Feb 3 2014

OPINION: Response to Mayor Chiang RE Bond Measure

– The following letter was sent to the City Council and PCA on Feb. 3, 2014. – Mayor Chiang’s previously published Feb. 2 comments are printed below.
Mayor Chiang:
     What first caught my attention was the “majority” voter requirement reported in the Montclairon. As it turns out, you and the City Council had full knowledge of the 2/3’s requirement back in June of last year, by Finance director, Erick Cheung’s Council Agenda Report (June 17, 2013) where you and the Council were clearly advised that the measure would require a 2/3’s voter approval.  Why the ballot language indicating otherwise and that only a majority vote would be required remains quizzical.
     As I said previously, whether the City will actually save money remains to be seen. However, the measure’s language (“to do any and all things they [City Council] deem necessary”) is clearly an unrestricted Blank Check.  But, you say, there will be no future need for a subsequent bond offering. That is not accurate – considering the proposed bonds will Not completely satisfy the “side fund”, but only 90% and an additional actuarial adjustment will surely be encountered at the end of the terms (7 and 9 yrs), more than likely a great deal more money will be owed to satisfy the UAAL at that time.
    Contrary to the Ordinance, the side fund does not equal the unfunded liability of each plan.  It may have at the commencement of the risk pools but as time has passed it surely has grown out of balance where now more money is owed. Additionally, the unfunded liability is a moving target and continually moving forward with time. You equate it with a simple home mortgage but it is more akin to a mortgage with an unknown balloon payment at the end and with continuing and increasing neighborhood association fees forever after.
    The City’s pension liability will never go away – it continues with time.  Conceptually, money can be invested with enough anticipated earnings (PERS 7.5%) to satisfy all future liabilities. But, the past decade has clearly proven how unreliable that notion is. Further, PERS bench mark is only 90% of full funding, so you never catch up. Also, your proposed “lump sum” bond measure is based on outdated unrealistic fixed interest rates and questionable employer contribution growth rates.
    You are correct in that I am certainly aggravated with Oakland’s frivolous pension bond activities but unfortunately, despite your protestations, there are many parallels with Piedmont. Most noticeable is the lack of information and not being forthcoming with critical details – and as they say, the devil is in the details.
     Lastly, you rely heavily on bond counsel, the City attorney and brokers while ignoring the obvious – they all work for the City, well paid and with an undeniable vested interest.
David E. Mix

The following emails from Mayor Chiang were received and published under comments on February 2, 2014.

Mr. Mix,

This note is a brief response to your letter to John Tulloch on a number of questions regarding Measure A. Assuming you are a registered Oakland voter, I can understand your frustration, but Piedmont’s refinancing of its CalPERS side fund obligations is not the same.

Regarding your reference to Oakland’s Pension Bond debt – it’s not the same. The City is asking for voter approval to issue bonds or other indebtedness to refinance its existing CalPERS side fund obligations at a lower interest rate (currently estimated to be 4.25% versus the existing 7.50%) for a known fixed obligation amount provided by CalPERS as the payoff amount – no different than a homeowner refinancing an existing mortgage at a lower interest rate.

You reference the 2/3rds voter requirement for meeting the State’s Constitutional debt limit and exceptions. I am not going to debate your arguments. The City relies upon the professional expertise of bond counsel, who is very experienced in these matters, and of our City Attorney.

I do not agree with your reference to the Ordinance being an “unlimited blank check”. Again, this is simply a refinancing of existing obligations at a lower interest rate.

The CalPERS side fund pension obligation amounts will be fixed at the time the City gets a payoff demand amount from the State. The City is doing a refinancing. There is sufficient room in the $8 million to cover not only the obligation amounts, but also the costs of debt issuance – so there is no need for a subsequent bond offering.

The bonds or indebtedness to be issued will to through a public offering or private placement. They will be fully amortizing bonds or indebtedness and not capital appreciation bonds. It will clearly be demonstrated to the City Council that there will be cost savings before it votes on any proposals by the City’s financial advisors for this transaction.

Regarding your point on contractual changes necessary to union contracts and the employee payment caps, all of our negotiations have been with this potential refinancing of the CalPERS side fund in mind, and all recent contracts have provisions that enable us to move forward without any problem. In summary, the refinancing proposal makes sense.

Mayor John Chiang


Mr. Mix,

This note is in response to your opinion that Measure A is fatally flawed. Even though you are not a registered voter in Piedmont, I do not share that opinion. You may be a registered voter in Oakland and are upset with what Oakland did a number of years ago, but it’s not a reason to compare it to Piedmont’s which is totally different and not the same. Unlike other cities, we’re not speculating on interest rates or assuming we can borrow money and invest it for a higher return. We’re taking a fiscally responsible action and not gambling as you are asserting.

The bonds will save the City money (assuming interest rates and the costs of issuance do not rise dramatically to make it financially unsound). The obligation will be fixed with a payoff amount from CalPERS. We are simply refinancing an existing obligation by paying it off with proceeds from new bonds or other indebtedness at a lower interest rate (currently estimated to be 4.25% versus the existing 7.50%), and we are not trying to do an interest rate arbitrage. There are many examples in the marketplace with successful CalPERS side fund refinancing. The City is using a very experienced financial advisor for this refinancing transaction who has done many of these transactions. As for your comment that we need agreement from the unions to accomplish this, all of our negotiations have been with this potential refinancing of the CalPERS side fund in mind, and all recent contracts have provisions that enable us to move forward without any problem.

I am not trying to change the language of the ballot measure as you are suggesting. We know the rules. The ballot measure is only dealing with the City Charter requirements. As to the validation action and requirements, the City relies upon the professional expertise of bond counsel and of our City Attorney.

Mayor John Chiang

Editors’ Note:  The opinions expressed are those of the authors and not necessarily those of the Piedmont Civic Association.

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