Banking & Finance, Government, and Human Resources

City may go to bond market for medical costs

Commissioners give OK to set funding process in motion.

March 8, 2013
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Grand Rapids city commissioners gave the fiscal department a green light last week to publish a 45-day notice that the city may go to the bond market to cover a portion of its unfunded accrued health care costs for retirees.

But the city has not committed to going forward with issuing one or more series of bonds at this point in time. The idea is to clear the notice period so the city can act quickly when market conditions are right to provide the return the city needs from its investment.

“We still would need to return to you — and would do so — with the bonds,” said City CFO Scott Buhrer to commissioners last week.

When that time comes, the city will issue federally taxable bonds in an amount that won’t exceed $100 million. The term is likely to be 30 years, and the issuance will be backed by the city’s full faith and credit.

“This is an attempt to stabilize and secure health care benefits for our retirees,” said Commissioner James White.

“I think it’s a great idea for flexibility and for smoothing,” said Commissioner Walt Gutowski.

Smoothing would lower the current payment for the health care liability and stretch it out over a longer timeframe. Right now, the annual payment is $14 million. But if the city can time its trip to the bond market correctly, Buhrer said the payment would fall to about $10.5 million.

This plan would allow the city to pay less now when costs are high and then pay more in coming decades when costs drop with fewer retirees on the program.

The total unfunded amount is roughly $160 million.

Buhrer said the city would issue bonds for 75 percent of the debt liability and doing that would reduce the costs city departments will have to pay over the security’s term. Commissioner David Schafer, a banker by trade, said the city would need a return of at least 4 percent to accomplish that.

To make this effort work to the city’s best advantage, Buhrer said the city needs to go to the bond market when the stock market is depressed and is in the process of making a correction. He said the market has declined by 10 to 20 percent on 16 separate occasions, and investments like the city wants to make have been able to secure returns of 5 percent and higher during those periods.

“We have a liability that was many decades in the making, and that liability has been capped. So the question is, how do we pay for that liability?” said Buhrer.  Several years ago, the city moved newer workers to a defined contribution plan with health savings accounts that both the city and employees fund.

State lawmakers approved legislation last year that gives the city a two-year window in which it can issue bonds to fund the city’s retiree health obligation. The window closes at the end of 2014.

“The principal and interest from these bonds will be paid from cost allocations to all city departments, as well as from investment earnings realized from the investment of the bond proceeds,” wrote Jana Wallace, city debt and authority finance officer, in her memo to commissioners.

Buhrer said the city has established a retiree health care oversight committee that consists of experts in the financial field to help determine when the city should go to the bond market. He said the city plans to bring aboard a market consultant for additional direction.

“It’s a big decision and it’s complicated, but we can get all the help that we need,” said White.

“I think it’s important for all of us to confront this health care issue,” said Commissioner Ruth Kelly, who also pointed to a recent Time magazine article that exposed a number of huge pricing markups in hospital services and prescription drugs. “Health care costs are affecting our human resources,” she said.

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