Laserfiche WebLink
PENSION OBLIGATION BONDS <br /> <br />City Hall Room 203 <br />455 Main Street <br />Worcester, Massachusetts 01608 <br />(508) 799-1075 <br /> <br />Departmental Overview: <br /> <br />pension Obligation Bonds are a method <br />of funding a system's unfunded <br />liability. This method of funding has <br />been used over the last ten years in other <br />parts of the country, but it is relatively new <br />in Massachusetts. The City of Worcester is <br />the first municipality in Massachusetts to <br />issue pension obligation bonds. Authorized <br />legislation (Chapter 191 of the state laws) <br />for the bonds was passed on July 30, 1998. <br />Chapter 191 requires that debt service for <br />bonds be level and that the City of <br />Worcester also obtains approval for its <br />funding and debt payment plans from the <br />state's Secretary of Finance and <br />Administration. This method of funding is <br />generally good news for pension funds in <br />that they fully fund the system immediately <br />and not at some point in the future. In <br />addition they do not introduce any additional <br />liabilities to the system. <br /> <br />Introduction <br />S ince 1990, Massachusetts Public <br />Funds have been allowed to set their <br />appropriations from their member <br />units according to the requirements of <br />actuarial funding schedules. These <br />schedules are set up according to the dictates <br />of Chapter 32 usually 22D or 22 (6)a. The <br />calculations are usually made in two main <br /> <br />components. First it takes into consideration <br />the Normal Cost, which evaluates the <br />present value of future benefits earned by the <br />members of the system. Secondly, it <br />evaluates the Amortization Scheduled <br />payments due to the underfunded status of <br />most Massachusetts Public Funds. These <br />schedules recognize that regular payments <br />over and above the Normal cost must be <br />made in order for the Retirement system to <br />fund their unfunded liability. The payments <br />are made using either level dollar, or <br />accelerating payment methods and are <br />designed to treat the unfunded amount as a <br />debt to be paid over a stated number of <br />years. <br /> <br />Unfunded Pension Obligation <br />The City of Worcester unfunded <br />pension liability as of December 1, <br />1998 was $217,399,984.00. The <br />unfunded actuarial liability was 56% at Jan <br />1, 1998. After selling the Pension <br />Obligation Bonds at a true interest cost of <br />6.31%, the proceeds of the bonds have <br />funded the liability, generating present value <br />savings of $53.4 million compared with the <br />present pension-funding schedule. To <br />produce this savings for the city investment <br />would have to exceed this projected interest <br />rate over the 29-year period. <br /> <br />CITY OF WORCESTER FISCAL 2005 ANNUAL BUDGET <br /> <br /> Page 1 <br /> <br /> <br />