By Alison Knezevich, The Baltimore Sun
7:23 PM EDT, September 11, 2012
Baltimore County Executive Kevin Kamenetz wants to borrow $255 million and repay it over the next 30 years to help fund the county's retirement system, a move that would carry risk but that the administration says could benefit taxpayers in the long run.
County Administrative Officer Fred Homan told the County Council at a briefing Tuesday that the administration would introduce legislation next week to allow the county to issue pension obligation bonds. The bond issue would not have to be approved by voters.
In July, the county lowered its projections on the assumed investment earnings for its retirement system, meaning taxpayers must contribute an additional $15 million annually to the retirement system starting next year.
Issuing pension bonds would help close that gap "at the lowest possible cost to taxpayers," said Homan, who was joined at the meeting by county consultants, including financial advisers and bond lawyers. The county would invest the borrowed money along with other funds in the pension system.
Governments throughout the nation have issued pension obligation bonds, though it's not a widespread practice, said Jeffrey Esser, executive director and CEO of the Government Finance Officers Association, a professional organization representing members in the United States and Canada.
"We don't necessarily consider pension obligation bonds a best practice," Esser said.
The organization first issued an advisory about such bonds in 1997, urging governments to use caution when considering them.
The biggest risk, Esser said, is the possibility that the government issuing the bonds earns less on its investments than the cost of borrowing the money. "Then you've got a bigger problem than you started with," he said.
Homan told council members that the county expects to borrow the funds at an interest rate of 4.25 percent to 4.5 percent.
The pension fund's 10-year average return on investments was 7.4 percent as of July, Homan said. He emphasized that the move would not affect retirement benefits because the county is obligated to pay those.
"Over the long term, it is important that the County earn more than the cost of the funds it borrows," administration officials wrote in a proposal for the bond issue. "Thus, the performance of such a financial transaction for the County will depend on future investment returns."
Administration officials say the move could save $250 million over 30 years because the county would receive money now at a low interest rate to pay its liabilities.
If introduced next week, the bond legislation could be voted on by the council in October.
Councilman Tom Quirk, a Catonsville Democrat who chairs the council's Spending Affordability Committee, called the proposed bond issue a "calculated bet."
"I think it's a good calculation, I think it's a reasonable bet," he said, but added that council members still need to study the issue further. "One way or another, we have to pay for our pension obligations."
The administration also met Tuesday with public employee labor representatives to explain the proposal.
Cole Weston, president of the Baltimore County Fraternal Order of Police Lodge No. 4, said his union is awaiting a draft of the legislation and would study the details carefully.
He noted the proposal for the bond issue comes after the county retirement system's board of trustees approved a Kamenetz administration proposal to borrow $25 million from the pension system in July to upgrade a recycling facility, a move the police union criticized.
"There's still a lot of unanswered questions about the loan," Weston said, adding that the union's lawyers are reviewing issues surrounding it.
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