Massachusetts city to issue $475M of pension bonds

Quincy, Massachusetts, is planning a $475 million pension obligation bond sale for Tuesday that is projected to fully fund its retirement system.

City officials say they are getting out front of a state directive for its municipalities to reach full pension funding by 2037 and borrowing while interest rates are still low.

Ramirez & Co. is the lead manager for the negotiated sale. Quincy is veering from its tradition of competitive offerings.

“By doing this pension bond, it gives us a steady obligation payment schedule and will put us in a solid position,” said Thomas Koch, mayor of the 102,000-population city about 10 miles south of Boston since January 2008.

S&P Global Ratings, the only rating agency Quincy used for the sale, assigned its AA long-term rating and stable outlook on the taxable 18-year bonds.

It also affirmed its AA rating and SP-1-plus ratings on the city’s outstanding GO bonds and $274 million in outstanding bond anticipation notes.

Quincy’s City Council passed the bond measure by a 6-to-3 vote in June — with two-thirds approval necessary — after a contentious back-and-forth with Koch. Some council members worried about the additional debt service.

With bond approval finally in hand, the council then passed the $347 million budget for fiscal 2022.

“I was a little disturbed,” Koch, in an interview, said of the council’s pushback. “There was really a lack of understanding of the financial situation, I say respectfully. It wasn’t about politics or policy, it was about the math.”

Pension obligation borrowing has been subject to ongoing debate in public finance.

“Issuing debt to close budget gaps and pay down unfunded pension liabilities can alleviate short-term budget pressures but also presents long-term risks,” Greg Mennis, Stephanie Connolly and Mollie Mills of Pew Charitable Trusts said in a commentary.

“POBs increase the exposure of budgets and pension balance sheets to financial market volatility, specifically the risk that returns will be less than the borrowing costs,” they wrote. “However, identifying these risks in advance and ensuring that the purpose of the borrowed funds is clear and supported by effective monitoring and controls can help manage them.”

Koch, Chief Financial Officer Eric Mason and Strategic Asset Manager Enrico Coscia began planning for the bond sale last year. Koch pitched the concept on a Facebook video in March.

“Essentially people have a little misnomer about how public pensions works,” Koch said. “A few years ago, when California, Wisconsin and some of those states got in trouble [with] their pension systems it came out that employees did not contribute that much to the pensions out there.”

Massachusetts law, by contrast, requires all employees pay 11% of their salary to their pensions.

“In each year at budget time when I start to develop the budget, which then gets presented to the City Council for approval, we look at several areas,” Koch said. “What’s going up in cost? The two biggest increases usually in the budget are healthcare costs for employees and retirements costs for employees. And from there we work the departments and other costs like rubbish increases, energy increases. These two are the biggies.”

Elsewhere in Massachusetts, 106,000-population Brockton issued a $302 million negotiated pension bond two months ago while voters in Andover, a 37,000-population town, approved a pension bond of up to $185 millon in June, with final approval pending the Select Board.

Rebecca Sielman, a principal with consulting firm Milliman, estimated Quicy’s unfunded actuarial accrued liability at $478.7 million as of Sept. 30., and projected annual payments ranging from $36.1 million to $52.7 million, assuming a Sept. 30, 2039, end date and a 2.25% amortization growth rate.

Without the pension bond, payments would have ballooned to upwards of $65 million, according to Mason.

The city will invest the proceeds of the 18-year bond through the Massachusetts Pension Reserve Investment Management system.

Council member Brian Palmucci voted for the bond issue, even while acknowledging downsides that included lingering structural problems with the pension system and the risks of returns too low.

“We have to pay it, no matter what. Every year it’s going up in the budget,” Palmucci said. “What really bolsters the argument for this is the fact that we’re going to invest this money with PRIM, which is a top three pension system in the country. Putting our money with PRIM, I think, will give us the best chance for a successful return.”

S&P described Quincy as “a diversified commercial and industrial city,” citing a growing tax base and strong per capita household incomes.

“We have 27 miles of waterfront, and four Red Line [subway] stations,” Koch said. “And being just south of Boston, we have advantages for our real estate.”

Quincy also boasts of its history. It is the birthplace of former presidents John Adams and John Quincy Adams and intends to observe its 400th anniversary in 2025. “We’re proud to be a city of immigrants,” Koch said.

According to Koch, the flexibility will enable the city to adequately budget for public safety, infrastructure and economic development, among other initiatives.

“We’re an old city, so infrastructure is always a challenge,” Koch said. “We’ll continue to be aggressive about development. We have a lot in the pipeline.”

The city has been building out its biotech presence, and is part of a regional “life-sciences corridor” economic development initiative that also includes Boston, Cambridge, Somerville and Braintree, all of which the Massachusetts Bay Transportation Authority’s Red Line covers.

According to S&P, the city estimates that the borrowing will reduce cumulative pension contributions by more than $130.6 million on a present-value basis through 2040.

“While the debt burden increases, the city’s pension costs will decrease, resulting in very little budgetary effect at the onset,” S&P said.

Quincy plans to appropriate $5 million annually in each of the next six years in part from its projected annual savings to the reserve fund until it reaches a $30 million balance.

“Doing so will require the city to maintain budgetary discipline to produce sufficient surplus necessary to fund growing costs and to also appropriate into reserve,” S&P said.

Coscia also cited the benefits of full funding to the city’s bond rating. Its pension funding levels have hovered around 45%.

“This took a lot of fortitude on behalf of the mayor,” he said. “It would have been easy for him to say this was too complex.”