If Mayor Bart Peterson gets his wish, a $450 million bond issue finally will settle Indianapolis’ long-standing dilemma over underfunded police and firefighter pensions once and for all.
It will also generate up to $9 million in professional fees. And locally based City Securities Corp. is laying the groundwork to earn a lion’s share-even though investment banking is dominated by giant companies in Manhattan.
“I would assume that most of Wall Street has made a call,” said City Securities Vice Chairman Jim Merten, who leads the firm’s powerful Public Finance Division. “If I was a New York banker who covered Indiana, I would.”
Pensions for cops and firefighters hired before 1977 have been a drag on local government finances for decades, because Indianapolis never set aside money to pay them. As a result, officials must choose every year between paying down the pension debt or putting more cops and firefighters on the street.
In 2007, Indianapolis will spend $23.5 million on pension payments-about onetenth of the city’s whole public safety budget. The annual obligation increases every year until it peaks in 2031 at $64.9 million. Peterson wants to retire the pension problem in one stroke by raising $450 million through taxable bonds and investing the proceeds in the market for growth.
“We have to have a mechanism to take care of this problem,” said Indianapolis City Controller Bob Clifford. “It’s been looming for 30 years and everyone knew it was coming.”
For now, the bond plan is just a concept on the drawing board. To make it reality, Peterson must persuade the General Assembly to increase Indianapolis’ debt ceiling.
He also hasn’t identified a revenue source to repay the bonds. Peterson is counting on the Legislature to pass the “Hometown Matters” proposal, which would give local governments authority to increase sales, restaurant or hotel taxes if they simultaneously lower property taxes. The measure is the Indiana Association of Cities and Towns’ top legislative priority this session.
In the meantime, City Securities is creating bond “structure scenarios” for the proposed debt issue, said Indianapolis Local Public Improvement Bond Bank Executive Director Barbara Lawrence. So is New York-based Lehman Brothers Inc. In 2005, City Securities led a syndicate of underwriters when Indianapolis issued $100 million in bonds as an emergency pension stopgap.
If Peterson’s $450 million bond plan is approved by the Legislature-then accepted again by the Indianapolis-Marion County City-County Council and the Bond Bank’s board-Lawrence expects the city would pay 5.66-percent interest annually on the debt over 30 years.
Indianapolis would most likely ask the Indiana Public Employees Retirement Fund, which manages police and firefighter pensions across the state, to invest the $450 million. But there is a chance the city would put the money management business out for bid to a private firm, Lawrence said. Indianapolis would expect its money to earn 7.25 percent annually. Any gains could be used to repay the bonds early.
Indianapolis must act now to secure a viable payment plan for the pensions, Lawrence said. Otherwise, their rising cost will overwhelm the city in the years to come.
“It’s a problem that the city faces,” she said. “Somebody needs to step up to the plate and help solve it.”
Credit rating agencies are still digesting the proposal. But they’re likely to look favorably on it. Joe O’Keefe, a senior director of New York-based Fitch Ratings Ltd., said the pension problem is the primary threat to Indianapolis’ AAA credit rating.
“This is an obligation they have to pay one way or another. To the extent they can address it, it’s a positive step,” he said. “Like many of these problems, they just get bigger over time.”