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City completes pension bond transaction

The $2.95 million transaction will enable the city to pay off its unfunded PERS liability


While many entities throughout Oregon are facing significant public pension expenses in the coming years, the City of Prineville is now anticipating an easier road.

City leaders recently completed a pension bond transaction that paid off their $2.846 million in PERS unfunded liability.

Early last year, the city began exploring ways to mitigate anticipated PERS rate increases that were forecasted for the future.

"The Tier 1 and Tier 2 retirees who are drawing out of the moneys that the City of Prineville put in, the Tier 1's are guaranteed 8 percent return," explained Prineville City Manager Steve Forrester. "So, if the market goes negative, they still get their 8 percent."

The market crash of 2007 and 2008 caused most PERS accounts, which are tied to the stock market, to lose about 30 percent of their value. The city was therefore faced with nearly $3 million in unfunded liability that had to be paid back.

Consequently, the city was faced with annually increasing contribution rates that could climb from the current 11 percent to as high as 30 percent.

City leaders therefore decided to explore a pension obligation bond to pay off the shortfall and face lower pension expenses going forward. City councilors and members of the finance committee and staff felt it was best to fix the problem now than wait for the State of Oregon to come up with their own fix.

“We knew we owed that,” Prineville Mayor Betty Roppe continued. “We were going to have to pay it sometime along the line.”

As they initiated the process, the city engaged Eco Northwest to conduct a risk/reward analysis regarding funding of unfunded liability with bonded debt. After evaluating the study and reviewing the results with their financial consultant, they chose to move forward with a private lender at an interest rate no higher than 5.5 percent.

“We had workshops with the council,” said City Finance Director Liz Schuette. “We met with different lending institutions to find out possibilities ... There was a lot of due diligence done and it started almost a year ago.”

The city completed a transaction with Umpqua Bank in the amount of $2.95 million at an interest rate of 5.457 percent. The money will pay off the entire unfunded liability.

“They (the state) figured you are going to be able to fund your liability within 20 years,” Schuette said. “Doing this transaction is going to enable us to fund it in 15 years, at a lesser interest rate.”

Roppe stressed that the city could not have carried out this sort of transaction without having a sterling financial track record and high credit rating going in.

“We have the financial strength to do it,” said Roppe.

For city leaders, the transaction has lifted a huge financial weight off of their shoulders, and provides much more stability for how the city manages its financial future.

“It put a big building block in place,” Forrester said.




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