Sunday, July 22, 2012

Council's Capital/Operating Conundrum

Having under invested in capital items and infrastructure over the years, San Angelo's City Council is in the throes of budget woes.  Council needs money to replace expensive fire trucks and restore area roads.  Elected leaders assented to some level of borrowing to play capital catch up and reducing operating expenses to drive more funds to capital.

A wild card in the meeting was an offer from State Representative Drew Darby and the Texas Department of Transportation.  The state proposed the city fund and build an interchange near Howard College, currently slated for 2018. Mayor New said TXDOT would expect partnerships in the future for new roads or improvements.  He sees toll roads in metro areas (public-private partnerships) and local funding required for our area (public-public partnerships)

City employees generate the largest operating expense though pay and benefits.  Mayor New raised reducing headcount in Council's recent budget session.  Nine months ago Mayor New discussed taking nearly $500,000 in projected health insurance savings and buying a needed fire truck.  His idea got no traction in a public meeting.

Pressure to reduce staff and save on benefits played out indirectly at the end of the July 17 council meeting.  Mayor New raised the issue of meeting GASB obligation, which impacts pension funding and employee health insurance.  New focused solely on pensions and what he perceives as a low return problem.

Mayor New mentioned other pensions.  GM recently offered certain pensioners a buyout, then contracted out the pension (for those not taking the buyout) to Prudential, via a group annuity.    New talked about challenging times for pensions to garner return.  This could presage investing in riskier assets, like private equity.  Might San Angelo employee pensions end up with a stake in MedHab?

Update 7-23-12:  Chasing return brings risk.  Consider what one financial consultant said in Barron's.  "Pension funds are front and center on the endangered list, having, as Stephanie notes, "loaded the boat with junk (debt) in a desperate attempt to meet 8%-plus return assumptions in a 1.5% risk-free world."

Update 7-24-12:  The Standard Times reported on Council's latest budget workshop.

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