. Among that is a very compelling case based on the Elliott wave principle. Interested readers can check out Robert Prechter, Jr.'s books at AADL and also go to and find the writings of Nicole Foss, who has been a big-picture observer of energy issues and global finance for many years. As for giving up on American capitalism, yes, I have. It's dysfunctional and unnecessary (as are all monetizing and economic concepts, communism and socialism included), but that's another discussion.


Fri, Jun 7, 2013 : 4:35 p.m.

It's just over-the-top grandstanding to say there is "no realistic scenario in which returns in held fund could he higher than interest costs." I know from your other comments that you subscribe to this Elliott Wave "Dow 400" view, but the great majority of the economic world disagrees with you. The readers here should know that. Over a long term (that is, decades), it is very realistic that returns exceed borrowing cost. I'm not talking about taking on margin for day trading, or managing results on an annual basis. This is the fundamental principal of almost every insurance company, investment trust, operating business, etc. To say otherwise is to basically give up on American capitalism.

Vivienne Armentrout

Fri, Jun 7, 2013 : 1:31 p.m.

Conan was on the BOC when the commissioners approved switching employees from the defined contribution (similar to a 401K) retirement plan to a defined benefit (traditional pension) plan. The County was ahead of its time in instituting a defined contribution plan in 1984 The Money Purchase Pension Plan (MPPP) was fully portable and the County was matching (or better) employee contributions to a variety of investment vehicles. The employee was able at termination to roll that over into IRA funds. This plan had much less long-term impact on county finances, since at retirement the employee simply began accessing his/her plan savings. In 2008, at the worst possible time in this young century to make such a move, the BOC changed employees into a defined benefit plan, which immediately imposed the actuarial obligations that are now being addressed. Conan Smith is the only Ann Arbor commissioner remaining on the BOC who participated in that decision. (The others were Jeff Irwin, Leah Gunn, and Barbara Bergman.) He has stated very recently that he still does not regret that move, and he apparently opposed the move back to a defined contribution pension system. He has a lot to account for.


Fri, Jun 7, 2013 : 11:48 a.m.

"Langer said the county's health care plan is about 30 percent funded . . ." "The county's pension plan was 90% funded . . . Now, it's 60%. . ." "We've never not made our actuarial contributions to these funds. . ." "We failed to monitor this debt." "You cannot erase a mistake of $345 million. . ." The plan: Create more debt to extend these unresolved problems. Borrow from tomorrow to pay for today. It's likely that none of the commissioners will still be on the board when this plan comes home to roost. They have little courage or ability to manage these problems. The only beneficiary will be the bond fund managers, collecting their fees regardless of fund performance. Why not face the truth now? For example, the retiree health care plans are unsustainable. End the current plans, and shift the costs to Medicare/Affordable Health Care Plan.


Fri, Jun 7, 2013 : 11:35 a.m.

Anyone who buys these bonds will be a fool. You will be buying bonds with a lower interest rate based on a bond rating that will fall as soon as this new debt is calculated into it. The smart buyer will wait for the next bond issued by the County, to build or renovate a school or any other public works project because it will pay more interest and have the same tax benefits.


Fri, Jun 7, 2013 : 11:31 a.m.

If the County has a cash flow problem, they have other solutions. They can use a State program to run a deficit as long as they submit a plan as to how they will make up the deficit. If this is just a cash flow problem, then there are other ways to deal with it. The real hope of the commission is that they can borrow money at below market rates because of the tax exempt status of their bonds and then invest that money to try to make a profit. If the markets don't cooperate, the results could be catastrophic. The tax exempt status of the bonds will also rob other branches of the government of needed revenue. This is really a scheme to rob Peter to pay Paul but Peter is the taxpayers and Paul is a bunch of crony financial managers and County administrators who don't want to deal with budget cuts.


Fri, Jun 7, 2013 : 8:35 p.m.

@Amy- if you listened to a later question, as soon as the County has to pay the $30 million annual payment in the next budget year it will be a fund in deficit, which is eligible for the deficit elimination plan. The County staff who were answering the question had a vested interest in confusing the question, which they did.

Steve Hendel

Fri, Jun 7, 2013 : 5:21 p.m.

Amy, it IS just semantics, because an unfunded liability (in the absence of any remediation) creates a future deficit when the liability must be paid.

Amy Biolchini

Fri, Jun 7, 2013 : 2:56 p.m.

trespass, it sounds like you're referencing a deficit elimination plan. Last night, the county's finance director Kelly Belknap and financial analyst Tina Gavalier addressed this issue after it was brought up. Deficit elimination plans are required by the state if a municipality's fund has expenditures higher than revenues. The debt the county is facing is a liability, not a deficit, according to county officials -- making it ineligible for a deficit elimination plan. It may sound like semantics, but the county staff said it's not an option.

Stephen Lange Ranzini

Fri, Jun 7, 2013 : 12:10 p.m.

@trespass: Actually the documents state that these bonds will not be tax exempt and will be fully taxable. There is no tax arbitrage opportunity here making the investment challenge that much greater.


Fri, Jun 7, 2013 : 11:24 a.m.

