The concept of Pension Obligation Bonds (“POBs”) is to allow a jurisdiction to borrow at low interest rates and send funds to PERS; if returns exceed borrowing rate, jurisdictions save.  Under federal tax law, POBs must be sold on a taxable basis, so borrowing rates are higher than on typical capital borrowings. This resolution proposes the issuance of approximately $15.5 million in POBs.

Proceeds of the POB issuance are deposited into a Side Account (“SA”) and invested with the PERS, with earnings/losses credited directly to the SA. SAs are drawn down and provide a “rate credit” over 20 years.

Over 150 Oregon POBs have been issued from 1999 – 2021 at rates ranging from 2.45% to 7.06%. Generally, positive PERS returns means most, but not ALL issuers, have realized savings.

Success in issuing POBs largely depends upon the market returning more than the cost of the POB. If returns are greater than the borrowing rate, borrowers should expect to have lower pension costs than they otherwise would be. If returns equal the borrowing rate, borrowers should expect to breakeven. If returns are less than the borrowing rate, borrowers would be worse off than if they had not issued a POB. 

According to Piper Sandler (our financial advising firm) the City of Hermiston is expecting a borrowing rate between 3.50% and 4.00%

It should be noted the timing of earnings on the SA do matter. Early negative returns on the SA are hard to overcome and may more than offset later positive returns. Earnings variability will cause volatility, even if the earnings rate exceeds the bond rate. Also, a particularly fast or slow growth in payroll relative to the 3.4% assumed payroll growth rate can cause increases or decreases. It should be mentioned that unknown future changes to PERS may have negative consequences.  Finally, the issuance of a POB will change a “soft” liability to a “hard” liability.

This resolution provides for a cap on the interest rate of the proposed POB of 4.5% as well as a date, December 31, 2022, by which the resolution authority will cease (if no bonds are issued).

Fiscal Prudence

Adopting Resolution No. 2215 will allow the city of Hermiston the opportunity to address its unfunded pension liability of approximately $15,445,054 and to potentially reduce overall future PERS contributions. Not adopting Resolution No. 2215 will provide for the continuing growth of this unfunded liability into the future and, most likely, resulting in increased costs.  

1.       Approve Resolution No. 2215 as proposed.

2.       Do not approve Resolution No. 2215 as proposed.

Approve Resolution No. 2215 as proposed.