Washtenaw County considers borrowing unprecedented $345M to cover its retiree benefits
Editor's note: This story was edited at 11:45 a.m. for clarification as to what the bond would fully fund.
In order to cover an existing $148 million in debt as well as future liabilities from retiree health benefit and pension costs for its employees, Washtenaw County is considering borrowing about $345 million that it would pay back over the next 25 years.
Bonding for the debt is projected to save the county $112.5 million over that 25 years, according to an analysis presented to county officials Thursday night by Municipal Financial Consultants Incorporated.
The financial consultants estimated $345 million would be the maximum amount needed to fully fund future long-term retiree health costs of $210.5 million and future pension fund costs of $130.3 million.
AnnArbor.com file photo
Those new union contracts have allowed the county to begin vetting the idea of bonding to cover pension costs, as the retirement plans were closed for new hires during the negotiations. The county’s pension fund has now been closed - a requirement for the body to consider bonding for that large debt.
Thursday night the board began vetting the idea after a presentation by John Axe of Axe and Ecklund, the lawyer on the county’s bond counsel.
“This is a brand new type of bond,” Axe said. “No one has ever issued these obligations before in Michigan. … As of right now, no one has yet had approval by the Michigan Department of Treasury.”
The state requires municipalities to have a AA bond rating in order to bond for retiree pension costs. Washtenaw County has a Aa1 Moody’s rating and a AA+ Standard & Poor rating.
“I’m satisfied you’re doing your job,” Axe said to the Board of Commissioners and county staff. “If I didn’t think you could pay these bonds back I would not be here.”
The ability of municipalities to bond for their long-term liabilities in their retirement funds was made possible by a law signed into effect in October 2012.
County administration directed Axe’s firm to begin evaluating the measure in November 2012, though the intent of the county to consider bonding for the debt was not publicly discussed at the Board of Commissioners until mid-April.
Wes Prater
Ryan J. Stanton | AnnArbor.com file photo
The weight of the proposal before the board even drew former county Commissioner Wesley Prater to the meeting, who commented on the proceedings before and after the discussion.
“We’re talking about a large amount of money that our citizens and taxpayers are responsible for,” Prater said. “I hope we don’t rush through these decisions and then feel sorry for them afterwards.”
Prater said the county got itself into the situation of having such a large unfunded liability for its retirement plans because of a lack of scrutiny - and he said he now worries that there’s a similar lack of scrutiny over bonding to pay for the debt.
The county first established a trust fund to provide health care benefits for retired county employees in 1948 - the Voluntary Employee Beneficiary Association.
Commissioner Conan Smith, D-Ann Arbor, said the county has always made its actuarial contributions to its retirement funds.
“Our unfunded liability is not because of irresponsibility on behalf of the government,” Smith said. “We have always been fiscally responsible.”
Conan Smith
Ryan J. Stanton | AnnArbor.com file photo
The county must wait on an actuarial report on its staff to be issued this June before the bond amount needed to fully fund the debt can be determined. For the purposes of the report Axe presented Thursday, that amount was estimated to be $345 million.
Axe supplied a timeline of the steps that would be needed to have bonds issued this year:
- May 15 Ways and Means meeting of the board: Resolution stating notice of intent, bond resolution and continuing disclosure resolution up for first approval
- June 5: Resolution stating notice of intent, bond resolution and continuing disclosure resolution up for final approval
- June 9: Notice of intent filed in AnnArbor.com
- June: Trust fund boards approve actuarial reports
- July 10: Ways and Means meeting of the board: Resolution of the bond plan first approval; following full board meeting: Resolution of the bond plan final approval
- July 24: Receive bond rating
- July 25: 45-day referendum period expires
- July 26: File for approval from the Michigan Department of Treasury
The majority of the savings by issuing bonds to cover the debt would be felt by the county within the first five to 10 years.
The difference between the county’s payment to its retirement fund and the bond payment would be a savings of $12.7 million in 2014 alone.
Commissioner Dan Smith, R-Northfield Township, questioned why the county needed to move forward so quickly with the bond proposal.
“All of the analysis that has been done on how this has been done financially are based on current expectations on interest rates,” Axe said in response. “It’s up to the client to decide how quickly to go.”
The Board of Commissioners has the power to issue bonds as general obligation limited tax funds without voter approval. Those bonds could only be paid for using money that already comes into the county’s hands through revenue, state reimbursements or taxes levied at already existing rates - which are at their maximum, Axe said.
However, should the county decide to request the voter’s permission to issue bonds as non-limited funds, the county would be able to levy an additional tax at any amount to cover its costs.
Commissioner Ronnie Peterson, D-Ypsilanti and Dan Smith expressed interest Thursday in taking the bonding issue to voters anyway to get their consent, even though they weren’t interested in levying additional taxes.
Several of the commissioners were initially concerned about pension obligation bonds - as a similar move heavily contributed to the debt situation incurred by the City of Detroit.
Axe explained Detroit issued certificates of participation to cover its retiree trust fund costs - but failed to close the retiree benefit plan and so employees continued to enroll. The city also undershot its estimate for covering its costs by about $300 million, Axe said.
Commissioner Felicia Brabec, D-Pittsfield Township, asked Axe how the county can be sure that it won’t underfund its debts by bonding too low.
“Pay close attention to the actuarial reports,” Axe said.
The amount of money the county would borrow to fully fund the pension costs is heavily dependent on actuarial reports that project based on historical data how long people will live and how much the county will be responsible for paying in health care costs.
Commissioner Rolland Sizemore Jr., D-Ypsilanti Township, said he would like to use business students from the University of Michigan and Eastern Michigan University on a pro bono status instead of hiring an outside firm to do an independent review.
Board Chairman Yousef Rabhi, D-Ann Arbor, said he would like to schedule additional means to engage the public in the discussion on bonding for the debt - including an informal press conference within the next two weeks, a presentation to the public between May 15 and June 5, and developing a pamphlet that will be available at county buildings and libraries.
The issue will also be on the Board of Commissioners’ agenda for its meetings in May, June and July. Rabhi encouraged the public to attend and give their comments on the process.
Amy Biolchini covers Washtenaw County, health and environmental issues for AnnArbor.com. Reach her at (734) 623-2552, amybiolchini@annarbor.com or on Twitter.