The model that was presented left something very important out of his calculations of risk. What affect will this bond issue have on the borrowing costs for every other County agency and school district for the next 25 years. The bond rating will go down, given a new $600 million debt. When the bond rating goes down the interest rate for bonds will go up. So every new bond issue for the next 25 years will cost more.


Fri, Jun 7, 2013 : 12:47 p.m.

They're just looking for a solution that will get them out of hot water with the retirees and let someone else tell that the system is broke. Give each retiree a lump sum payout and liquidate the system, that's about all that can be done this late in the game. Issuing bonds is the cowards way out.


Fri, Jun 7, 2013 : 11:20 a.m.

The commissioner who really warned about this impending disaster for years was Wes Pater. When it came time for redistricting, the County Prosecutor and the County Treasurer who were on the redistricting committee made sure that he was redistricted into a Republican district. No one but Wes wanted to cut the County budgets to make bigger contributions to the funds or negotiate contracts that gave less generous pensions. It was disgraceful to listen to Conan Smith try to say that none of this could have been foreseen and that it was just due to a bad economy. Many people saw it but they didn't want to make the hard decisions about budget cuts, especially not Verna McDaniels who might have had to manage with a smaller budget. We need a new manager who will look out for the taxpayers interest rather than her own.

Stephen Lange Ranzini

Fri, Jun 7, 2013 : 11:08 a.m.

About 90% of the return achieved from investments comes from the changes in the index of the type of asset in which funds are allocated (asset allocation) and not from the skill of the money manager or stock picking investor. It is tough for professional managers to even achieve an investment index benchmark because of transaction costs and money management fees. With the stock market and bond market being at all-time bubble driven highs, it is unlikely that picking even a great manager or financial advisor will result in anything other than a disaster for our county if they chose to borrow and invest now rather than waiting for stock and bond indexes to revert to long term levels indicating fair valuations. Bonds are at all-time record highs, with interest rate returns even lower than during the Great Depression. The two best measures of fair value of stocks (as I informed the commissioners during the public comment period of this meeting) are the 10 Year Cyclically Adjusted Price to Earnings Ratio (10 Year CAPER) and the Tobin Q Ratio which measures current share prices versus replacement costs. Both measures are about 45% to 50% over fair value averages of the past 115 years. Since stocks have averaged about 4.6% return over that timeframe if you invest when the stock market on average is 45% overvalued, you may not see a positive return on investment for ten years. Meanwhile the bond interest costs will eat you alive and the pension plan's actuarial costs will increase opening up a new major deficit in the retirement system. The time to do this would have been in 2009 when stocks were under fair value, not today. If the county really wants to go down this path, please wait to sell these bonds until the bond and stock markets are lower to carry out this plan.

Stephen Lange Ranzini

Fri, Jun 7, 2013 : 12:18 p.m.

@Steve Bean: What you need to make this plan work is a low stock market and low interest rates. If either are high the math doesn't work. If the economy turns down again (it may have as recent economic statistics are showing weakness) and the stock market drops, interest rates may also drop again. If that happens it would be the prefect time to do this. Also FYI, the documents state that these bonds will not be tax exempt and will be fully taxable. There is no tax arbitrage opportunity here making the investment challenge that much greater. @Kai Petainen: Another great point and I agree completely!

Steve Bean

Fri, Jun 7, 2013 : 11:42 a.m.

Stephen, interest rates are rising since the recent bottom and likely will through at least the market bottom a few years from now. Do you think it would be a better time in terms of the bond market if that's the case? Or are you referring to the investment side for the county rather than the cost of interest on the bonds we would issue? I agree fully with your assessment of both the bond and stock markets. They've topped and have a long way to go down. Positive return in stocks is likely even more than 10 years away at this point.

Kai Petainen

Fri, Jun 7, 2013 : 11:26 a.m.

"About 90% of the return achieved from investments comes from the changes in the index of the type of asset in which funds are allocated (asset allocation) and not from the skill of the money manager or stock picking investor. It is tough for professional managers to even achieve an investment index benchmark because of transaction costs and money management fees." Stephen is right. Can I say he is right on the money? It's also tough to beat a benchmark due to liquidity. Huge funds have a brutally hard time beating the indices because they are too big. At that point, it becomes less about actually beating the benchmark and more about raising the assets under management (AUM). And when the funds pick a benchmark to compare themselves to, quite often it's an easy marketing benchmark to beat and not the appropriate benchmark to use.

Basic Bob

Fri, Jun 7, 2013 : 11:05 a.m.

"the real challenge lays on the county board to select a competent financial advisor who can invest the money wisely" With the amount we'd be borrowing, the county would be one market crash from insolvency. But Axe and Shanle would have their money up front.


Fri, Jun 7, 2013 : 10:59 a.m.

The response from the County Administrators was hogwash on the topic of "why didn't the Commissioners know about this until April when it was a done deal due to the new 10 yr labor contract?". When negotiating a massive, game-changing contract you tell the Commissioners the range of potential outcomes.


Fri, Jun 7, 2013 : 10:57 a.m.

Will the bonding process be competitive or is it some kind of sweetheart deal?


Fri, Jun 7, 2013 : 10:41 a.m.

A $345 Million dollar whoops pretty well shows the monitoring process is not working well. This needs to be addressed for sure.