LOS ANGELES - A plan for Los Angeles County to float $2 billion in pension obligation bonds is in jeopardy, and probably is dead.
Robert Hermann, a trustee on the Los Angeles County Employees' Retirement Association, said the county has been "dragging its feet" on the plan. Because of the delays and rising interest rates, the chance of pension cost savings probably has no chance unless interest rates fall in June or July as a few economists expect, he said.
The plan was designed to save the county $500 million in costs to the pension fund over 20 years.
Mr. Hermann charges much of the problem lies with Elliot Marcus, chief labor negotiator and a county administrative office division chief, who was sent to negotiate with fund officials. Mr. Marcus doesn't understand the cost-saving proposal, said Mr. Hermann.
Responded Mr. Marcus: "Let me save you some time. I will tell you simply that the county is evaluating the value of the pension obligations bonds. We haven't made a decision yet."
Asked whether the evaluation should have been done urgently, Mr. Marcus said, "If it isn't a good investment, then by not making it we are not late at all."
Last October, county fund trustees proposed the county float pension obligations bonds at low interest rates. The money raised from the low-interest bonds was to be used to pay off the pension fund's $2 billion unfunded liability.
The estimated $500 million savings to the county, sponsor of the plan, would result from an interest rate arbitrage. The arbitrage results from substituting low-cost fixed debt in the form of taxable pension obligation bonds for the equivalent of higher-cost floating-rate pension debt.
At the time the arbitrage was proposed, long-term interest rates on the 30-year bond reached a 25-year low of 5.79%.
The estimated $500 million savings to the county, sponsor of the plan, would result from the difference between the interest rate on the bonds, estimated at 6.5%, and the plans' actuarial interest assumption rate of 8% - which could go higher.
Instead of hurrying to float the bonds, county officials did nothing and accused fund trustees of having a "secret agenda," Mr. Hermann said. The county accused the pension trustees of trying to increase retirement benefits, he said. He said the trustees were shocked at the accusation and tried to convince the county their charge was not true.
Mr. Hermann said the county now estimates more than half of the anticipated savings are gone because of a rise in interest rates. With the way rates are rising, all of the savings might be gone, he said.
In October 1992, issuing the pension obligation bonds would have saved the county an estimated $519 million. By Feb. 25 of this year, interest rate increases shrunk potential savings to $318 million. By March 10, higher interest rates had reduced the estimated savings to $240 million, according to Mr. Hermann. He said he can't predict right now when all the potential savings will be gone.
Even if interest rates were to drop, the county has a market timing problem: How low will rates go and when should the county float the bonds?
On March 11, as a result of inflation fears and an interest rate hike by the Federal Reserve Board, the yield on the 30-year bond increased to 6.95%, its highest level in nine months. By early April the yield on 30-year Treasury bond hit 7.24%, well above the 5.79% of last October.
Mr. Hermann pointed out San Diego County, which received a similar pension cost saving proposal at the same time, floated $430 million in bonds in February at an interest rate of 6.36%.
Not only has Los Angeles delayed floating its bonds, county officials have proposed other plans that would increase pension costs in the long run, Mr. Hermann said. They include:
A plan to reamortize the county's unfunded liability from 12 years to 30 years.
A change in the county's pension accounting method from entry age normal to projected unit credit, a move that would "back load" retirement costs so they are higher later on, said Mr. Hermann.
An increase in the county's actuarial interest assumption rate to 8.5% from 8%, even though investment returns are expected to be lower in this decade than they were in the 1980s, Mr. Hermann said. The pension fund could have trouble meeting that higher actuarial interest assumption rate, he added.
Mr. Hermann said the county wants to make the changes because it can't balance the county budget and lower its short-term pension costs. The county faces a budget gap of between $900 million and $1.2 billion for the coming fiscal year. According to L.A. County fund officials, some county officials have held up floating the pension obligation bonds to get certain benefits from the fund. One benefit the county wants is to shift funding of retiree medical benefits from the county to the fund. But under state legislation, the L.A. County fund doesn't have authority to assume funding of retiree medical benefits, said Mr. Hermann.
Fund trustees, sources said, did offer to use any excess earnings from investments to help pay retiree medical benefits, now more than $150 million a year.
But while the county dickers over advantages for itself, fund trustees say they are losing the opportunity save $500 million.
Mr. Hermann said the county remains uninterested in floating pension obligation bonds. He said the county wants to use excess returns - the investment returns above the actuarial interest assumption rate of the fund - to create an emergency fund for the county. Mr. Hermann opposes that idea, saying excess returns should be used to reduce the unfunded liability.