Comments
A Voice of Reason
Sat, May 4, 2013 : 9:49 p.m.
Most important questions of the day...do we really need a county government? Other than maintaining roads and the Sheriff, I think they just spend money. Yes, we cannot afford the pension benefits promised. File for bankruptcy or hire an emergency manager. This is a disgrace.
Edward R Murrow's Ghost
Sun, May 5, 2013 : 10:49 p.m.
Absolutely! So let's take this to its ultimate logic. Who needs a city government? Who needs a township government? Who needs the state government? All of them a waste of time, effort, and money. All we really need is a national government to tell us all what to do. Right? GN&GL
Alex Brown
Sun, May 5, 2013 : 11:49 a.m.
Actually we do not need the county government to deal with roads either. The County Road Commission is independent from the county government. The only reason they have "County" in their name is because when the Legislature set them up the boundaries of their jurisdiction coincided with the already established county boundaries. As for the Sheriff, the cost for deputies patrolling the county is about 90% paid for by the Townships contracting. The county jail is by far the largest part of the sheriff's dept. that is paid for by the county.
shepard145
Sat, May 4, 2013 : 5:02 p.m.
CALIFORNIA SPENDING INTO BANKRUPTCY ECONOMICS ARRIVE IN MICHIGAN ON THE DESKS OF DEMOCRAT HACKS As a big spending liberal, Conan has no idea what he's talking about. Washtenaw County has been managed by the circular funding process of unions supporting democrats who support unions and negotiate rich, sweet contracts as payment. It's been going on for decades and there is no way they can hid from or deny that fact. Democrats do not negotiate union contracts on behalf of the PEOPLE/TAX PAYERS, but on behalf of their UNION CRONIES who pay up at election time. Washtenaw County needs to seek bankrupsy protection, apologize to the taxpayers and renegotiate pension plans to a level that is affordable by those who pay them - WE THE PEOPLE! The notion that the county would TAKE OUT A LONE FOR $345,000,000 for a third of a billion dollars to pay sweet pensions that we can't afford should outrage every working tax payer in the county!! The "Board of Commissioners" needs to be replaced!
Ricardo Queso
Sat, May 4, 2013 : 1:34 p.m.
We can't afford to save this much money.
Itchy
Sat, May 4, 2013 : 11:32 a.m.
I do not understand why we would borrow money for something that we have determined that we cannot afford. Sounds like a formula for disaster.
AAbob43
Sat, May 4, 2013 : 6:44 a.m.
I've been a pension attorney for 37 years. I find the following to be sadly laughable and regrettable: "Commissioner Rolland Sizemore Jr., D-Ypsilanti Township, said he would like to use business students from the University of Michigan and Eastern Michigan University on a pro bono status instead of hiring an outside firm to do an independent review." Yeah. let's get some students to do this analysis. For that matter, can I get some first year residents to do my brain surgery? It is so sad that the County got itself into this stupid position in the first place. Now, Comm'r Sizemore wants a bunch of students to fix things? Wow. No wonder the pension and retiree medical benefit obligations are so outlandish. The following is also pretty sad: "According to Smith, there are two main reasons the county has such a large debt: The county re-opened its retirement plan to allow employees to enroll several years ago - and now those employees are ready to retire; and the county as a whole lost money in 2008 and 2009 because of the economic slump." The stock market decline was virtually unforseeable, so the County gets a pass on that. But no sane plan sponsor allows the kind of adverse selection that allows employees to jump between defined contribution and defined benefit plans. That begs for adverse selection, that can only add to the plan sponsor's funding costs. As observed, this rooster has (predictably) come home to roost.
Patrick Maurer
Sat, May 4, 2013 : 12:32 a.m.
Just what I thought would happen. These bozo's worked hand in glove to sign long term contracts with their cohort union buddies to fleece the tax payers who will be on the hook for their excessive benefits and pensions. All these bums should be thrown out of office at the first election and I intend to campaign to see that it happens.
Jay Thomas
Sat, May 4, 2013 : 6:01 p.m.
I agree, but easier said than done. Their strength is not the townies but the student voters who are only visitors in the grand scheme of things (but get to decide our taxes and everything else while living in a dorm).
Arno B
Fri, May 3, 2013 : 11:20 p.m.
345 Megabucks!! WOW! Well I suppose that is how Detroit managed for so long for so many years - borrow to pay your bills! The same mentalities here, just more of them. Lack of scrutiny! Yes - by the voters who keep putting these astute Commissionmers into office! "Savings to cover the debt!!!" Quite a novel noble concept! "The County will be responsible for paying for health care costs": where are these costs defined? Those of us who work for a living have to join Medicare at 65. Why isn't that required of these folks too? It sounds to me that the County has just been blackmailed by the unions. I wouldn't be surprised to find out that the present Commissioners will get 100% of the union member vote. As Mark Twain said over 120 years ago, "WE HAVE THE BEST POLITICIANS MONEY CAN BUY!!"
SalineTeacher
Sat, May 4, 2013 : 3:55 a.m.
How many union members do you really think voted for (Republican) Commissioner Dan Smith? He got "only" 85% in some precincts--with nobody running against him!
tim
Fri, May 3, 2013 : 8:57 p.m.
Why don't retirees go on Medicare when they reach 65? This country needs a single payer system.
Vivienne Armentrout
Sat, May 4, 2013 : 2:28 a.m.
Actually, they do. Health benefits only consist of a medigap policy, which is still a very nice benefit. I agree about the single payer system.
Jay Thomas
Fri, May 3, 2013 : 8:50 p.m.
Ten year contracts are normal when you take your marching orders from the unions; they make no sense to anyone in the real world because it is impossible to know what your financial situation is going to be that far into the future. Rather than live within their means they will borrow... because they can. Liberalism = Go broke. Unfortunately it is almost impossible to get rid of these people with two major universities supplying them so many votes.
ypsi-investor
Fri, May 3, 2013 : 8:44 p.m.
Please, not another Sylvan bond debacle.
walker101
Fri, May 3, 2013 : 8:35 p.m.
Commissioner Rolland Sizemore Jr., D-Ypsilanti Township, said he would like to use business students from the University of Michigan and Eastern Michigan University on a pro bono status instead of hiring an outside firm to do an independent review. Just what the County needs, a bunch of college students to make an independent review on making sure they have it right. That being the case lets have high school students run the commission.
