LAKE ELSINORE: Trustees hear plan to pay for retiree benefits

District could issue bonds to pay for health care

By RANI GUPTA - Staff Writer | Saturday, September 6, 2008 5:11 PM PDT ∞

LAKE ELSINORE ---- School trustees are weighing risk versus reward as they consider selling bonds to pay for health care benefits for retired employees.

If the bond money is invested poorly, the district risks losing money. But if the profits from investing exceed the bond interest rates, the district could save millions, according to a financial consultant.

Benjamin Dolinka, president of the Irvine-based Dolinka Group consulting firm, told Lake Elsinore Unified School District trustees at a meeting earlier this month that they could use the returns to pay about $25 million the district is expected to owe retirees for health, vision and dental care over the next several decades.

Dolinka, who recently set up a similar bond issue in the San Marcos Unified School District, said the proceeds from selling the bonds would be invested in a trust that could be used only to pay retiree benefits.

The bonds would cost about $500,000 to issue, including bond insurance and management fees. The bonds would not require voter approval because the health benefits are already considered a liability under state and federal law, according to Dolinka.

The district now pays the annual costs of retiree health benefits out of the general fund, the district's main account, which pays for salaries and other expenses. The amount varies from year to year, but the district is expected to spend $750,000 on retiree health benefits for the budget year that started July 1.

If the district were to replace the "pay-as-you-go" system with bonds, the bond proceeds would pay for the retirees' health care. The district would use money from its general fund to pay off bondholders.

Every year, the district would pay thousands less out of the general fund under a bond system than if it continued on the current method of paying benefits, according to scenarios outlined by Dolinka.

Over time, he said, the district could save $6.2 million, assuming a 7.75 percent reinvestment rate and a 4.89 percent interest rate over the life of 30-year bonds.

Trustee Jeanie Corral said, "That works on the premise you're going to have high earnings."

Dolinka said the estimates are conservative, noting that the current bond interest rate is only about 2.5 percent. While the district might not save $6.2 million, he said, it only needs the rate of return to be higher than the cost of issuing bonds.

"So long as your return on investment is more than what you're paying on your bonds by any amount, you're still saving money," Dolinka said.

The risk to the district, he said, comes from picking investments that would cause the district to lose money.

Dolinka added that there are ways to reduce the risk if the district is willing to sacrifice higher returns. For instance, a bank could guarantee the district a minimum return in exchange for collecting profits over a certain amount, he said.

Trustees expressed interest in the idea, but said they wanted to first conduct a new study to determine what the district will owe in benefits before proceeding. Dolinka's figures were based on estimates compiled in October. Since then, the district offered employees an early retirement plan, which is expected to change the numbers.

Teachers union President Karl Stuck said last week that the proposal was "risky and unnecessary" because, he said, the district owes relatively little for future benefits. He also questioned the estimated $500,000 cost of issuing the bonds.

"Giving away a half a million dollars, that seems a bit steep, especially for something that seems that risky to me," Stuck said.

Contact staff writer Rani Gupta at (951) 676-4315, Ext. 2625, or rgupta@californian.com.