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Santa Cruz County Bank lends hand with Scotts Valley Fire District pension debt

March 9, 2012

By Eli Segall - Silicon Valley / San Jose Business Journal

Mike McMurry is not a number-cruncher. He became a firefighter at age 18, battled blazes for 13 years and is now a veteran fire chief in Santa Cruz County.

But after looking at pension costs a few years back, he knew this much: The retirement costs of his firefighters were rising fast, and he needed to do something.

He called a friend at Santa Cruz County Bank, asked if his Scotts Valley Fire District could get a loan, and inked a rarely used pension-financing deal — one that could help government agencies save some money and give banks a new line of business.

David Heald, president and CEO of the bank, and Chuck Maffia, a regional manager, helped craft the deal last year for a $3.2 million loan for the fire district, to help pay its pension costs. The 15-year loan came with a 5.6 percent interest rate and $25,000 in fees, according to McMurry. The deal saved the agency hundreds of thousands of dollars compared to selling bonds, which is a more common way to fund pension costs.

“Our whole point here was to save the fire district and taxpayers money,” McMurry said.

Still, public agencies have been criticized for borrowing money to pay off their pension costs, by swapping one debt for another. But for banks, it’s another revenue source.

“It helps address the pension problems (public agencies) created many, many years ago,” Heald said.

The Santa Cruz-based bank, which has $320 million of assets and five branches, reached a similar deal last summer with another agency — the North County Fire Protection District of Monterey County, which got a $3.4 million loan. Bank officials also are in talks with other public agencies for more deals, Heald said.

Only a handful of banks are said to issue these types of loans, and at least one law firm has worked on these deals.

Orrick, Herrington & Sutcliffe LLP, a firm with a strong base of government clients, has worked on “at least half a dozen” such loans, said Roger Davis, chair of the firm’s public finance department.

Davis, who has led the practice group since 1981 and is based in San Francisco, said most deals range in size from $5 million to $50 million. He said community banks have issued loans to small nearby agencies, but most of the lenders involved are large banks like JPMorgan Chase Bank, U.S. Bank and Bank of America.

For Santa Cruz County Bank there is room to grow in this area of finance. Still, it’s unclear just how many banks issue loans to help agencies pay their pension costs, according to a number of bankers and public officials in Silicon Valley.

Tim Coffey, a banking analyst with FIG Partners LLC in San Francisco, said it’s more common for banks to lend government agencies money for equipment than to fund pension costs.

“This isn’t typical,” he said of the deals by Santa Cruz County Bank.

Unfunded benefits

The Santa Cruz County Bank loans stem from the fire districts’ inclusion in the California Public Employees’ Retirement System. In 2003, CalPERS required its smaller participating agencies to join various risk-sharing pools, lumping them together with the hope of getting more consistent employer contribution rates.

CalPERS also required the agencies to fully fund their pension costs; to do so, they could either make a lump-sum payment or pay it off with a so-called “side fund” loan from CalPERS. The loan carried a 7.75 percent interest rate.

Around that time, many public agencies also started improving their benefits packages, in part to lure people away from the booming private sector. As a result, their side fund debt swelled even more.

In the small town of Los Gatos, the side fund for public safety pensions was $5.8 million as of June 30, 2010, according to the most recent data from CalPERS. Some underwriting firms have approached town officials about selling bonds to pay it off, but the town declined, said Stephen Conway, finance director of Los Gatos.

As far as he knows, town officials have not been contacted to consider a bank loan, which he said could be a cheaper option.

“That would make (the loans) more attractive for a lot of cities,” he said.

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