County board: $345M bond issue to cover debt is 'cash flow management' solution

The Washtenaw County Board of Commissioners got a lesson in bond basics from an accounting professor at its meeting Thursday night as the body readies itself to vote on initiating a $345 million bond issue process.

The board had invited Jens Stephan from Eastern Michigan University to attend the meeting and help commissioners understand the risks involved in borrowing money to pay down its unfunded liabilities.

Those unfunded liabilities are estimated to be about $340 million - a combination of debt from the county’s health care and pension funds for its retirees that aren’t being profitable enough to cover costs.

Issuing limited tax bonds to fully fund both plans in a 25-year payback period would allow the county a cash flow management solution to pay down its hefty debt.

As the county is facing the task of eliminating about $7 million from its operating costs from its budget, it is looking for ways to cut expenses. The annual required contribution to its health care and pension funds has continued to increase year after year - with the county making a payment of about $20 million this year. That figure is projected to increase by millions of dollars within the next several years.

The county’s bond counsel has structured the bond payments to pay down less of the principal in the early years - about $17 million in the first year -- and to pay higher principal amounts in later years.

“You’re going to make up for it later,” Stephan said to the commissioners Thursday.

Commissioner Dan Smith, R-Northfield Township, said that he’s more interested in the ability to manage the county’s immediate cash flow issue than to end the bond payment process 25 years later with reduced expenditures.

Board Chairman Yousef Rabhi, D-Ann Arbor, echoed his sentiments by stating the county is trying to create an investment policy based on security, and that the county is trying to manage its payment and not to make money off the bonds.

The success of the bond issue relies on the return on investment being at least the same or higher than the rate at which the money was borrowed.

In the presentation of several financial models to the commissioners, Stephan calculated the probability of success of issuing bonds using the federal government’s low borrowing rate at 90 percent. Higher borrowing rates lowered the probability of success.

The $345 million bond figure the board is considering is based off of a 2011 actuary report.

Commissioners postponed their vote to start the bonding process in May so they could get a more accurate estimate from the newest actuary report. County Administrator Verna McDaniel said Thursday the actuary report would be delivered July 8 - two days before the board is set to vote July 10.

At the Thursday working session, commissioners also had the opportunity to question their bond counsel - John Axe of Axe & Ecklund and Meredith Shanle of MFCI - and their actuary, Larry Langer of Buck Consultants.

The level of understanding among the board members regarding nuance to the bond issue has risen dramatically since the item was first introduced publicly in May.

However, commissioners disagreed over how the county’s unfunded liabilities for both funds had become to be so large. Former Commissioner Rob Turner attended the Thursday meeting and said that the massive liabilities in the health care and pension funds were items he had tried to alert the board to during his term.

Langer said the county’s health care plan is about 30 percent funded and the pension plan is about 60 percent funded.

“I’d say you’re in reasonably good shape,” Langer said.

Ideally, Langer said the pension plan would be 100 percent funded so the assets can pay for what the retirees have accrued. At the beginning of the decade, the county’s pension plan was about 90 percent funded. The decline is likely due to the market slump, Langer said.

“We’ve never not made our actuarial contributions to these funds,” said Commissioner Conan Smith, D-Ann Arbor.

Commissioner Ronnie Peterson, D-Ypsilanti, didn’t see it that way.

“We failed to monitor this debt. We need to correct our behavior,” Peterson said.

He called for the board to examine itself and overhaul the budget process.

“You cannot erase a mistake of $345 million,” Peterson said.

Should the county choose to issue the bonds, the borrowed money would have to be placed in an intermediary trust for a financial advisor to invest.

Axe, the county’s bond counsel, advised the board that his job was the simple one in the whole process and that the real challenge lays on the county board to select a competent financial advisor who can invest the money wisely.

“The investment side is the critical piece,” Axe said.

McDaniel said the county would select the financial advisor through the request for proposals process. A board will also have to be created to oversee the trust fund and financer’s operations.

Rabhi said he’s now focused on creating a good financial policy to guide the county’s future advisor.

“Can we structure the trust in a way that we trust?” Rabhi said. “We need a policy that puts a premium on defensive investments. The goal isn’t to make money on the deal; the goal is to create financial stability.”

The county board will vote twice to initiate the $345 million bond issue at its next meeting July 10 - first in the Ways and Means and then for a final vote in the following regular meeting that night.

The vote will be to issue a notice of intent to issue the bond, which begins a 45-day referendum period during which the issue could be forced to a ballot if residents collect the necessary amount of signatures.

A second public hearing will also be conducted July 10 on the bond issue during the regular meeting.

Amy Biolchini covers Washtenaw County, health and environmental issues for AnnArbor.com. Reach her at (734) 623-2552, amybiolchini@annarbor.com or on Twitter.