Photo: Selectman Jim Williams.
To the Belmontonian:
Some supporters have related that the “Belmont Street” is critical of the ideas I have put forth around the town’s management of its unfunded benefits obligations because it’s unlikely that I’ll be living in Belmont in 2026. While I have no idea as to whether we’ll be living in Belmont (or even living for that matter, but let that go), we all have some idea of the magnitude of the commitments Belmont has already made and is making to its employees and retirees. Also, we have some idea of how the town is currently managing these duties and my professional opinion is that the Belmont’s current policies and strategies are no longer valid based on what we know.
More specifically:
- Town Counsel George Hall confirmed that the Belmont Retirement Board is responsible for managing the town’s pension obligation and manages that responsibility in part by determining how pension obligations are funded thru annual negotiations with the Board of Selectmen. The BOS then puts forward an annual warrant addressing the agreed funding schedule for review by the Warrant Committee and consideration by Town Meeting, which appropriates funding if agreed.
- The BOS is responsible for town’s pension policy and strategy. The same is true for OPEB policy and strategy albeit Town Treasurer Floyd Carman did propose and gain approval from past BOS administrations to set up and begin minimal funding the town’s OPEB Trust. So, the town treasurer is not responsible for benefits policies and strategies; the board is.
- First Southwest, Inc. has not advised the current or past selectmen on town pension or OPEB policy or strategy and has not been formally engaged by the town to do so.
Given the above as background and because the financial and operating challenges Belmont faces over the next decade are unprecedented, the following are proposed for our consideration:
- The status quo pension and OPEB strategies need to be addressed in the fiscal 2017 budget cycle and require our immediate attention.
- The town can issue a Request for Proposal to engage a financial advisor to assist us in evaluating new strategies to meet our known benefits obligations. My recommendation is that the Town meet with the following firms: Stifle, Inc.; Kopelman and Paige PC; Seagal Group, Inc.; and FirstSouthwest, Inc.
- As a policy, Belmont should restructure its unfunded pension obligation amortization schedule by 1.) extending its maturity to 2035 using a straight line amortization schedule and 2.) structure a partial refunding (amount to be determined) by issuing a 20-year pension obligation bond to reduce near term cash outflow and extend the commitment.
- As a policy, the town should undertake the funding of the Net Present Value of its current OPEB obligation estimate for the 30th year of the forecast using a discount rate of 7.75 percent annually going forward. This should be accomplished beginning in fiscal 2016 using funding from free cash flow.
- Belmont should restructure its pension obligations and fund its resulting current obligations annually.
Mark Twain said: “Never make projections, especially about the future.” It would be so nice if we could use this idea as the basis for managing our benefits obligations, but we can’t because the cost of these long term commitments can be readily estimated as committed and they need to be funded annually with present value funding. If not, Belmont will end up with enormous obligations payable as we go forward, and this debt will beggar our operating, capital, and financial capabilities.
It’s simply not fair to future Belmont generations which bring me back to the opening remarks of this opinion. It may be that the town might be better off if we all assume that we are not going to be around in 2026 because it draws attention to how unpredictable the future is and the need to take care of today’s business today.
Jim Williams
Belmont Selectman, Town Meeting Member
Can someone explain in more depth how town credit rating is affected if we act upon Selectmen Williams advice vs. doing nothing different then what was done so far?
I am also interested in Belmont being able to rebuild and prosper, but at the same time I am not sure I understand all the implications of an old approach vs. new proposed approach for our long term fiscal health and credit rating. Is this something akin to consumer having credit score checked when opening new account? Do we somehow look worse in the long run?
Please explain it to people who do not work in banking. Thank you!
I’m not in banking, but I’ll give this a try. Our credit rating is related to how leveraged we are, what reserves we have and what our current and predicted revenue sources are compared to our expenses. If our pension obligations were out of control, that could affect our credit rating negatively, but as of the budget discussions in the June 2015 town meetings, our pension obligations were actually $21 million lower than had been predicted. What Mr. Williams proposes to do is borrow more money by floating bonds to address our pension obligations. But the more money one borrows, the more “leveraged” one is, much like if you had more than one mortgage. If Moody’s (our current credit rating agency for the town) deems that we are overleveraged vis-à-vis our revenue sources and expenses, it could downgrade our credit rating from its current AAA rating. (We are one of only a handful of towns in MA with this highest rating). If Moody’s downgrades the town’s credit rating, it could make it more expensive to borrow for capital development projects that we care about (renovated high school, police station, DPW yard, municipal light building, whatever your favorite cause is). Of course these projects will cost Belmont taxpayers, too, but at least we’ll have something tangible to show for it, and we can get more for our money if we can borrow at low rates. Most places (Alaska, etc) don’t resort to floating pension bonds until they are desperate. Of course we must pay our obligations, but we are doing so more aggressively than required at the moment. As a parent of kids who will eventually go to BHS, I’d sooner see us focus on maintaining our credit rating so we can fund that with as low interest rates as possible. It’s worth remembering that without top-rate schools, everything in Belmont founders. A lot of our revenue (mostly through property taxes) comes from the faith new young families have in those schools and the money they spend in town.
Right now, the single most important thing for Belmont is following through on the recent state approval of rebuilding/remodeling the high school. For that, we will need a good credit rating, which unfortunately we will not get by floating pension bonds. We are currently paying our pension obligations *more aggressively* (that is, on a quicker schedule) than the state requires. Perhaps we should ease up on this so as not to have to take from Peter to pay Paul. Either way, I think funding the high school at a good loan rate has to be our very first priority.