Commissioners Support Bonding County Pension Debt
By Beth Milligan | June 3, 2021
Historic low interest rates are breathing new life into an age-old debate in Grand Traverse County: whether to address the county’s unfunded pension liability by bonding the debt. Staff made the case to county commissioners Wednesday that now is the time to bond, saying the move would conservatively save the county $8 to $15 million, lower the county’s annual pension payments, and free up cash to address other county priorities, like employee wages. Though past boards have rejected the move, a majority of commissioners Wednesday – including several who resisted bonding in the past – gave staff the green light to pursue a bonding plan.
Grand Traverse County has an unfunded pension liability of approximately $40 million, according to Finance Director Dean Bott. The county can legally bond up to 95 percent of that debt; county reserve funds could cover the remaining five percent. Bonding would bring Grand Traverse County up from 60 percent funded on its pension liability today to 100 percent funded. The county could even make payments beyond that point to get to 110 percent funded – providing a safeguard in case of market fluctuations – and then put payments into a pension stabilization fund to ensure the county remains fully funded into the future.
Bonding the debt upfront now will give the county a larger asset base to collect investment returns in the years to come, Bott explained. Staff estimated those returns would result in $8 million in savings on the low end and potentially $15 million or more on the high end, depending on the rate of return. Bott emphasized that staff were taking an overly cautious approach in their projections. “We do not want to paint a rosier picture here for this,” he said. “We're trying to be as conservative on every issue as we can be to make sure we can keep this contained. We don't want any surprises.”
When county commissioners previously discussed bonding in 2013 – an approach they ultimately rejected – they were looking at a 20-year plan with interest rates that climbed up to 5 percent. Commissioners now are looking at a shorter plan – 13-14 years – with interest rates topping out at 2-2.5 percent. “Interest rates are extremely low,” Bott said, “the lowest I've ever seen in my professional career.” Grand Traverse County also closed out all its defined benefit plans since commissioners last considered bonding, a factor Deputy Administrator Chris Forysth said was important to note.
“If you say, “Well, what's changed in the last eight years, I mean the interest rate is probably number one,” said Forsyth. “Number two is the term is going to be a lot less than 20 years. And number three, all our divisions in the MERS system (the Municipal Employees’ Retirement System, the county’s pension plan provider) are now closed.”
Bott, Forsyth, and County Administrator Nate Alger were united in their recommendation that commissioners pursue bonding. Given past contentious discussions about the approach, Alger admitted that it was “not an easy decision to come to this board and recommend the bonding of the unfunded liability.” However, he said lengthy financial analysis and the historic low interest rates compelled staff to make commissioners aware of the potential savings by bonding. “The landscape upon which we are standing currently, Grand Traverse County has so many opportunities to blossom and I think we’re in the right place at the right time to move forward on the pension bonding,” Alger said.
One of those opportunities is using some of the cash Grand Traverse County is paying toward its pension debt each year – the county is required to pay at least $5.9 million, but has been committing $7 million – toward other county priorities. Lower anticipated annual payments under bonding “increases our flexibility with our operating budget,” Bott said. “If we’re paying less money to MERS to fund this liability, we have more funds to work with in our annual budget.” Those could go to facility improvements, staffing needs, or a myriad of other county priorities, Bott said.
Staffing needs particularly caught the attention of commissioners, as recent reports from department heads across the county have made it clear that a lack of competitive wages is making it difficult for Grand Traverse County to recruit and retain employees. Consulting firm Management Advisory Group (MAG) Inc. is currently conducting a wage analysis of every county position, a report due in September that is expected to give commissioners a clear look at where the county is falling behind its competitors in salaries. Commission Chair Rob Hentschel, who said Wednesday that he’s “been against bonding for a long time” but thinks the “stars have aligned for bonding” now because money has become so cheap to borrow, said the county was “going to need excess cash flow to keep up with the cost of labor.” Having extra room in the budget each year, Hentschel said, would give “our finance team, our HR team, the flexibility they’re going to need to stay competitive going forward.”
Other commissioners were equally supportive of bonding. Commissioner Darryl Nelson called the staff proposal a “cautious, conservative, fiscally responsible effort.” Commissioner Bryce Hundley, who has an economics degree and was previously resistant to bonding, said the “ability to borrow at incredibly low rates” made him excited about moving ahead with bonding. “No matter how many years I get to serve in this chair, I doubt that there will ever be another opportunity to have as positive a financial impact on our county with one action as we have right now with this bonding,” he said. “Really, the only question is can we get it to market fast enough that we actually get these rates.”
Bott said he thought Grand Traverse County was in good shape to lock in the current low interest rates if the county took action this year. With the support of commissioners, Alger said staff will next begin to prepare a comprehensive financial plan (CFP), a legally required document that details the bonding approach and must be approved by both commissioners and the Michigan Department of Treasury. The county will post the CFP on its website for public comment – likely this summer – for a mandatory 45-day response period. Alger said the county can also hold a special study session with commissioners to take public input on the proposal. Assuming the plan is approved, and all interest rates and financial projections are still within the expected range, the county could be ready to bond the debt by November, staff said.
Alger noted the bonding process in the coming months will include multiple checkpoints for input and approvals, saying staff were committed to taking a conservative approach to executing the plan. “We are going to build stopgaps into this process, because we know very well where this county has been, and we know very well where we want this county to be,” Alger said. “We are not going to let that pension obligation become a problem again.”
Pictured: Slide from county staff presentation Wednesday detailing the approach to fully funding the county's pension debtComment