Pension Obligation Bonds: Montebello, CA

California cities are having to make difficult decisions when it comes to pension obligations. Some cities are considering risky options such as pension obligation bonds. Montebello, CA is considering this option. Via San Gabriel Valley Tribune:

Seeking to address the dilemma of rising pension costs, Montebello City Council members plan to issue a $155 million bond to pay off its unfunded portion of the city’s pension liabilities.

It’s a bond that some think is risky, although no one, including council members, spoke up at Wednesday’s meeting. That’s when City Manager Rene Bobadilla was authorized on a 5-0 vote to begin the process. If all goes as planned, the city would issue the bond in February, and it would take taxpayers 20 years to pay off.



Ventura County Star in July 2019 report that two-thirds of these types of bonds lose money. I take that to mean they don't just under-perform. The bond money from such a deal is invested in stocks, bonds and real estate. When the US has been in a long bull market, one has to question when the bear market will arrive. The San Gabriel Valley Tribune article mentions that the city anticipates that they will issue the bonds at around 3%. You have to wonder if anyone on the city council knows the risks associated with pension obligation bonds as it is reported that no one spoke up against it or questioned it. Hopefully, after the meeting, some members of the council started doing a little research on the topic. 

In the San Gabriel Valley Tribune article, there were references to other articles on Montebello that indicate that the state has concerns about the city's finances. I figured it might be an interesting rundown. All  the articles come from the Whittier Daily News.

In December 2018:

The audit found several problems with Montebello’s two hotels, including mismanagement of hotel revenues that cost the city at least $1.6 million because it failed to pay for the first hotel’s management fees and accrued $2 million in interest costs by the end of fiscal year 2016–17.

. . . This is not the first audit of the city’s finances. The state controller audited Montebello in 2011 and found, “possible pension spiking, payroll errors, a loose petty cash drawer and systemic problems,” according to a new release that accompanied the audit. Since that time, the most recent audit said the city has not adequately implemented the changes necessary to address nine of the state controller’s 21 recommendations.

The article mentions that there were 3 new members elected to the city council. Per the City of Montebello website, there are 5 members of the city council. Perhaps this high turn-over explains why no one questioned the pension obligation bond proposal -- they're too new to understand that it is.

And just a random thought: why exactly does the city need to manage 2 hotels? Hopefully, they're profitable though during a recession they probably turn unprofitable.

In June:

Montebello city’s financial problems — outlined in last December’s state audit — will continue for another year as interim City Manager Paul Talbot’s proposed budget projects a $2.8 million deficit. 

But Talbot isn’t worried about the unbalanced budget the City Council is expected to approve at its Wednesday meeting. 

 “We have so many vacancies that we’ll balance ourselves by the end of the year,” he said.

Well, at least they're able to hit their current fiscal year numbers. Of course, this is standard practice in the corporate world: if you have certain aggressive targets to hit, just don't fill open headcounts.

In July:

Montebello officials have complied with nearly all 23 to-do items required by a state audit which said the city’s structural deficit and poor operational procedures threatened its finances, according to a report from interim City Manager Paul Talbot.

It does look like the turn-over in the city council resulted in the recent audit being taken more seriously than the one that was issued in 2011. I say this as the December 2018 article mentions that many of the 2011 audit findings weren't resolved. Hopefully, the city council members re-look at the pension obligation bond issue.

OC Register wrote the following about pension obligation bonds indicating this is not just a Montebello concern:

“Pension bonds are staging a comeback in California,” reports the Bond Buyer. The publication notes that most California pension-obligation bonds were floated in the mid-2000s, but nine cities have issued $700 million in such bonds since 2017. It’s a growing trend.