Upland City Council And Staff Playing Hide The Ball From Residents On Pension Obligation Bonds

Stealthily, Upland city officials this week took two crucial steps toward committing Upland residents to assuming $130 million in bonded indebtedness intended to cover the city’s existing and growing pension costs.
There are yet multiple questions about the city’s intended issuance of pension obligation bonds that Upland officials have sought to avoid answering, at least in part because they do not want to draw attention to the effort to qualify the city to issue the bonds, the process for which can over the next 30 days be challenged by the city’s taxpayers.
In California, additional taxes are not to be levied unless they are first approved by a majority of voters who are to pay them. Cities often use bonds as a type of funding for city operations and to defray the cost of civic improvements and infrastructure. A governmental entity will issue, or create, bonds and thereupon sell them at an amount equal to their face value at a specific interest rate to buyers. That governmental entity will then use the proceeds from the bond sales as it deems fit or previously specified, usually, but not necessarily, to build roads or structures, undertake capital improvements or construct new, expand existing or refurbish or upgrade city assets such as, for example, water resources in the form of wells, reservoirs, cisterns, aqueducts, mains or pipes. The city thereafter pays to the bondbuyers each year an installment on the debt equal to the percentage of the bonds specified when issued. Thus, a bond buyer who purchases a bond with a face value of $100,000 at 6 percent would see a return of $6,000 per year for the number of years that the bond is dedicated, generally 20, 25, 30 or 35 years. At the end of that dedicated time, the bond is said to have reached maturity. Upon the bond maturing, the city pays the holder the face value of the bond. This retires the city’s bonded indebtedness to that bondholder in full.
In this case the city is looking to issue bonds not to pay for tangible capital improvements or infrastructure, but to retire existing debt created by runaway pension costs. The issuance of the bonds will not address ongoing pension obligations that will continue to accrue into the future.
To issue most municipal bonds, a majority vote of a city’s voters is required. There are exceptions made with certain types of bonds, such as so-called certificates of participation, certificates of obligation and pension obligation bonds.
A city can avoid having to get voter approval for participation or obligation certificates or for pension obligation bonds by engaging in what is called a validation process. This entails the city lodging a validation complaint in a local court, inviting anyone of standing or with an interest in the matter, which generally means the city’s residents, to contest the proposed issuance of the bonds by stating reasons why they should not be issued. Pleadings and hearings then ensue before a judge who ultimately determines whether the bonds should or should not be issued. The public is given notice of the validation action by an obscure ad in a local newspaper. If no one comes forth to contest the matter in court within 30 days, the city is then at liberty to make the bond issuance.
This week, secretively so as not to alert Upland residents, the Upland City Council at its Monday night meeting voted to hire J.P. Morgan Securities LLC and Stifel, Nicolaus & Company, Incorporated to serve as the managing and co-managing underwriters, respectively, for the city’s proposed issuance of pension obligation bonds. The council did so without any discussion whatsoever, as the vote to retain the underwriters had been placed on that evening’s consent calendar.
The consent calendar by tradition is reserved for routine and non-controversial matters. Multiple items are strung together on the consent calendar, and instead of being considered and voted upon separately, they are taken up collectively without any comment or discussion and are voted upon in one fell swoop with a single vote.
By quietly voting on the matter relating to the hiring of the bond underwriting team, the council sidestepped informing the public about what it was doing.
Three days later, on Thursday August 12, the city again quietly filed a summons naming no single individual but a collective, that being “all persons.”
“You are being sued,” the summons to participate in the validation process reads in part. “You have 30 calendar days after this summons and legal papers are served on you to file a written response.” That service will consist of a newspaper notice that is anticipated to be published in the next few days.
If no challenge to the validation is made within the 30-day timeframe, no further opportunity to stop the bond sale will be available to Upland’s residents, who will bear the cost of servicing the bond debt at the percentage specified on the bonds and ultimately by paying the full amount of the issuance upon the bonds reaching maturity.
In the same way they have hidden the move toward the issuance of the bonds and the validation proceeding from Upland’s residents, Upland officials have been parsimonious with regard to information about the bonds themselves.
A document issued by the city in March 2021 indicated the city’s unfunded pension liability – that is, its currently outstanding debt to cover the payments it must make to the California Public Employees Retirement System to cover the cost of the pensions paid to currently retired former Upland City employees and the anticipated cost of paying current employees – had reached $130,186,277. That amount had climbed from $120,920,721 as of June 30, 2020, which was nearly $9 million more than the $112,039,675 it had been at the midway point of fiscal year 2019-20 on December 31, 2019, which was up more than $12 million from $99,976,917 as of June 30, 2019. In the last two years, Upland’s pension debt escalation has been historically steep. Over the previous seven years, the city’s pension debt had grown by roughly $11 million. Upland’s unfunded pension liability was $88,994,066 as of June 30, 2012.
