Wednesday, November 13, 2013

WHAT? Borrow $85 Million to pay a DEBT but NOW OWE $165 Million Plus Interest?

Hi All,

Question:  What happens when you borrow money to pay one bill, but instead of instantly paying the bill you make a promise to pay?   Instead, you use that borrowed money by depositing the money in another account and then use it to invest in the stock market and other investments.

Answer:  You now have two bills to pay.  

Bloomfield Township took advantage of the state and Gov. Snyder’s recent law (Public Act 329 of 2012) that permits AA or higher rated municipalities to solve the underfunded pension debt with new bonds.

With no vote from the citizens, the 7 Board of Trustees authorized a $85 million bond sale..which was recently completed.   The necessary fees were paid out of the bond sale.    

The township has placed the $80 million remaining proceeds from the bond sale into an EQUITY TRUST Fund and all $80 million is to be immediately invested into the stock market and other investments facilitated by Gregory Schwartz and Co…. none of it in cash.  This investment program was approved at the Board of Trustees meeting on 11/12/13.

The new found borrowed remaining  $80 million money represents about 38% of the pension obligation that was the underfunded part of the pension plan that the bond sale was intended to pay.

There is  $130 million representing the other 62 % of the pension obligation that is already paid by the taxpayers and deposited (in past years) with Prudential … the company that will actually pay the pension benefits. 

The way I look at this is:
  • The company that needs the money in their account to actually pay 100% of the pensions, Prudential, does not have the money in their account.  However, on paper, the township has the pension funded 100%  by establishing a new account: an Equity Fund account for the pensions. 
  • The township is choosing to risk  $80 million that was borrowed to pay the underfunded pension debt.   
  • All that money is now invested in the stock market and other investments, not through Prudential, but from an Equity Trust Fund set up by the Township and Gregory Schwartz and Co. is advising.
What if we have another 2000 or 2008 economy?
  • The $85 million  borrowed via selling bonds to pay the pensions is already down millions to pay the costs for selling bonds.  
  • The $80 million invested in the Equity Trust Fund  MAY experience losses in any potential economic downturn.  
  • Whatever happens in the stock market and investments, the public still has the obligation to pay the entire sum borrowed plus interest to the bond holders.
  • The same is true of the entire 38% currently underfunded pension amount owed to the retirees.
  • This Equity Trust Fund account will need to regularly make payments to Prudential as employees retire. There are many employees close to retirement now.  The investment climate is risky at this time.  Eventually, the payments may reduce the amount in the Equity Trust Fund to or near zero.  What if that happens too soon? What if there is not enough equity to recover from losses from bad years?  
Did we really pay the debt to the underfunded pension with the borrowed $85 million dollars from the bond sale?

  • NOT REALLY !   Not until the money is deposited in Prudential that actually guarantees the pension payouts.
  • As of 11/13/13,  until that money is actually deposited into the Prudential account the township taxpayers still owe that $80 million to the pension fund. 
  • As of 11/13/13,  the taxpayers also owe the bond holders $85 million plus interest.
  • That total amount as of 11/13/13 is:   $ 165,000,000  plus interest.
Investment Return Assumption "Over the years.... the township will have saved over $60 million dollars in payments."

From May 13, 2012 Board of Trustees Study Session Minutes:

from July 22, 2013  Regular meeting minutes of the Board of Trustees

Link to the Township minutes

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