Refinancing is not the same as adding debt.
The scheme Brown proposed whereas the City would borrower an additional $120 million (along with JEA taking a cash advance on their own credit card of another $120 million in exchange for returning less taxpayer money over the next 20 years) would represent new debt. The deal proposed wouldn't refinance existing debt. That's now a one time payment that would reduce the unfunded liability by less than 20% (if this was a cash payment, it would reduce the current carrying costs of borrowing money to fill the gaps, however you have to pay interest on the new debt so reductions in carrying costs aren't as significant under this proposal.. servicing costs on the pension liability have more than doubled in the last 10 years, from $65mm in 2006 to $190mm today). The proposal would stop the leaking by adjusting new hire benefits, there's no question about that. The additional revenue to pay down another significant portion of the gap would come from existing workers contributing more of their pay to the pension fund, unless we hire 400 new police officers in the next couple of years while everyone stops retiring (an unlikely scenario). The key there is finding a manageable solution for contribution and accrual rate changes among existing workers. Keep in mind also that the fund isn't going to produce 10% annual returns forever.
Meanwhile, less JEA money would be going into the general fund for the next two decades. About 11% of the City's cash comes from JEA revenue transfers. That means less money to mow the grass, fix potholes and hire police officers (remember, current employees pay the benefits for current retirees).
Respectfully to my friend Mike Field, he is incorrect. It is not a "scheme", and the proposal would refinance existing debt. Sounds like a good excuse for Mike and me to have a beer and talk pension economics.
The Police and Fire Pension Fund (PFPF) currently has an unfunded liability of approximately $1.62 Billion. The City is obligated by law to pay that pension debt and we make an annual debt repayment as part of our Annual Required Contribution (ARC) to the PFPF. That debt accrues at a rate of 7%.
After meeting for nearly a year to recommend solutions to the City's police and fire pension challenges, the Jacksonville Retirement Reform Task Force recommended that the City accelerate its payment of the unfunded liability by approximately $40 million/year, or $400 million over 10 years. That recommendation ultimately became part of the City's tentative agreement with the Police and Fire Pension Fund.
The Carlucci/Appleby Plan (named for its creators, former Council President Matt Carlucci and long-time business executive Charlie Appleby) makes sense as a way to meet that additional funding obligation. Rather than pay $400 million over 10 years, the City would pay the net present value equivalent ($300 million) up front. Since the PFPF had already agreed to transfer approximately $60 million, the City's up-front payment would be $240 million.
JEA would provide $120 million, and has certified that the payment would have no impact on utility rates.
The City would refinance the other $120 million in existing debt (at a rate closer to 3.5% than the 7% we currently pay) so we can put that amount toward the unfunded liability up front.
Let's be clear: the City owes that $120 million no matter what. But if we pay it over time as part of the ARC at a higher rate, the cost of that debt is higher than if we pay it up front at a lower rate. Plus, it gives an immediate boost to the Funded Status of the PFPF as the City and Fund continue to work toward an 80% or higher status.
As for the annual JEA contribution, let's be clear about two things.
First, the credit rating agencies have repeatedly told JEA that their biggest vulnerability is the amount of its annual contribution to the City, which is viewed as on the high side for a public utility. They have urged them to move back toward a system where JEA pays based on the formula calculation set forth in the City of Jacksonville Charter.
Second, the current COJ-JEA funding arrangement expires on September 30, 2016. if a new COJ-JEA funding arrangement is not in place by that time, the JEA contribution could revert to the formula contribution -- which could mean an immediate loss of nearly $30 million in annual revenue. The Carlucci/Appleby Plan represents a far more gradual shift to the formula-based approach in the Charter.
The detailed financial analyses of the Carlucci/Appleby Plan show that if it was the funding source for a retirement reform agreement, the City would save $1.3 Billion over the next 30 years. That takes into account the change in the annual JEA contribution.
Mike or anyone else, I'm happy to discuss in more detail. But seeing as how we are pushing 1 AM, let's have that discussion tomorrow or another time.
