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 The challenge of fully accounting for and funding retiree health
care benefits is weighing heavily on public agencies across the
nation. Providing full funding for these benefits without creating
a "pay-as-you-go" system is possible through the issuance of
taxable bonds that could save agencies money in the long run
and potentially provide for a bargaining chip in reducing future
post-employment benefits.
These challenges come as a result of Governmental Accounting
Standards Board ("GASB") 45. GASB 45 requires a full accounting
of the actual costs of all future post-employment benefits.
In December 2005, Dolinka Group, Inc., a financing and planning firm for school districts located in
Newport Beach, CA, was contacted by School Services of California to examine the potential of issuing
debt to fund the Unfunded Accrued Liability ("UAL") of Other Post Employment Benefits ("OPEB") for school districts and community college districts. The purpose for issuing such debt was initially to ensure agencies were being fiscally responsible and complying with GASB 45; however, after spending more than nine months developing a program, Dolinka Group has identified two additional purposes for issuing debt to fund the UAL associated with OPEB.
Reducing Future UAL
By issuing debt, a school district or community college district could realize the potential of negotiating more favorable post-employment benefit terms with classified and certificated employees.
Numerous superintendents and assistant superintendents of business for school districts throughout
the State of California have indicated that unions may be willing to exchange future benefit increases
for the greater certainty that future OPEB will be paid as a result of funding those OPEB through the
issuance of bonds. For example, some have reduced lifetime benefits to age 65, increased the initial year from 55 years of age to 58 years of age, and others changed the requirement to 15 years of service as opposed to 10 years. All of these changes will help reduce the cost of post employment benefits on a forward basis.
Reducing the Cost of the Existing UAL
There is also the potential of decreasing both the annual and overall cost of the UAL. Since the debt is taxable rather than tax-exempt, the school district/community college district has the opportunity to realize positive arbitrage (investment earnings in excess of the interest rate on the bonds).
In today's municipal bond market, the issuance of taxable bonds on a fixed rate basis would be at an
interest rate of approximately 5.20 percent (the variable rate is less than 5.00 percent). Since the proceeds of such debt could be invested in equities, it would not be unreasonable to average an investment return of 7.00 percent. Based on preliminary analyses completed by Dolinka Group, the positive arbitrage could create a savings of approximately 20 to 25 percent compared to a pay-as-you-go program.
The issuance of bonds under this approach also allows each agency to identify its risk tolerance and
develop an investment strategy accordingly. Dolinka Group is currently working to identify potential
investment vehicles that will generate an average return in excess of the bond yield, with minimal risk of loss of principal.
In connection with the issuance of OPEB bonds, Dolinka Group will develop a debt service structure to
match the specific needs of the school district/community college district. Some examples of this are
capitalized interest, which eliminates payment in initial years; elimination of serial bonds, creating interest only payments for a period of time; and escalating debt service to better capture future cost of living increases.
A question that still remains unanswered is how the rating agencies will react to taking a "soft" obligation under GASB 45 and making it a "hard" obligation by the issuance of debt. Dolinka Group believes that when presented with the numbers comparing the pay-as-you-go program to the annual obligation associated with the issuance of bonds and sharing the concessions made by the bargaining units to limit future liabilities, the rating agencies will have no alternative but to look favorably at the transaction.
Creating a Structured Program
As it does with all its services, Dolinka Group believes in the importance of structuring a program to
fund the UAL that meets individual needs of its clients. There is no one-size fits all program, but rather a series of different options and programs that a school district or community college district could select from. Dolinka Group is leading the charge in assisting public agencies handle the requirements of GASB 45 without putting a drain on operating budgets. Dolinka Group is eager to assist your district and discuss possible programs that could be structured to meet your needs.
Benjamin Dolinka is president of Dolinka Group, Inc. Since 1994, Mr. Dolinka has focused on the creation of new financial and demographic services to meet client needs, the identification of potential public-public and privatepublic partnerships, and the establishment of long-term relationships that provide clients with the tools needed to meet the challenges they face. Mr. Dolinka holds a B.A. degree in Economics from the University of California, San Diego, with emphases in macroeconomics and econometrics. Dolinka Group, Inc. is a public finance and facilities
planning consulting firm providing services to clients throughout the State of California.
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