By David Pendered
If Atlanta receives a favorable interest rate on $250 million it may borrow in 2016 to repair roads, bridges and sidewalks, the rate will be due in part to pension reform completed in 2011.
Standard & Poor’s specifically cited Atlanta’s pension reform as one of three reasons it raised Atlanta’s fiscal outlook to stable from negative in 2012, the most recent rating of the city’s general obligation debt. The credit-rating agency also affirmed its investment-grade rating of the city’s debt.
Pension reform is back in play in Atlanta for at least two reasons: A pending lawsuit filed by city employees that challenge aspects of the city’s 2011 pension reform; and Atlanta’s future credit rating in regards to the potential $250 million bond issue, a rating that will be determined partly on the basis of Atlanta’s pension obligations.
City officials have talked for years about the need to upgrade Atlanta’s roads, bridges, sidewalks, streetlights and other public amenities generally expected to be in good condition in a modern city. Atlanta CFO James Beard has released a preliminary analysis that sets the bond amount at $250 million and annual payments at $16.5 million.
Atlanta Mayor Kasim Reed’s proposed budget, due for adoption June 16 by the Atlanta City Council, envisions the bonds being sold in 2016. For that to happen, the Atlanta City Council would have to call a referendum and voters would have to approve the borrowing
If Atlanta does go to market for $250 million, the role of the city’s pension obligations in determining the interest rate on the bonds can’t be overstated.
That’s because the interest rate is a function of the city’s credit rating, which itself is a function of liabilities such as pensions.
The concept is the same as with a home mortgage. Lenders generally will provide lower interest rates to borrowers who have low debt and good credit.
S&P outlined its view of the positives and negatives of Atlanta’s pension situation in its report about its decision to upgrade Atlanta’s fiscal outlook to stable from negative:
- “The outlook revision reflects our view of the city’s measures to eliminate its general fund structural imbalance, curtail its future pension obligation growth, and improve its cash flow.”
- “However, the city’s OPEB obligations [pension and other post-employment benefits] remain as an ongoing sizable financial constraint for the city. The city funds its OPEB costs on a pay-as-you-go basis and as of June 30, 2010, the [unfunded liability] is $1.4 billion. For 2011, the city paid $36.2 million for OPEBs, equal to 8 percent of general fund expenditures.”
The report even contained a complete section on Atlanta’s pension reform, titled, “Major Pension Overhaul Will Help City’s Finances Over The Long Term.”
At the same time, the S&P report indicates an awareness of Atlanta’s need to improve its infrastruture. The report cites Atlanta’s aged infrastructure in this sentence contained in the future outlook for Atlanta:
- “In our view, the city still needs to contend with a soft revenue environment, ongoing expenditure growth in part due to delayed capital needs, and a weakened underlying economy.”