DonBee
Sat, May 4, 2013 : 12:11 a.m.
Many of the business school students are in their 30s and 40s and have significant financial experience under their belts, not all the business school students are months out of under graduate.
Jay Thomas
Fri, May 3, 2013 : 8:51 p.m.
Who knows, they might be smarter and more responsible.
justcurious
Fri, May 3, 2013 : 7:30 p.m.
We need to dump more money into the government feed trough huh? While the rest of the hard working populace will never benefit from it.
belboz
Fri, May 3, 2013 : 6:12 p.m.
Counties can go bankrupt. I'd much rather see that then adding more debt if there is not enough money to cover costs. Renegotiations seems necessary.
PineyWoodsGuy
Fri, May 3, 2013 : 5:31 p.m.
Ax Mr. Axe, the Bond Lawyer, how much money he will be paid if this deal goes thru. Inquiring minds should like to ken. Transparency in govt and all that sort of buzz words the cmrs frequently yelp. Where is the transparency on the cost of the "consultant?" Also, if the Bond Issue is voted down, does Mr. Axe still get paid $$$? BTW I have no axe to grind, never met the man, am just an humble taxpayer. I tend to agree with Mr. Ranzini's comments. Don't know where GoNavy is coming from. Duhh . . . Bottom Line: It is not how the RR should be run!
Joe Zurawski
Sat, May 4, 2013 : 8:54 p.m.
Mary Morgan (Publisher of the Ann Arbor Chronicle and former Business Editor for the Ann Arbor News) said in an interview with Lucy Ann Lance on WLBY the Mr. Axe would make approximately a half-million dollars on the deal.
SalineTeacher
Sat, May 4, 2013 : 3:57 a.m.
There is no requirement to bring the bond issue to the voters.
Solitude
Fri, May 3, 2013 : 4:47 p.m.
I would hope these commissioners will be smart enough to realize that no one should ever make a commitment based on the financial advice or analysis of someone who stands to make money from that commitment. It would seem to be painfully obvious common sense, but it doesn't sound like the board is discussing an outside, independent opinion of the idea, from a municipal finance expert that's not selling anything, or maybe SEMCOG...
Amy Biolchini
Fri, May 3, 2013 : 3:49 p.m.
All: I have updated the first three paragraphs of this story for clarification. It should now read: "In order to cover an existing $148 million in debt, as well as future liabilities, from retiree health benefit and pension costs for its employees, Washtenaw County is considering borrowing about $345 million that it would pay back over the next 25 years. Bonding for the debt is projected to save the county $112.5 million over that 25 years, according to an analysis presented to county officials Thursday night by Municipal Financial Consultants Incorporated. The financial consultants estimated $345 million would be the maximum amount needed to fully fund future long-term retiree health costs of $210.5 million and future pension fund costs of $130.3 million." This is the first story on this complicated subject and I look forward to continuing the discussion in the future.
SalineTeacher
Sat, May 4, 2013 : 4:05 a.m.
There is no existing $148 million debt. The total pension+health-care liability is currently estimated to be about $250 million; $345 million is a worse-case maximum, the actual amount will probably be (much) less.
Do not vote for Conan!
Fri, May 3, 2013 : 3:40 p.m.
Again, it is blame the Union. Many of you think we just sit around and get our fat pay check. I get cussed at, blamed, and threatened almost every day. I am not complaining because i chose my field but it irritates me when the Washtenaw County Union Members are blamed for the ill budgeting of the County which has gone back to the days before these commissioners. All of us have taken pay cuts, increased our insurance costs, and taken days with out pay. Many of us are just one paycheck away from homelessness because we receive low pay due to society's view of are worth. However, as we continue to point out, when you need someone in an emergency regarding community safety, family violence, or Juvenile Incorrigibility, we are asked by you to intervene and fix it.
justcurious
Fri, May 3, 2013 : 7:31 p.m.
"Many of us are just one paycheck away from homelessness because we receive low pay due to society's view of are worth." I cannot believe you said that.
Tru2Blu76
Fri, May 3, 2013 : 3:24 p.m.
As of last year's election, this board seems heavily weighted with Democrats. Is that true?
Jay Thomas
Fri, May 3, 2013 : 8:54 p.m.
Democrat voters bring Democrat politicians which brings Democrat giveaways which leads to going broke.
maallen
Fri, May 3, 2013 : 2:25 p.m.
"Board Chairman Yousef Rabhi, D-Ann Arbor, said he would like to schedule additional means to engage the public in the discussion on bonding for the debt - including an informal press conference within the next two weeks, a presentation to the public between May 15 and June 5..." If only they would have done this when it came to extending the union contracts for another 10 years! Instead, they pushed it through on the backs of the taxpayers.
Jay Thomas
Fri, May 3, 2013 : 8:57 p.m.
The politicians and their union paymasters would prefer you only read about it when its all wrapped up. "We have to pass the bill to find out what's in it," etc.
maallen
Fri, May 3, 2013 : 2:22 p.m.
"Our unfunded liability is not because of irresponsibility on behalf of the government," Smith said. "We have always been fiscally responsible." But then Conan Smith goes on to say "there are two main reasons the county has such a large debt: The county re-opened its retirement plan to allow employees to enroll several years ago..." So if you re-opened the retirement plan, knowing full well that these employees will eventually retire and the county will have pay out at some point....how exactly was that being fiscally responsible? And if it is an "unfunded liability" isn't that being irresponsible? Conan Smith also says ""We have always been fiscally responsible." In other words, the taxpayer has always bailed us out. So once again, washtenaw county board's mismanagement of our money will cost us even more just to bail them out.
Jay Thomas
Fri, May 3, 2013 : 8:59 p.m.
They re-opened it because it's a better deal for public employees than they would get anyplace else. The democrats are in the pocket of the unions; they don't care what size the bill is for the general public.
Larry Baird
Fri, May 3, 2013 : 2:10 p.m.
