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Chlers Atlvisor March 2UO3
<br />OPEB Bonds May Help with Budget Pressures
<br />As local governments in Minnesota
<br />str~xggle with pending budget shortfalls,
<br />some. have found limited relief through
<br />a new Minnesota State Law related to
<br />finding of other post-employment
<br />benefits (OPEB}. Essentially, the ldw
<br />allows governments to reduce their
<br />operating fund expenditures by using
<br />OPEB fonds to fund a trust, OPEB
<br />costs (chiefly zetiree laealth insurance)
<br />could then be paid from tlae trust
<br />rather than from operating fiends.
<br />The decision to issue OPEB bonds is
<br />not an easy one, It will cause increased
<br />debt service levies, and there maybe
<br />other financial and political drawbacks,
<br />including increased exposlue to
<br />investment performance. Some local
<br />governments may have already
<br />reserved finds for tlaeir OPEB liabilities
<br />or may have bettet• options For firnding
<br />future costs.
<br />As of March f, 38 Minnesota school
<br />districts laave issued OPEB bonds,
<br />ranging in size from $725,000 to
<br />$40,085,000. Fewet• cities and counties
<br />are considering OPEB bonds at this
<br />time. Most cities have relatively low
<br />liabilities, and most counties are able to
<br />cash flow the costs from existing or
<br />planned tax levies, It is likely that
<br />counties and a few cities will issue debt
<br />for OPEB in tlae near firtltre as levy
<br />limits and budgets tighten,
<br />As local governments prepa~•e to
<br />implement the new accounting
<br />standa>tds for OtXaer Post-Employment
<br />Benefits (GASB 43 and 45}, they slaould
<br />take the opportunity to develop a plan
<br />for funding their OPEB liability. The
<br />plan may include continuing to "pay as
<br />you go," setting up a trust, anti possibly
<br />issuing bonds to fiend the trust.
<br />The fist step u1 t1~e process is the
<br />completion of an actuarial study to
<br />document the accrued liabilities and the
<br />costs for OPEB. Once the actuarial study
<br />is completed, the government unit
<br />should develop a comprehensive
<br />f~.aancial plan for its OPEB costs and
<br />liabilities. The plan should address at
<br />least the following issues:
<br />+ whether to establish a trust and tlae
<br />type of trust;
<br />• what portion of the liability should
<br />be fiXnded by the trust;
<br />By Gary Olsen, Financial Advisor
<br />How fiends in the gust should be
<br />invested;
<br />• Sources of fiends for the t~•ust
<br />(bonds, operating fiends, or a
<br />combination};
<br />• Bond terms and structures;
<br />• Tax impact of issuing bonds;.
<br />• Political and otlae~• consequences of
<br />issuing bonds;
<br />• The impact on the general fund; and,
<br />• How fitt~~re OPEB costs will be funded.
<br />Developing a comp~•ehensive plan will
<br />require a collaborative effort. Ehlers
<br />financial advisors are ready to work
<br />with yout• staff, yout• actuary, your
<br />auditor once other professionals to
<br />discuss yaLl1• options and help you
<br />develop an OPEB firnding plan.
<br />_ - lans~~e~~e®waei
<br />~~ ~f ~ i~ ~< ~ ~ 5 i 1 II ~ V A~
<br />Railer Coaster for Rafas. The last six months Nava been among the most tumultuous in
<br />history far the world financial markets and for the municipal band market as well, Beginning in
<br />mid-September, avariety offactors -plummeting investor confidence, the demise of large
<br />financial institutions, lack of liquidityfor other large institutional investors - led to dramatic
<br />II1CreaSeS In Interest Bond Buyer Index, 200Q to Present
<br />rates on municipal ~.~Jo% March 6, 2009
<br />bonds, As shown in this
<br />graph, the Bond Buyer a,oo°I°
<br />Index ~a weekly national
<br />index of average yields ~,~o°lo
<br />an AA-rated 20 year
<br />municipal bonds rose ~.oo°lo
<br />from x,54°I° in mid- , °
<br />September to B.O~°/° ire 4.~0 la
<br />mid-October, its highest ~ oo°~°
<br />level since January of oo a~ 02 03 04 05 o6 07 as o9
<br />280D, Rates fluctuated
<br />wi id ly through NOTE; The sond Buyer 20 Band index is a weekly index of average yields on AA-rated municipal bands
<br />maturing In 20 years. SOURCE; The Bond Buyer. Chart prepared by Ehlers & Associates, Inc,
<br />December before
<br />dropping dramatically in January, As of March 6, the Bond Buyer Index was back down to
<br />4,96°I°, which is very close to its average over the last ten years
<br />"Muni to Treasury" Ratios Return to More Normal Levels. One of the key ratios that we
<br />moniter isthe ratio ofyields on high-rated municipal bonds ~"munis"~ to the yields on
<br />treasuries. Because interest on municipal bonds is taxexempt, muni yields are generally lower
<br />than treasury yields, For ten year bands, this ratio has hovered between 85°lo and 90°lo for most
<br />of the past decade.l~hen the ratio gets significantly higher than this, it is usually a sign that
<br />muni yields will decline.
<br />As investors grew increasingly nervous last year and showed a strong preference far the safety of
<br />treasuries, the muni to treasury ratio for 1D year bonds increased above 100°l~ on September ~2
<br />and hit an incredible high of 188°I° in December, This led to a chorus of pronouncements from
<br />brokers and other financial experts that munis were a "great buy," followed by an increase in
<br />demand for munisand adec~ine inyields, Bymid-February., the 1o year muni to treasury ratio
<br />had dropped down below 100°/Q, As of March 1, it had increased to just above 100°/°.
<br />This means that munis are no longer the "great buy" that they were in recent months, So here is
<br />less raasan aow to beliave ihat moor yields: will coniiaoa i~a ~'ecline s~bsta~~ially tllart here was
<br />a moa~l7 ago, These trends; however, apply primarily tohigher-rated bonds with relatively short
<br />maturities. Yields onlower-rated bonds and longer maturities are still high relativeto treasuries,
<br />Ehlers. Weekly Market ~'nmmentarles to Clients. To help our clients stay aware of the
<br />rapid changes in the municipal band market, we began last #all to send out weekly market
<br />commentaries to cur clients by eWmail~ If you are a client and are not receiving these
<br />commentaries, you may contact your Fhlers financial advisor to be added to the list.
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