Pontiac, Michigan -- Oakland County taxpayers will save an estimated $100 million if the Board of Commissioners approves County Executive L. Brooks Patterson's request to refinance the county's outstanding balance on Certificates of Participation (COPs) at a lower interest rate. The COPs were issued in 2007 to fully fund the county's retiree health care obligation. They will be refinanced through limited taxable general obligation (GO) bonds.
"Oakland County consistently retains its AAA bond rating because of our prudent fiscal management," Patterson said. "My Budget Task Force says now is the time to take advantage of a new state law and low interest rates to save taxpayers tens of millions of dollars."
The savings will occur in part because interest rates have dropped since 2007 from 6.2 percent to 2.9 percent now. In addition, because of the growth in investment value of the county's two retiree health care trust funds, the county will be able to pay down principal on the outstanding COPs balance by at least $75 million. This will leave the combined trust funds 110 percent funded (assets in excess of accrued liabilities).
Municipal Financial Consultants Incorporated, the county's financial adviser, indicates that with the issuance of GO bonds for the outstanding COPs balance of $438.2 million, the annual debt service for Fiscal Years 2014-2027 would generate a savings of $8.1 million a year for all county operations, $6.5 million of which would be attributed to General Fund operations. The county presently pays $48.5 million a year in debt service for the COPs.
The GO bonds will be issued in two series in August 2013 and December 2013. As part of his request to the commissioners, Patterson has asked the board to enable the administration to react quickly - before August 2013 - if interest rates were to move in an adverse direction or investment values in the retiree health care trusts were to falter.
"Given the new legislation, favorable bond interest rates, and current market value of the investments in the two retiree health care trusts, responsible fiscal management dictates that the county should refinance the outstanding balance of the COPs," Deputy County Executive Robert Daddow said.
Working in conjunction with Oakland County, its bond counsel John Axe, and other interested county and local governments, the State of Michigan recently passed Public Act 329 of 2012 which was effective Oct. 9. The law gives certain local units of government the authority to issue GO bonds in lieu of COPs.
On July 31, 2007, Oakland County issued $556,985,000 in COPs to fully fund retiree health care benefits and pay the cost of closing the defined benefit retirees' health care plan while shifting newly-hired employees to a health savings account. Under the program, the county achieved huge savings. The retiree health care debt service became roughly $48.5 million annually for 20 years versus the pre-COPs annual contribution of $60.2 million over 30 years. This difference has already saved taxpayers more than $100 million during the funding period. This is in addition to the $100 million taxpayers will save if the commissioners approve Patterson’s request. Today, all county employee groups’ new hires are under a defined contribution plan for retiree health care going forward.
The Board of Commissioners Finance Committee will meet at 9 a.m. Thursday, Nov. 15, in Committee Room A of the BOC Auditorium, 1200 N. Telegraph, in Pontiac to take up the administration's request.
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