LOS ANGELES In what is shaping up as one of the largest-ever municipal financings, Los Angeles County plans to sell via negotiation $1.965 billion of pension obligation bonds next month, county officials said yesterday.
Proceeds from the transaction will finance the county's obligation to its retirement system and generate $150 million that will help balance the county's $14.5 billion fiscal 1995 budget, said the county's assistant chief administrative officer, Sandra M. Davis.
Depending on how the deal is structured, some credit enhancement "is a possibility if it is advantageous," Davis said.
The transaction will be structured as refunding bonds. While not exempt from federal income taxation, the bonds are exempt from California income taxes;
The county hopes to reach the market "in early to mid-September," Davis said. But "to the extent we aren't able to market" the issue because of high interest rates, "we have a $150 million hole in our [fiscal 1995] budget. This is why it is important we get it done."
The county's fiscal year began July 1.
Lehman Brothers has been named senior managing underwriter of an 11-member underwriting team, and additional firms "may be added at the discretion" of Larry J. Monteilh, the newly named county treasurer and tax collector who will oversee the deal, Davis said.
The preliminary financing team also includes: CS First Boston Corp.; Morgan Stanley & Co.; Bank of America; Merrill Lynch & Co.; Prudential Securities Inc.; Grigsby Brandford & Co.; Smith Mitchell Investment Group Inc.; Reinoso & Co.; Kieider, Peabody & Co.; and Artemis Capital Group Inc.
Bond counsel is Jones, Day, Reavis & Pogue. Underwriter's counsel is O'Melveny & Myers.
The county is issuing the bonds to finance 100% of its unfunded pension obligation liabilities owed to its retirement system, the Los Angeles County Employees Retirement Association, Davis said.
An unfunded pension liability refers to the present value of what the retirement system is projected to pay in benefits previously earned by employees, less the assets projected to be available to pay those benefits.
The amount of this liability is calculated on a number of assumptions, including the life expectancy of the system's employee base, payments made into the system, and earnings on assets.
Los Angeles County's yearly contribution to its pension system is based on the "assumed rate" of return on investments of 8%, which the retirement system assigns to unfunded liabilities, Davis said. At this 8% level, there is an opportunity for a lower true interest cost savings if the proposed issuance hits the market at the right time.
By handing over the bond proceeds to the retirement association, the county will discharge its responsibility to fund the current unfunded pension liability.
The financing could also help the general fund in future fiscal years. The county and the retirement association have agreed to divide surplus earnings over the next four years, with 75% earmarked for the county and 25% for the association.
County assistant administrative officer Sharon Yonashiro said the county has been working on the financing since last December. In February, the county received a judicial validation of the proposed transaction by a Los Angeles County Superior Court judge. Los Angeles County has sold pension obligation debt twicepreviously, with a $100 million taxable offering in 1988 and a $461.5 million tax-exempt issue in 1986, according to records kept by the California Debt Advisory Commission.
All told, $1.385 billion of pension obligation bonds have been sold by 14 issuers in California since 1985, the advisory commission said.
"There is no doubt that pension obligation bonds, if structured properly can produce substantial savings for local governments with unfunded pension liabilities," commission executive director Steve Juarez said yesterday. "Such savings have become all the more critical as local agencies have had to weather the state's recession and Cutbacks in property tax revenue."
Juarez said, however, that in recent months taxable interest rates have trended upward, and as a result, "most of the activity surrounding pension obligation financing has come to a standstill. "While it is certainly conceivable that a few transactions might still make financial sense, the savings will clearly be less than would have been the case during most of 1993 and early 1994," Juarez said.
