CHICAGO - A bill that would enable Ohio muncipalities to issue general obligation bonds to pay off in a lump sum about $400 million of accrued liability to a state pension fund has been introduced in the state legislature.
If the bill is passed and signed into law, the next step would be for a municipality to put together a transaction and seek a revenue ruling from the Internal Revenue Service on whether the deal would be considered an issue of arbitrage bonds and therefore taxable.
Rep. Dean Conley, D-Columbus, the bill's sponsor, said the purpose of the bill is to allow cities in Ohio to issue tax-exempt bonds and use the proceeds to prepay their liability to the Police and Firemen's Disability and Pension Fund in a single payment.
Rep. Conley said he does not foresee any opposition to the measure in the state legislature, which is currently in recess and will convene later this year. The bill was introduced in the House last month and is pending before the Health and Retirement Committee.
The bill would also exempt the bonds from statutory caps on bonded indebtedness and from a requirement for voter approval.
The municipalities' liability dates back to 1966, when the state formed the pension fund for all local police and fire personnel. The following year, the fund assigned an amount of pension fund liability to each municipality that covered the retirement benefits for existing personnel. The municipalities were given until 2035 to pay off the liability.
That liability initially totaled about $420 million plus 5% annual interest, according to Robert Cramer, the former finance director of Dayton, Ohio, who developed the bonding plan. He estimated that the municipalities currently owe $400 million in principal to the fund.
Richard Kane, a partner at the law firm of Bricker & Eckler in Columbus, who is working with Mr. Cramer on the plan, said the legislation would clarify any vagueness in existing state statutes and allow municipalities to issue debt to fund their pension fund liabilities.
Mr. Cramer, who is now a senior vice president of public finance at Banc One Capital Corp., said the bonding plan had been submitted to the IRS 18 months ago, but was rejected for a ruling because no state law authorized the plan.
Questions about the tax-exempt status of the bonds under the plan arose from commentary in the Blue Book for the Tax Reform Act of 1986. The commentary suggests bonds issued to fund pension obligations would be considered "arbitrage bonds." and thus taxable, according to Mr. Kane.
He said the bonding plan envisioned by Mr. Cramer would not involve any arbitrage to borrow money to invest the proceeds at a higher yield.
"We are proposing a current refunding at a discount of an existing obligation," Mr. Kane explained. "It is no different than any bond obligation or indebtedness of an issuer."
"We believe we have the tax law on our side," Mr. Cramer added.
A key element to the plan would be getting the pension fund board to offer the pension fund board to offer incentives, such as a discount of the municipalities' liabilities, in exchange for having the long-term liability paid off immediately, Mr. Cramer said.
The board in March voted 8 to 0 in favor of supporting the concept contained in the legislation, according to an April 3 letter to Mr. Cramer from Henry Helling 3d, the executive director of the pension fund. Mr. Helling did not return phone calls for comment.
Mr. Cramer said he expects a lot of Ohio cities will pursue the bonding plan if it is cleared by the IRS and if the pension board agrees to concessions.
Hugh Dorrian, city auditor for Columbus and a chief proponent of the bill, said he would "jump at the chance" to issue GO bonds for the city's liability if all the pieces are in place from the state, the pension board, and the IRS. He pointed out the advantage to cities would be to shorten the repayment schedule and lower the annual costs of funding the liability.
Columbus, which owes the pension fund about $43 million, is scheduled to set aside $2.1 million a year in its budget for the pension liability until 2035, Mr. Dorrian said. But if the city was able to issue GO bonds to retire the discounted pension debt, he said, the bonds would be paid off in less time and at a possible reduced annual appropriation.
Steve Strnisha, the finance director of Cleveland, which currently owes the pension fund $106 million, said the city would probably support the debt payment plan if it works out the city's benefit.
"If there's an advantage to us, we'll look at it," he said. "There would have to be some kind of incentive like a discount to make it worthwhile."
Frank Dawson, Cincinnati's finance director, said there was not enough information in the bill to determine if it would benefit his city. Cincinnati currently pays about $3 million annually to the pension fund, he said.