Here's another analogy: The county is at the blackjack table and is losing badly, it already owes $148 million (unfunded healthcare promises). Not liking this predicament, the county asks the house (casino) for additional credit (poker chips), let's say $345 million. So now the county "doubles down" on it's bet and gets to take another card. Will the county be dealt a winning or losing hand? The Oxford-English dictionary's definition of "doubling down" should provide a clue as to what is being proposed here To "double down", "to engage in risky behavior, especially when one is already in a dangerous situation,"
Jay Thomas
Sat, May 4, 2013 : 6:09 p.m.
Obama used this very poker phrase. Something to think about.
zip the cat
Fri, May 3, 2013 : 2:07 p.m.
That's not very smart,borrowing to get out of debt So if you don't have the funds now whats going to happen in a few more years. Sounds like you need someone else running the show
Jay Thomas
Fri, May 3, 2013 : 9:08 p.m.
They are making a bet.
Nicholas Urfe
Fri, May 3, 2013 : 2:06 p.m.
Seldom mentioned by those who tout the "great savings!!!" of replacing a pension with a 401k is the fact that it means there are no new contributors, no new money, being paid into the pension. Once you do that, the burden of keeping the pension afloat shifts from new contributors to municipalities and their tax payers. Though in other cases the pension is robbed by corporate raiders, though that isn't the case here.
SonnyDog09
Fri, May 3, 2013 : 6:32 p.m.
If your pension plan relies on new contributors to pay current beneficiaries, how is it different from a run of the mill Ponzi scheme?
Solitude
Fri, May 3, 2013 : 5:25 p.m.
Clarification, the employer's portion of SS tax is more than seven percent; an equal amount is also deducted from each employee's wages.
Solitude
Fri, May 3, 2013 : 4:42 p.m.
Exactly. Also seldom mentioned is the fact that the employer also must begin paying social security payroll taxes, which are at least seven percent of wages, for previously exempt employees, like police and fire employees.
Vivienne Armentrout
Fri, May 3, 2013 : 2:06 p.m.
The county shifted from the MPPP (defined contribution) to WCERS (defined benefit) plan in 2008. Here is a quote from a document, link below: "The Employee Retirement System (ERS) is a defined benefit plan in existence since 1947 covering most employees hired prior to 1984. In 1984 the County initiated the Money Purchase Pension Plan (MPPP), a defined contribution plan which covered substantially all newer employees. In 2008 the county shifted away from the MPPP and back into the ERS system." See http://www.ewashtenaw.org/government/departments/finance/budget/final-budget-2010-2011/11-%20Appendix%202010.pdf which is a comprehensive overview of county accounting policies. I was dumfounded when the County - against all current trends in governance - shifted newer employees into a defined benefit pension just as most private employers had gone almost exclusively to 401K plans. This set them up for the position they find themselves in today. At the time, their document stated that their liability was 77% covered by assets (down from 84% just 4 years earlier).
Vivienne Armentrout
Fri, May 3, 2013 : 7:38 p.m.
Solitude, that is a good point. I don't know how the county pension fund was invested. One reason employees wanted out of the MPPP was that many of them saw their individual accounts losing money. But some of them had invested in riskier funds, others in more conservative funds. (I was a member of the MPPP while I was on the BOC so I am somewhat familiar with it. I withdrew all funds when I left the BOC.) I don't understand how the county dealt with the discrepancy in the MPPP funds that individuals had which were presumably then credited to them in the shift.
Solitude
Fri, May 3, 2013 : 4:39 p.m.
@Vivienne A, Those are good points, but it's also true that pension funds that were substantially overfunded at the beginning of 2008 ended up underfunded by the end of the crash, even without a substantial number of new pension enrollees. The stock market crashed hard enough and long enough to require much larger payments from municipalities to keep them properly funded, as you already know. So even if the county had not reopened the plan, it might still be underfunded.
Stephen Lange Ranzini
Fri, May 3, 2013 : 3:37 p.m.
Question: Which commissioners voted to approve this proposal in 2008?
Nicholas Urfe
Fri, May 3, 2013 : 1:32 p.m.
This is being terribly rushed. They started studying this in November but they kept it a secret. Now there is scant time left to evaluate and discuss the plan. What alternatives have their sought? What other opinions? Stephen Lange Ranzini raises some excellent points about the risk and timing, and also about past bad "bets" that have been made. Anything being touted by Conan Smith makes me *extremely* suspect. Each time I see the man I instinctively reach for my wallet and count the money to make sure nothing is missing, and then I wonder if he isn't somehow diverting the cash to Wayne county transportation.
Ricardo Queso
Fri, May 3, 2013 : 1:29 p.m.
No mention of a reduction in benefits to help with the deficit. God forbid the sacred county employees should suffer like the general public.
Jay Thomas
Fri, May 3, 2013 : 9:12 p.m.
johnnya2, we are talking about contracts negotiated between politicians and the unions who helped put them there. Absurd ten year contracts. Yes, they need to be renegotiated because the public credit card is maxed out.
Ricardo Queso
Fri, May 3, 2013 : 4:44 p.m.
You are always free to seek other employment.
johnnya2
Fri, May 3, 2013 : 3:21 p.m.
So you are in favor of the county breaching it s CONTRACTS with employees? they negotiated their pay based on the contracts. SOme people take lower pay for better benefits. Many of those people may have done something else if the benefoits were not promised to them IN A CONTRACT. I wonder how you would feel if a home builder was building you a house and said, I am having trouble paying my employees, so Instead of giving you granite counter tops, you need to suffer just like me and take formica.
belboz
Fri, May 3, 2013 : 1:29 p.m.
This $345 million bond will provide no tangible benefit to the tax payers. It is really disappointing. And no, the financials apparently are not in order, otherwise they would not be asking for over 1/3 of a billion dollars. Perhaps they should have thought about this when signing that 10 year contract. How does that contract take this financial burden into consideration? It doesn't. What a sad display of cronyism.
Nicholas Urfe
Fri, May 3, 2013 : 1:28 p.m.
Why was the pension re-opened up? Who and how many were allowed to sign up at that time? Were there restrictions on who could sign up, specifically in regard to the number of years until retirement? Call me jaded, but it sounds like some cronies were able to get lifetime health benefits without contributing into the plan for a sufficient period of time.
Jay Thomas
Fri, May 3, 2013 : 9:14 p.m.
It was re-opened because it's a good deal and people who are supportive of democrats would get that deal at the expense of the rest of us.
