Wednesday, October 09, 2013

Mayor Karl Dean is proposing borrowing $200 million to fund pension liability.

Mayor Karl Dean is proposing borrowing $200 million to help meet about half of Nashville's unfunded employee pension liability. The money would be borrowed at an interest rate of about 4.1% and invested. with the hope of getting a return greater than the cost of the borrowing.

Over a 15 year period the bonds would be repaid. These bonds would be general obligation bonds and Metro would have to raise taxes sufficient to pay them off when they become due. This is how the amendment is worded that addresses the obligation to pay the debt:

Debt service on the bonds shall be payable from and secured by ad valorem and all taxable property in the General Services District and Urban Services District, fully sufficient to pay all such debt service falling due prior to the time of collection of the next succeeding tax levy. The Metropolitan Government shall be unconditionally and irrevocably obligated to levy and collect  ad valorem taxes without limit as to rate or amount on all taxable property within the Metropolitan Government to the full extend necessary to pay all service on the bonds and the full faith and credit of the Metropolitan Government shall be irrevocably pledged to the payment thereof." (link, section 4)

If  we cannot get a return of greater than the cost of the bonds, we could be left with substantial debt. The city would have to raise the tax level sufficient to pay the debt no matter what that tax rate may be. I hope the Council is cautious in considering this and does just not rubber stamp the mayor's proposal. I hope the Budget and Finance committee takes their responsibility seriously and carefully weighs their decision. With the city's current debt due to the Music City Center and other projects such as the Hickory Hollow ice rink and various other lavish spending projects, and with the planned Riverfront Park expansion, the proposed Sulfur Dell baseball stadium, and the proposed Amp, I fear we are over extending. We may need our debt capacity for something different in the future. Also, I do not want the city to always have to raise taxes to cover operating cost every year. We may not always be the "it" city. The national economic future is in doubt with a national debt of $17 million dollars. There is a lot of economic uncertainty.  I think it is a time to be very cautious.

We must honor our pension obligations, but I am not convinced borrowing the money is the way to do it. While we have an obligation to meet current pension obligations, I think we should phase out of the  traditional defined benefit plan that provides an annual income at retirement based a formula that relates retirement income to pay and years of service and instead go to a system of account-based  plans. Metro could still contribute to the employees retirement but the amount of income at retirement would be based on the amount above Metro's contribution the employee decided to invest and how the employee's account grew based on which plan, among a limited menu of plans, the employee chose, and how the investment performed. I do not see why Metro should take all the risk in planning for an employee's retirement. Most employers, if they contribute to retirement at all, contribute to an account-based retirement fund.  That aside however, in today's financial climate, I question if it is wise to borrow money and invest it, hoping we can make money. 

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