The $100 million worth of pension bonds that are backed by the city’s tobacco settlement revenues have been priced and made available to investors today, the Mayor’s Office announced.
Tentative orders ranging from $15 million worth of bonds to $45 million have been taken, the Mayor’s Office reported.
The receipts of the bond sales are expected to be wired into the San Diego City Employees’ Retirement System by next Wednesday. The city will take at least 24 years to pay off this $100 million loan.
That sum of money will go toward paying off the city’s $1.4 billion pension gap. The tobacco bond will also comply with a tentative legal settlement a former employee struck with the city last week. The settlement will end William McGuigan’s claim that the city underfunded its pension system by $173 million over the last decade.
Ina addition to the tobacco money, the city will have to pay the remaining $73 million into the fund over the next five years, beyond what the city’s annual pension bills call for. The City Council signed off on the settlement Tuesday and, pending some paperwork, the settlement is expected to be finalized on Aug. 21.
This borrowing plan occurred despite the city’s poor financial standing. The city is barred from the public bond markets while its credit rating is suspended, a result of not having the past three years’ worth of audits certified. This borrowing plan was possible because bond buyers will rely on the credit rating of the tobacco companies that would otherwise be paying the city the settlement money.
Investors were provided a 7.125 percent yield, which will result in some savings for the city because they will be charged that amount to pay back its $1.4 billion pension debt, which accrues interest at 8 percent. Chief Financial Officer Jay Goldstone said that the borrowing plan was only worthwhile if the city could obtain an interest rate that was less than 7.9 percent.
This $100 million tobacco bond is part of Mayor Jerry Sanders’ $674 million borrowing plan. The remainder of that plan faces obstacles. City Attorney Mike Aguirre said he will not sign off on pension bonds until a court determines the legality of retirement benefit enhancements that total $700 million. In addition, the rest of the loans are expected to be offered on the public bond markets, which the city hopes to reenter by the end of 2006.