A2since74
Fri, May 3, 2013 : 1:15 p.m.
I have skimmed the document which Vivian linked us to. It is not clear to me whether the $350,000 is IN ADDITION to the amount already in the Pension and Health Care funds, or includes them. I Googled the ownership of Michigan Financial Consultants Corporation. It would appear that they have a lot of experience in dealing with financially distressed municipalities within Michigan. I suppose that could be a good thing - or a not so good thing.
Mr. Ed
Fri, May 3, 2013 : 12:59 p.m.
Wes Prater himself collecting a nice Fire pension from ann Arbor. former county Commissioner Wesley Prater to the meeting, who commented on the proceedings before and after the discussion. "We're talking about a large amount of money that our citizens and taxpayers are responsible for," Prater said. "I hope we don't rush through these decisions and then feel sorry for them afterwards." Prater said the county got itself into the situation of having such a large unfunded liability for its retirement plans because of a lack of scrutiny
Vivienne Armentrout
Fri, May 3, 2013 : 12:53 p.m.
One of the reasons governments issue bonds is to finance the cost of buildings and infrastructure, to meet perceived needs. Sometimes it is to launch a new program that is expected to provide benefits well beyond the cost. This notion here is to BORROW money to INVEST. And then the county would hope that its investments pay off well enough to pay for its obligations that have already been incurred. Would these public servants recommend that any of their constituents enter into such an agreement after what we saw in the last financial crisis? Put yourself in long-term debt to borrow money to invest at what you hope is a better return than the cost of the interest payments? That is how a lot of people got into serious financial trouble over the last 10 years. (And to continue the personal finance analogy, the purpose of borrowing and investing is to pay off the "credit card bills" the county has already incurred.) And by the way - the borrowing and investing both also incur service charges. The BOC clearly has a problem in that they will have to meet some serious payment demands in upcoming budgets. But this is simply snake oil and should be rejected out of hand.
Steve Hendel
Fri, May 3, 2013 : 4:33 p.m.
But johnny, the tax exemption granted to most governmental debt is not intended to finance investment schemes. One of the main purposes of this exercise is to reduce the amount County taxpayers will have to pay towards these humungous unfunded pension-related liabilities (via the interest rate spread) by, in essence, putting those costs onto ALL taxpayers (lower federal/state tax revenues). Transferring debt from one group to another, which is the essence of this exercise, is not-again-the purpose of the tax exemption granted to governmental debt.
johnnya2
Fri, May 3, 2013 : 3:18 p.m.
Families do it all the time. I borrow money and invest in my home. If I am thinking my housing value will go up faster than the rate at which they borrowed it is a win. If you borrow $1000 at 5% interest, and invest that in something that provides an 8% return would you do it? The concept is a great concept, the important issue is to look at the specific numbers.
annarboral
Fri, May 3, 2013 : 12:41 p.m.
The real propblem is the crazy pension benefits these idiots have given to the unions that elected them. The pensions should be cancelled and converted to 401K type plans, that is, defined contribution instead of defined benefit. Somehow it should be illegal for people elected by unions (and that's the reality, union money is what gets them elected) to vote on contracts that directly benefit the people that got them elected. In the business world it would be called a "conflict of interest" and would not be allowed.
Steve Hendel
Fri, May 3, 2013 : 4:16 p.m.
But most things legislators do benefit, in one way or another, some/most of the voters who elected them. So what do you do/tell legislators they cannot approve anything that benefits anyone who may have voted for them. Think before you write.
Vivienne Armentrout
Fri, May 3, 2013 : 12:40 p.m.
Additional explanation and discussion can be found in this article: http://annarborchronicle.com/2013/04/24/property-values-up-budget-decisions-loom/
notob
Fri, May 3, 2013 : 12:36 p.m.
Conan Smith: "Our unfunded liability is not because of irresponsibility on behalf of the government, we have always been fiscally responsible." Who does he think he's kidding? What a politician.
Vivienne Armentrout
Fri, May 3, 2013 : 12:31 p.m.
With all due respect to Mr. Rabhi, this proposal is not one that merits the public input that he describes, including the meetings and pamphlet. This proposal should be rejected outright by the commissioners and they should get back to the business of considering how to meet their obligations within the confines of their budget and what is known now. Here is the 17-page proposal: http://www.ewashtenaw.org/government/boc/agenda/ws/year_2013/2013-05-02ws/Bonding%20Executive%20Summary%20with%20all%20attachments%20FINAL%204.17.13.pdf You will note that this is not analysis and recommendation from the County Administration. This is a PROPOSAL from an outside firm that will benefit from selling bonds. I'm guessing that the municipal bond market has been rather slow lately, and it is reasonable that a firm whose business is processing bond sales might be out looking for business. The fact that John Axe has a long history of doing business with the county should not confuse the commissioners. He is not working for them. Too many wrong-headed things about the idea to put into one comment. I'll have to do more later.
JoeNuke
Fri, May 3, 2013 : 2:18 p.m.
"Commissioner Ronnie Peterson, D-Ypsilanti and Dan Smith expressed interest Thursday in taking the bonding issue to voters anyway to get their consent, even though they weren't interested in levying additional taxes. " VA: I agree. The commissioners are hoping to cover their political butts, but they need to do their jobs! Analyze alternatives and make a decision based on analysis. Deferring to public input instead of rigorous analysis is not appropriate; there is too much at stake. I also agree that the if adopting the proposal would benefit Axe, et al, it should be independently evaluated for cost and risk compared to "pay as you go." While historically low interest rates make this an ideal time to borrow, they make this less than an ideal time to invest the bond proceeds. These factors need real financial analysis to understand best and worst cases.
Stephen Lange Ranzini
Fri, May 3, 2013 : 12:45 p.m.
Thanks very much for the link, Vivienne!
Stephen Lange Ranzini
Fri, May 3, 2013 : 12:19 p.m.
The $345 million is just to cover the hole in the healthcare retiree benefits pension program. What is the true size of the hole in the main retiree pension program? The headline of this story is misleading because it implies that the entire pension program would be fully funded by this borrowing when in fact it only covers the healthcare half of the pension program.
Stephen Lange Ranzini
Fri, May 3, 2013 : 12:42 p.m.
If that is true, this article is very poorly written then, Vivienne!
