A light in the otherwise bleak prognosis for the 2020 budget was presented to Bradford City Council during a work session Friday.
Police Chief Chris Lucco, who will be taking over as city administrator in the new year, presented a potential solution to the current budget struggles, with the potential to bring the projected 3.94 mil tax increase down to an increase of 1 mil.
Lucco discussed the $1.3 million in unfunded liability for the city’s pension fund, which the state requires to be paid during 2020. The total amount of unfunded liability for the pension for city employees currently stands at $8.6 million.
This $1.3 million, in addition to the annual $500,000 minimal municipal obligation, means that the pension will account for $1.8 million of the budget, which is $10 million in total.
“This is why everyone is screaming for pension reform, but it’s just not there yet,” Lucco said.
Lucco introduced the idea of the city purchasing a pension obligation bond, at either a 20-year or 25-year term. The bond would cover the $8.6 million in unfunded liability, spreading it out over the term of the bond.
Lucco explained that, during his research of pension obligation bonds, a significant concern is paying more interest in a year where gains from the pension are lower than expected. Currently, interest rates are around 2.7%, which is 99.8% lower than they have been since January 1961. While the interest rate for the city can not be locked in without approval from City Council, the rates are expected to stay in the area of 2.7%. The average gain for the pension has been 7%, since 2007, when Manning & Napier took over management for the City of Bradford.
Lucco explained that, projecting an average gain of 6% for the pension plan going forward, the city would see a gain of $13 million, in addition to paying back the bond, at the end of a 20-year term. The option of a 25-year term is also a possibility.
Council member Brad Mangel voiced his preference for the 20-year term.
“Our biggest expense is the pension, and we have no control over that. We are bound by the state,” he said. “There are only so many options to resolve this issue. It can be painful to the city employees or painful to the city taxpayers. To me, the benefit of a 20-year term is to pay it off sooner and have less cost. I am reluctant to put something on the backs of a future council.”
Mayor Tom Riel noted that the 20-year term would also mean paying $1.2 million less in interest.
Lucco explained that the option, while not actively encouraged by the city’s pension attorney, Randy Rhodes, and the city’s pension actuary, Frank Canonico of Cowden and Associates, has been discussed at length with both, and neither have been vocal in opposition of the idea.
Both Lucco and City Administrator Terri Cannon discussed the various avenues the two have been pursuing to balance the budget, including not replacing staff in certain departments and reducing expenditures wherever possible.
“We are trying to do what we can to make it better. The department heads have really stepped up to the plate to help. I am not comfortable cutting anymore than we have,” Cannon said. “Last year’s budget was a very tough budget, but this year’s is extremely tough. I have never been involved with a budget like this.”
Lucco also explained that, during conversations regarding a pension obligation bond, the city’s general obligation bonds, issued in 2012 and 2013, were discussed. These two bonds could be refinanced at a lower rate for a 15-year term. This would provide the city an upfront savings of $315,000 and also provide a slightly lower payment while retaining the expected payoff in 2033 and 2034.
No action was taken at the work session.
The budget must be completed by Dec. 27.
