New Pension Obligation Bond achieved 2.46% borrowing cost
By Shannon McKone on Tuesday, August 10th, 2021 in Eastern/Southeast Oregon News Eastern/Southeast Oregon Top Stories
BAKER CITY – (Release from the Baker School District) On Wednesday, July 21, Baker School District participated in a pooled sale of pension obligation bonds with 21 other school districts. The district sold $19.6 million of the total $660 million sale. The 19 year bonds were popular with investors, reflecting the strong credit reputation of Oregon school districts. At the end of the initial order period, there were over $1.8 billion in orders for the $660 million sale, allowing the underwriter, Piper Sandler, to reduce the effective interest rates over the initial levels.
As a result, Baker School District locked in a True Interest Cost (TIC) of 2.46%, significantly lower than the maximum 4% TIC built into the budget and authorized by the school board. This 2.46% TIC compares favorably to the pension obligation bond that Baker School District sold in 2002, with a TIC of 5.6%, which has saved the district over $5 million through 2019 (the latest results available). Actual savings on the new pension bonds will not be known until the bonds have matured in 2040, but projected savings using the assumed earnings rate of 6.9% adopted by the PERS Board indicate potential net present value savings of $8.4 million.
The current pension obligation bond is scheduled to close on August 19, when funds will be sent to PERS and deposited in a side account. Baker School District will see its first rate relief with the September payroll.
The concept of a pension obligation bond is to seek to reduce pension costs by borrowing at low interest rates and depositing the funds into a side account invested with the rest of the PERS fund. If returns exceed the borrowing rate – 2.46% TIC, in this case – the borrower saves. The average return on side accounts from 2007 to 2019 has been 7.61%. The Oregon Investment Council (OIC) is responsible for PERS investments and has a history of strong performance.
“Baker School District is fortunate to have a forward-thinking board that acted to take advantage of favorable market conditions that are likely to save the district a significant amount of money,” says Superintendent Witty.
