I just spoke with pension board trustee Bill Sheffler and he believes he and his colleagues will settle tomorrow on a 20-year amortization period for the $1 billion pension deficit, a decision that would force the city to payback its debt at quicker clip.
And it would come with an asterisk: at no time can the annual payment be less than the yearly interest that is accrued by the deficit. That would avoid the phenomenon known as negative amortization, in which the annual payment allows the debt to grow because it isn’t enough to cover the simple interest accrued. Sheffler estimates that could add between $13 million and $17 million to the pension payment in the first year. The add-on likely won’t be necessary after about three years of the schedule, he said.
The city is currently in the third year of a 30-year amortization period, leaving it with 27 years remaining. Any acceleration of the pension payment would but a greater burden on the city’s annual budget, forcing it to allocate a greater chunk of its revenues toward the pension system.
Voters in 2004 approved a proposition to switch the amortization period to 15 years by 2009, but the California’s attorney general deemed the initiative unenforceable by law.
Mayor Jerry Sanders has planned for a 20-year amortization period in his five-year financial forecast. Under that forecast, the city would have a budget deficit of $87 million next year and more than $100 million in each of the four years after that. Click here for more in-depth coverage of the issue.
The pension board meets tomorrow at 8:30 a.m. Stay tuned for more.