Vivienne Armentrout
Fri, May 3, 2013 : 12:35 p.m.
That is not the way the document reads. It specifically says it is to cover legacy costs for WCERS as well as VEBA.
Poorman
Fri, May 3, 2013 : 12:12 p.m.
Before this debt is approved, an offset in the budget must be made to cut costs to cover the retiree benefits and this new interest and debt payment. We can not just kick the issue of unbalanced budgets down the road anymore.
Bob W
Fri, May 3, 2013 : 12:04 p.m.
This doesn't pass the smell test!
Mackinac Straits
Fri, May 3, 2013 : 12:03 p.m.
So the promises made by the Board that cannot be kept by them will be paid for by the family budgets of Washtenaw taxpayers? Thanks for that. How about doing what every taxpayer in Washtenaw does when faced with a spending problem -- trim your spending? Oh, wait, I forgot, we're creating the Workers Paradise, but it's only available to unionized civil servants.
trespass
Fri, May 3, 2013 : 11:59 a.m.
I think Amy buried the lead. "However, should the county decide to request the voter's permission to issue bonds as non-limited funds, the county would be able to levy an additional tax at any amount to cover its costs." I think this says that this is a way for the County to raise more taxes.
Goober
Fri, May 3, 2013 : 11:56 a.m.
Wow! Isn't this how many cities got themselves in trouble in California and are now declaring bankruptcy?
walker101
Fri, May 3, 2013 : 11:12 a.m.
"Our unfunded liability is not because of irresponsibility on behalf of the government," Smith said. "We have always been fiscally responsible." Sounds like another blunder by Conan, how could he possibly convince anyone that he is doing the right when it's obvious that making this quick to shoot decision is only a patch job when in the long run the County will be in a bigger financial crisis in the future. Sounds like poor speculation.
Goober
Fri, May 3, 2013 : 12:30 p.m.
We all know what Smith said is not true at all. Their decisions have not been fiscally responsible. And....we are powerless to do anything about this mess. Another group of government leaders gets the tax payers in trouble.
RUKiddingMe
Fri, May 3, 2013 : 11:11 a.m.
I re-read the article, and I still have no idea about a lot of things; I think some brief summary of the finances here and how they work would help. Especially an explanation of how the borrowing saves money over...what? Also, I see the pensions were "closed" during negotiations. Have these debt-burdening and unfeasible pension PROGRMS ceased being offered? What is the difference between the pension details offered to new hires then and what they are NOW?
DonBee
Fri, May 3, 2013 : 11:09 a.m.
Stewardship: the conducting, supervising, or managing of something; especially : the careful and responsible management of something entrusted to one's care. Something that the council should learn about. The contracts were unaffordable, but the union solidarity was more important than the tax payers and stewardship. Unions get contracts, Commissioners get campaign contributions and jobs for life, the tax payer gets the bill. Nothing new in Washtenaw County.
DonBee
Fri, May 3, 2013 : 3:12 p.m.
Just a side note, the amount is almost exactly $1000 per person in the county or about $4000 per family of 4. The $345 million bond will cost the tax payers just over $500 million at 3 percent - which would be a wonderful interest rate. How much in the way of fees for the bond placement, and other overhead is unknown (I am not a banker). For each of person the annual cost for the pay off would be around $1440. Since it will come out of property tax increases - assuming 2.8 people per average home... This will add over $150 a year to an average property tax bill - based on per person costs. Someone smarter than I am will have to do it based on total property value in the county. I suspect the interest rate will be closer to 4 percent, that the money will NOT fix the hole in the pension fund, and that we will end up with an increase for 25 years of more than what I calculated above, and then either service cuts in a decade or another property tax increase to deal with this folly.
SonnyDog09
Fri, May 3, 2013 : 11:02 a.m.
So, we're going to borrow this money and hope that it is enough to cover retiree healthcare costs? What if it's not enough? Do we have to borrow more money? Or, can we say "that's all you get. If that's not enough, Obamacare will take care of you."
Solitude
Fri, May 3, 2013 : 4:29 p.m.
This is not about retiree healthcare costs...its about the pension obligation as a whole, of which healthcare premiums are one part. Also remember that a large percentage of the county's pension members are police and fire employees, who get a pension instead of social security, not in addition to it as private sector employees do.
Stephen Lange Ranzini
Fri, May 3, 2013 : 10:55 a.m.
Question: Are the benefits under the terms of the current healthcare retirement plans comparable to equivalent private sector plans or more generous than equivalent private sector plans? If more generous, how much of the $345 million deficit was caused by giving out these more generous plans?
Solitude
Fri, May 3, 2013 : 4:50 p.m.
This is about the entire pension plan, not just the healthcare premiums portion of it, and you can't fairly compare private sector retirement plans with public sector plans because the police and fire employees in a public sector pension plan do not get social security. Public sector employers who offers pensions to police and fire do so because it got them out of paying social security payroll taxes. Private sector pensions are collected in addition to social security, whereas many public sector employees collect the pension instead of social security. You mentioned healthcare specifically, but healthcare premiums are part of the overall pension obligation, and these bonds are proposed to fund the entire pension system, not just the portion devoted to paying healthcare premiums.
Stephen Lange Ranzini
Fri, May 3, 2013 : 10:49 a.m.
The discount rate on the future pension fund required payments (it's liabilities) is the key here. If I assume a 5% discount rate versus a 4% discount rate, I can make the pension fund liability go down. If I borrow at 3% and fix the rate so it is no longer an assumption, the value of the deficit today goes up. That is why it takes $345 million in borrowing to close a pension fund that has a $148 million deficit. But what about the assumptions on the investment side? If I assume I can earn 7% on invested funds instead of 6% in the actuarial report, I can make the pension fund deficit go down. But show me where I can earn 7% or 6% in today's market and economic environment! If because of the stock market and bond market bubble the investments earn a negative return over the next five years (which is very likely) when the bubble unwinds, the value of the deficit will go up a lot. Lastly, this relates to the future retiree healthcare costs. If healthcare costs rise faster than expected, the pension fund will open a new deficit. Change the assumptions a little and it causes major swings between positive and negative.
antikvetch
Fri, May 3, 2013 : 10:45 a.m.
So, because we owe $148 million, we want to borrow $345 million, which will save us $112.5 million? Errr.....