When city officials took up the question in earnest last year about what it was going to do regarding the escalating pension costs that are eating up more and more of the city’s operating budget each succeeding year, they turned to Urban Futures, which offers municipal management and financial consulting services, for advice on possible solutions. Urban Futures, which formerly employed then-Assistant City Manager Steven Parker who is now serving in the role of acting city manager,  pushed the city council unrelentingly toward the option of issuing pension obligation bonds as a ploy to refinance the pension debt at a lower rate than the 7 percent expected return on investments that the California Public Employees Retirement System functions under. Undisclosed was that after the city council accepted Urban Futures’ advice and upon resolving to issue pension obligation bonds, it committed to pay Urban Futures $62,500 when the issuance of the bonds takes place. In this way the city council is relying upon an advisor with a financial stake in the advice it is providing to the city and the city council.
The Government Finance Officers Association has issued advisories against pension obligation bonds, calling them risky gambles with public money, saying strategies involving them are akin to using a newly-issued credit card to pay off existing credit card debt.
Prior to the 2020 election, then-Third District city council candidate Carlos Garcia and then-treasurer candidate Greg Bradley issued cautions to the city council about the advisability of utilizing pension obligation bonds to come to terms with Upland’s ongoing pension debt.
Garcia said the city should not “blindly” rely on pension obligation bonds as a solution to overcome the pension funding crisis, and he called upon city officials to think through the consequences of issuing bonds before doing so.
Bradley said, “I would insist that we have a plan to stop adding new debt before we consider a bond to push off old debt. You can’t get out of debt while you’re adding new debt.”
Both Garcia and Bradley were elected. Now in office, they have, under heavy lobbying by Urban Futures, essentially gone along with Parker in his agenda to issue the bonds.
Notably, much of the pension obligation bonds strategy in Upland remains shrouded in mystery. Different figures as to the size of the issuance have been thrown around. A city document gives Upland’s unfunded pension liability as of March of this year as $130,186,277. Urban Futures managing director Julio Morales pegged Upland’s outstanding pension liability at $120 million, and at one point he indicated the plan was to have the city issue bonds in that amount. Bradley, however, told the Sentinel that the initial issuance would only be $10 million, to be followed by future issuances.
Another issue not fully put to rest is whether or not the city will utilize the proceeds from the sale, borrowed at a low interest rate, to make investments that will hopefully provide returns at a much higher interest rate, and then use the earnings generated as a consequence of the difference to pay down the city’s pension debt. At one point, city officials said that was the plan. More recently, however, word is that the city will issue the bonds and then turn the proceeds over to the California Public Employees Retirement System to invest them. City officials are in no hurry to clear up that discrepancy.
Available city documents state that Best Best & Krieger, the law firm with which Upland City Attorney Steve Deitsch is a partner, will serve as bond counsel with regard to the bond issuance, and receive $45,000 for doing so. Another city document states that the law firm of Stradling Yocca Carlson & Rauth will receive $36,500 for serving as disclosure counsel with regard to the issuance of the bonds. Unclear, however, is whether the figures quoted pertain to an issuance of $10 million in bonds as referenced by Bradley, the $120 million referenced by Morales or the $130,186,277 in unfunded pension liability the city had accrued as of five months ago.
Bradley told the Sentinel that with historically low interest rate of 2.6 percent at present, if the city is to go the pension obligation bond route it would be best to take advantage of that rate, which he said is likely to creep up in the upcoming months, and issue $130 million worth of bonds at once. Bradley acknowledged, however, that he did not know if that was going to be the case. He said that even though he was the city’s treasurer and the node through which all financial information pertaining to the city should flow, Parker and Urban Futures had not made clear to him precisely what the strategy is or the timing on the issuances.
Neither Garcia nor Councilwoman Janice Elliott was able to tell the Sentinel whether the quoted bond counsel and disclosure counsel fees for, respectively, Best Best & Krieger and Stradling Yocca Carlson & Rauth were for a $10 million bond issuance or a $130 million issuance. Neither Garcia nor Elliott responded to whether they believed Urban Futures had involved itself in a conflict of interest by serving in the capacity of guiding the city on the advisability of issuing pension obligation bonds as a strategy to come to terms with the city’s pension debt and then taking on an assignment of providing ancillary professional services relating to the issuance of pension obligations for which it would receive fees. Both Garcia and Elliott balked at explaining why the city council was consistently putting all of its action relating to the issuance of pension obligation bonds on the council’s consent calendar, as it did this week, on May 10 and on April 26. Nor would they say if they truly believed the issuance of $130 million in pension obligation bonds without the approval of Upland’s voters qualified as being noncontroversial.
Elliott said she had “tremendous confidence” in Parker, and he was doing “an outstanding job as our city manager.”
The Sentinel spoke with Upland City Clerk Keri Johnson about who at City Hall makes decisions about what items are reserved for the consent calendar.
“The city manager has the final say,” she said.
Asked specifically who had put the issues relating to the bond issuance on the consent calendars for the April 26 meeting, the May 10 meeting and this week’s meeting, Johnson said, “If you are asking where agenda items are placed, you really should be speaking with the city manager’s office.”
-Mark Gutglueck

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