A Meadville City Council discussion Wednesday of significant potential savings — $300,000 from proposed bond refinancing — was followed immediately by a discussion of escalating pension costs that will likely wipe out any refinancing proceeds.
The opportunity for bond refinancing comes as the result of “a steep and drastic decrease in interest rates, not so much because of the U.S. economy, but because of the global economy, the trade war with China and how that could impact” the economy over the next two years, according to John McShane.
McShane, the city’s bond counsel and managing director of Boenning & Scattergood Inc., the Pittsburgh-based law firm that handles bond underwriting for the city, said the refinancing being considered was unrealistic a year ago when he told council to expect up to three interest rate hikes in 2019.
“You would refund this up until a month ago,” McShane told council of the refinancing, which involves refunding currently held bonds and then reissuing bonds in the same amount and under the same terms, but with significantly lower interest rates. “Rates were never low enough to make sense to refund this.”
Refinancing the city’s 2010 pension bonds and 2014 bonds issued to service city debt would produce a savings of about $300,000, possibly more, in 2020, City Manager Andy Walker told council.
As soon as council members indicated their support for moving forward with the plan, Walker turned to the topic of increasing pension costs.
“While it would have been exciting to have the bond refinance to really impact the budget, it’s going to be washed by this increase in the cost of the MMO,” Walker told council, referring to the city’s minimum municipal obligation, the lowest amount it must pay into its pension plan each year.
2019 pension costs of $1.6 million are expected to rise by $367,000 in 2020, according to Walker. The 2019 expenses consist of $495,000 for city staff pensions, $473,000 for police and $126,000 for fire department pensions plus $545,000 in debt payments on the 2010 pension bonds that were issued in order to fund the city’s three pension plans. State aid decreases the amount the city must pay by $568,375.
The estimated increase would represent a 34 percent increase in the city’s net pension costs, though Walker pointed out the estimate does not yet reflect changes in state aid or debt service cost.
Three factors contributed to the anticipated increase in pension costs, Walker told council.
Topping the list was $1.6 million in market losses for the city’s pension funds in 2017 and 2018, according to Walker.
The same period saw changes to the actuarial tables used to determine the city’s minimum pension contributions, Walker said. Because of longer lifespan projections, the amount the city must pay into the pension fund has gone up.
Lastly, the city’s projected rate of return on its pension investments is being lowered from 7.625 percent to 7.5 percent after “a number of years” of not meeting the target.
In fact, according to Walker, it may be time for a change.
“We want to see if there’s opportunities to work with a different pension fund manager,” Walker said, adding city staff would bring the possibility to council at a future meeting.
Mike Crowley can be reached at 724-6370 or by email at email@example.com.