Veracity
Fri, May 3, 2013 : 10:36 a.m.
Not being an actuary I do not understand why $345 million of "general obligation limited tax funds" is required to cover $148 million dollars of long term debt for future retiree health care costs. Apparently, borrowing such a large sum of money does not obligate tax payers to cover the bonding costs if money already being collected as county revenue is used for that purpose. Assuming a 4% interest rate for the debt, the 25 year borrowing expense would be $27.6 million annually. Shifting that amount of county revenue to debt payment must reduce funds available for services and capital projects. How will this new debt load effect the general budget? A more realistic approach would be to issue general obligation bonds and have tax payers agree to pay a new millage to cover debt servicing. No one has estimated the average annual additional tax payments that citizens would have to pay. To proceed honestly the county commissioners should provide the details for such a general bond obligation and compare the advantages and disadvantages of each debt instrument. By the way, I am curious about the generosity of the retiree health benefits being provided and how it compares to similar benefits in other similarly sized municipalities.
Veracity
Sat, May 4, 2013 : 12:57 a.m.
JoeNuke - The annual bond servicing cost which cover both retirement of the bonds and annual coupon rate (assumed at 4%) is $27.6 million. Please read the first three paragraphs of the article to learn how the bond issuance is expected to save the county money. Steve Hendel - Only if the investment of proceeds is successful which is not guaranteed.
Steve Hendel
Fri, May 3, 2013 : 6:06 p.m.
Veracity, the idea is that the interest payments on the new debt will be offset by interest income on the invested debt proceeds
JoeNuke
Fri, May 3, 2013 : 2 p.m.
At 4 per cent annual interest, the annual payment comes out to be about $22 million. But why should there be a new millage? The pension is a current obligation of the county and should be payed within the current revenue stream.
Stephen Lange Ranzini
Fri, May 3, 2013 : 10:36 a.m.
The past risky bets and actuarial reports were wrong so the solution is a new risky bet based on a new actuarial report?? The merit of borrowing now is that long term interest rates are low, however that money will be invested in stocks and bonds, which are at artificially high levels. Stocks are at artificially high levels due to the Fed's stated policy of printing money to cause the stock market to rise, causing a wealth effect that will prompt shareholders to spend some of that newly created wealth in the real economy. Bonds are at artificially high levels because the Fed has a program to buy $85 billion of them per month in an effort to lower long term interest rates to stimulate the economy. When the bond market and stock market drop the pension fund will lose a lot of that money it has invested including the newly borrowed funds. On the other hand the value of its liabilities will drop when long term interest rates rise. There are multiple outcomes and trajectories that are widely disparate some of which could cause large losses. This is not a sure thing at all, in fact it is speculation. The savings may disappear when a new deficit opens up. Also how are we assured that a future board won't again reopen the pension plan to new employees which is how we got to this position of losing a third of a billion dollars in the first place.
maallen
Sun, May 5, 2013 : 3:32 p.m.
OldNavy, You must be very proud, as you should be. But when I hire someone, I put more emphasis on common sense than where one has graduate from, or whether or not they can regurgitate what they read in books or taught in class. The problem is, a lot of "experts," like yourself, can't or aren't willing to see the rise of inflation because of the easy access to money (aka printing more money). One only has to look at their grocery bill to see this happening. Also common sense dictates that you can't keep printing money without suffering the consequences.
GoNavy
Fri, May 3, 2013 : 3:55 p.m.
@maallen- in addition to my years of experience in high finance, I did in fact earn a degree in economics from the fine institution in town here. So I have an "OK" idea of what inflation is. As an aside, please point us to where this "inflation" you talk about currently resides. @Stephen Ranzini- You and I both know here that what you are making is, in fact, a political argument. First of all, nowhere in this discussion should "buying stocks and bonds on margin" emerge. It is literally not part of the argument - so why you've chosen to include it is beyond me (though I have my suspicions as to why). I consider myself to be an in independent. In order to position myself this way, I gain a full understanding of the arguments both sides make - especially the extremes of both sides. This means going to the WSJ's editorial pages, to the NYT's pages, then on to the Huffer's Post. It helps me to get a sense of the base arguments people are making. Your base arguments - and trust me, they're pretty basic - are nothing but emotional appeals to the Fox News crowd. I'm shocked you're not here selling gold to us. Bringing in margin claims, accusations of speculation, "Wall Street" (eek!), and Ben Bernake to a discussion about the pros and cons of defeasing a pension obligation (a scientific operation) through a bond issuance indicates nothing more than an ideological rant, rather than a genuine desire to "help the community."
Stephen Lange Ranzini
Fri, May 3, 2013 : 3:25 p.m.
@GoNavy: Buying stocks and bonds on margin IS speculating. Sometimes speculators make money and sometimes they crash. Sometimes they even crash the economy. The best deal for speculators is the "heads I win, tails you lose" deal that the Wall Street investment banks have been operating under, privatizing the profits and socializing the losses. Chairman Ben Bernanke has been very explicit as to what he is doing to counteract the business depression (increase stock prices) and why he is doing it (to lever the wealth effect to increase consumer spending). Since economics is not actually a science, but a political science, all comments on economic topics are political regardless of their intent. If you still think economics is a science just ask two or more economists whether ARRA was effective and worked or what their forecast for GNP is for the next five years and you'll have as many answers as economists you ask! Here my intent in making comments is to help make our community the best it can be and to avoid bad decisions that will impact negatively the quality of life so that my family, friends and neighbors live in a city that is as vibrant as possible.
maallen
Fri, May 3, 2013 : 2:36 p.m.
GoNavy, I am shocked that you would be called an "expert" in the financial service industry if you don't understand the basics of what printing more money does to the economy.
GoNavy
Fri, May 3, 2013 : 1:38 p.m.
Mr. Urfe- I assure you that in the financial services industry, both myself and Mr. Ranzini would be considered "experts." Which is why I can tell that Mr. Ranzini is making a political argument, not a sound financial one.
Nicholas Urfe
Fri, May 3, 2013 : 1:25 p.m.
@GoNavy: It's funny, because I don't often agree with SRL. But this is the case where his profession makes him somewhat of an expert. And that expertise aside, I agree with him completely. The markets are once again in a bubble and will come down again soon.
