September 26, 2022
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Opinion: Oxnard should shy away from risky pension obligation bonds

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By David Grau

Inheriting a predecessor’s underfunded public pension debts is never fun, but the need to address them is unavoidable. The question before the Oxnard City Council was how — and there is both a right way and the lazy way.

The right way is to adopt policies that keep the pension debt from growing, help pay it down, and avoid it growing out of control. The lazy way is a maneuver that involves issuing risky pension obligation bonds.

Unfortunately, the council opted for the latter route.

On March 1, the Oxnard City Council approved a resolution seeking a “judicial validation” as plaintiff in Ventura County Superior Court to borrow up to $330 million in pension obligation bonds that mature in 30 years.

On May 20, the Howard Jarvis Taxpayers Association, Ventura County Taxpayers Association and Oxnard resident Aaron Starr joined as defendants, in opposition to the city of Oxnard.

Pension obligation bonds, or POBs, are a financial mechanism that allows state and local governments to reduce their current unfunded liabilities by borrowing against future tax revenue.

The simplest way to think about POBs is this: The money borrowed is invested by CalPERS, the pension system for most state and local government employees in California, into various investments which, hopefully, will earn returns that exceed the interest on the bonds, therefore earning money for the pension fund.

The taxpayers gain only if the actual return on the money invested with those POBs exceeds the interest rate the city pays to bondholders.

Since higher yielding investments often come with more risk, these bonds are inherently precarious. And when they go bad, they go very bad.

Although Oxnard risks big losses from POBs, they carry profits with almost no risks for the consultants, law firms and banks that help arrange them. These consultants and firms aggressively market deals in which they get their fees up front, no matter what happens to taxpayers in the long term.

Their sales pitch to elected officials is that borrowing at today’s interest rates all but guarantees a profit for the city because they can invest the proceeds in their CalPERS pension funds and for decades earn returns higher than the 4.8% in interest they will pay on the bonds.

But there’s a catch: If the timing is wrong, these POBs could clobber the city of Oxnard’s finances, and taxpayers — present and future — will be running huge risks and could get stuck with a massive tab.
Ultimately, Oxnard taxpayers end up assuming 100% of the risk, and that makes this city finance tactic the least taxpayer-friendly option.

In recent years, academics and analysts, including the Government Finance Officers Association, have strongly advised against pension bonds, suggesting that the instruments constitute an overt act of gambling with taxpayers dollars.

In a blunt statement, the GFOA says it “recommends that state and local governments do not issue POBs.”

The GFOA’s warning cannot be clearer. We hoped this warning would deter Oxnard from ever considering or issuing pension obligation bonds.

Council members are elected to make decisions while keeping the city financially solvent with low risk. Instead, they have not only opted for the lazy way out, which will heighten risk, but they are opting for a more expensive way out, because they are electing to fight a lawsuit with taxpayer associations that have the noble goal of minimizing risk for Oxnard taxpayers.

If the Oxnard City Council wishes to issue risky pension obligation bonds to reduce the city’s current unfunded liabilities by borrowing against future tax revenue, then it should place that question before voters to decide.

Absent that, the case of City of Oxnard v. Howard Jarvis Taxpayers Association, Ventura County Taxpayers Association, and Aaron Starr will be heard in Ventura County Superior Court.

• David Grau is president of the Ventura County Taxpayers Association.

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