GoNavy
Fri, May 3, 2013 : 1:17 p.m.
Mr. Ranzini- I've liked what you've had to say in the past, but now you sound like Fox Business News or the folks at ZeroHedge trying to sell us gloom and doom. These tired old arguments - that stocks (in particular) and bonds are at "artificially high levels" have done one thing for those who parade them out and practice them in their portfolios: Produced either no returns or losses. Every day the market is going to "crash"; every investment is just snake-oil being peddled by a dishonest broker. These are tired socio-political arguments - not sound business analysis. If your job were to act as a fiduciary and manage other people's money, you'd be fired at this point. Finally, in calling this move "speculation" you clearly mean to imply that it is neither well considered nor prudent, when in fact it appears to be the opposite.
Bob W
Fri, May 3, 2013 : 12:15 p.m.
Sounds like speculative investments or buying stock on margin. Government entities shouldn't be involved in such. Washtenaw County admin is starting to sound like Wall Street banking.
DonBee
Fri, May 3, 2013 : 11:13 a.m.
Mr. Ranzini - Like you, I will take the under on performance of the retirement fund. I will also take the over of the payouts to the union members covered by this retirement fund. Net result, the commissioners will be back at the well in 10 years looking for more money.
timjbd
Fri, May 3, 2013 : 11:11 a.m.
They could put the money to work as residential mortgages. ;^)
Steve Hendel
Fri, May 3, 2013 : 10:34 a.m.
"The difference between the county's payment to its retirement fund and the bond payment would be a savings of $12.7 million in 2014 alone." Amy, it's not clear why the overall bond payment would be lower than the payment to the retirement fund, if the unfunded pension liability remains the same. Are these bond akin to what used to be called arbitrage bonds, where the governmental unit borrows at a low tax-exempt rate and invests the proceeds at a higher (nominally) taxable rate-while of course paying no taxes? I didn't think those type of bonds, where the purpose was just to make money on the interest rate spread, qualified for tax-exempt status. In any case, it's all just a 'smoke and mirrors' game, where the winners are the County and it's bond counsel, and the losers are the general public-which, other things being equal, either pays higher taxes for the same services or the same taxes for less services.
RUKiddingMe
Fri, May 3, 2013 : 10:26 a.m.
Is this considered a savings because the interest paid out on the bonds will be less than something else? Or because the payments on the bonds will be spread out longer than for retiree plans? I'm confused. This article makes it seem like the rush to sign a 10-year contract before right to work kicked in made this bond consideration possible. So it would nOT have been possible before, because of right to work? The over-the-top pensions are GONE now, right? That's what "closed" means? So when all those people collecting pensions die, we're done with this problems? And thanks for getting us into the problem into the first place. I don't understand how so many peoople and so much bureaucracy can not figure out that when people retire the pensions offerred are going to become unmanageable.
johnnya2
Fri, May 3, 2013 : 2:58 p.m.
The plan was not possible before the new contract because NEW employees were still eligible to join the plan. The plan is closed to new hires, so the plan will cease to exist once all current employees who are in it and those that are retired are dead. I would suggest the problem is NOT the pensions, but the people who did not invest in the pensions in the first place. Pensions are a GOOD thing. It gives retirees MORE money. If they have MORE money, they can buy more things and that HELPS the overall economy. Of course the right wingers want to keep people poor and forced to take risks so that they might go hungry if there is an unexpected turn in the stock market
Barzoom
Fri, May 3, 2013 : 10:22 a.m.
Why would you borrow $345 million when the long term obligation is $148 million. The county could levy additional taxes to cover its costs. NO!
YpsiLivin
Sat, May 4, 2013 : 1:10 a.m.
johnnya2, Pension plans are generally limited in the investments they can make, and many securities - though they may perform well - are not considered pension-grade investments. Less risk (highly desirable in pension investments) = less reward.
GoNavy
Fri, May 3, 2013 : 6:03 p.m.
@JoeHood: No pension is using a savings account to defease future liabilities, so looking at savings accounts would not be appropriate in this case. The choice of discount factors in public pension accounting is largely a political consideration - not a financial one. However, it should be noted that even CalPERS (the recent favorite whipping boy of pensions) has a 20 year average return of 7.5% - not too shabby.
Joe Hood
Fri, May 3, 2013 : 3:55 p.m.
GoNavy: You are being unrealistic. Don't just look at some stock returns, look at what you can get in a bank savings account right now. I manage money for some older relatives and finding places to stash money and make any of the returns that pension funds base their numbers on is ridiculous. At least they have come down off of their 8% high horse!
johnnya2
Fri, May 3, 2013 : 2:54 p.m.
@Stephen Lange Ranzini, The S&P 500 on May 1 2012 was 1397.91. Today the S&P 500 was at 1603 around 10 am. That would mean an over 14% ROI. So if you are only earning 7%, you may want to change your investment strategies.
GoNavy
Fri, May 3, 2013 : 1:12 p.m.
Mr. Ranzini- Political rhetoric aside, I can assure you that many - MANY - funds average above 7% both this year and last year. If you are earning less than 7% in today's market and economic environment Mr. Ranzini, I suggest that you hire a professional.
Stephen Lange Ranzini
Fri, May 3, 2013 : 10:41 a.m.
Because clearly the actuarial assumptions in the pension plans today are based on rosy assumptions that are not based on reality! If I assume I can earn 7% on invested funds instead of 6% in the actuarial report, I can make the pension fund deficit go down. But show me where I can earn 7% or 6% in today's market and economic environment!
GoNavy
Fri, May 3, 2013 : 10:11 a.m.
I think readers would have liked to have seen the report presented by Municipal Financial Consultants Incorporated. Is there a link? I'm particularly interested in the "savings" portion of the analysis.
Vivienne Armentrout
Fri, May 3, 2013 : 12:45 p.m.
The link is here: http://www.ewashtenaw.org/government/boc/agenda/ws/year_2013/2013-05-02ws/Bonding%20Executive%20Summary%20with%20all%20attachments%20FINAL%204.17.13.pdf
1bit
Fri, May 3, 2013 : 10:30 a.m.
I agree, the details are important. The impact of rising interest rates (I know this won't happen soon, but interest rates will eventually go up) and assumptions made to forecast the debt obligations will also be interesting.