File #: 2019-1034    Version: 1 Name:
Type: Discussion Status: Agenda Ready
File created: 11/14/2019 In control: City Council
On agenda: 11/19/2019 Final action:
Title: PENSION OBLIGATION BONDS (CITY COUNCIL)
Attachments: 1. Exhibit 1 Schedule of Amortization Base, 2. Exhibit 2 Projected UAL Payment Requirements, 3. Exhibit 3 Level Debt Service to 2038 then Declining to Maturity in 2044, 4. Exhibit 4 Partial Funding, 5. Exibit 5 Pension OBligation Funding Memo

Report to Mayor and City Council

Tuesday, November 19, 2019

Discussion

 

 

SUBJECT:                     

Title

PENSION OBLIGATION BONDS  (CITY COUNCIL)

 

Body

I.                     SUMMARY

The City participates in the California Public Employees Retirement System (PERS) for funding current and retired employees’ retirement costs.  As of June 30, 2018, the City’s plan was approximately 64.8% funded.  The current unfunded actuarial liability (UAL) for the plan as of June 30, 2020 is estimated to be $107 million.  The City Council created an Ad Hoc Committee to review funding scenarios to pay down the UAL and future savings by issuing Pension Obligation Bonds (POBs) and make a recommendation to the City Council.

 

II.                     RECOMMENDATION

Recommendation

The Ad Hoc Committee recommends that City Council:

1.                     Direct staff to prepare documents necessary to approve the issuance of Pension Obligation Bonds to pay down the full amount of the UAL as of June 30, 2020, with expected reduction in the PERS payments of an estimated $45 million over 24 years,

2.                     Authorize staff to use the same financing team that which was assembled for Measure M & R Bonds and RFPs already submitted, and

3.                     Direct staff to determine if a reimbursement for prior years PERS payment can be included in the bond issuance.

 

Body

III.                     ALTERNATIVES

TAKE another action deemed appropriate by City Council.

IV.                     BACKGROUND

The City has a PERS plan for its general employees, the “Miscellaneous Plan,” that includes all full-time employees and some part-time staff. As of June 30, 2018, the most recent PERS valuation date, the plan was 64.8% funded.

The City’s UAL for the Miscellaneous Plan is comprised of multiple “amortization bases”, which are positive and negative amounts generated each year based on the performance of the PERS Investment Fund and changes in the actuarial assumptions as shown in Exhibit 1. Each amortization base has a separate payment schedule over a fixed period of years.  The amortization of these UAL Bases over differing years creates a significant payment obligation in the next 10 years before payments start to decline. The POBs are a debt management tool that will enable the financial impact to be minimized over the next 10 years.

The chart on Exhibit 2 shows the existing UAL payments provided by PERS in its June 30, 2018 valuation report. The chart on the Exhibit 2 also shows that the UAL payment for Fiscal Year 2020-2021 is $7.8 million. This is a $1.2 million increase compared to the Fiscal Year 2019-20 payment.

If the City were to issue POBs, based on current estimates, debt service on the new POB would be approximately $6.9 million in 2020-2021, compared to the $7.8 million UAL required payment. Therefore, the net UAL payment saving is approximately $0.9 million for Fiscal Year 2020-2021.  This savings increases each year through 2030-31 and then reduces until it matches the existing UAL payments in later years as shown below.  The savings is estimated at approximately $45 million over 24 years.

FYE June 30

UAL Payment

 Debt Service

 Reduction

2021

$  7,800,842

$6,960,000

$   840,842

2022

8,618,581

6,963,000

1,655,581

2023

9,284,153

6,959,000

2,325,153

2024

9,670,083

6,960,000

2,710,083

2025

10,114,816

6,959,000

3,155,816

2026

9,890,656

6,963,000

2,927,656

2027

9,977,460

6,959,000

3,018,460

2028

10,251,840

6,961,000

3,290,840

2029

10,533,767

6,962,000

3,571,767

2030

10,823,443

6,961,000

3,862,443

2031

11,121,087

6,962,000

4,159,087

2032

10,421,927

6,959,000

3,462,927

2033

10,261,326

6,961,000

3,300,326

2034

9,413,414

6,960,000

2,453,414

2035

9,062,837

6,959,000

2,103,837

2036

8,532,679

6,963,000

1,569,679

2037

7,630,590

6,962,000

668,590

2038

7,184,607

6,959,000

225,607

2039

6,708,324

6,703,000

5,324

2040

6,357,664

6,355,000

2,664

2041

6,158,081

6,156,000

2,081

2042

5,145,902

5,142,000

3,902

2043

5,225,106

5,223,000

2,106

2044

     3,919,622

      3,915,000

          4,622

 

$204,108,807

$158,786,000

$45,322,807

 

There will be no savings from issuing a POB in Fiscal Year 2019-2020, due to the timing of the issuance of the bonds.

The Ad Hoc Committee assessed the possibility of funding the PERS liability at 90% instead of 100%.  The committee is recommending a full funding of the liability to achieve a greater potential for savings and the level payment schedule as shown in the table above.

To issue bonds, the City would need to assemble a financing team comprised of a financial advisor, bond counsel, underwriter(s), underwriter’s counsel, and a trustee.  The fees paid to the financing team comprise the costs of issuance, including the underwriter’s discount.  Costs of issuance approximate 1.5%-2.0% of the amount financed. 

The Ad Hoc Committee recommends that the City uses the same financing team which was assembled for Measure M & R Bonds and RFPs already submitted.  With this team already assembled, the process to start issuing the POBs could commence quickly and the POBs be issued within about 6 months. 

The first step in the bond issuance process is to commence a validation action for the POBs, which requires requesting the court to approve the issuance of the POBs.  This generally takes 90-120 days. The bonds can be issued subsequent to 30 days after the court approves the validation.  This timing means the bonds will be issued toward the end of the current fiscal year.   

 

V.                     FISCAL IMPACT

In its simplest form, issuing POBs to fund the UAL exchanges one outstanding obligation that has a higher implicit interest rate for a new obligation (the POB) that accrues interest at a lower rate.  PERS currently accrues interest on the UAL at 7%.  The interest rate on the POBs is expected to be less than 4%.

The expected bond issue is approximately $108 million to pay both the UAL and expected costs of issuance. This structure has potential savings to the City of an estimated $45 million dollars compared to the PERS payment schedule, assuming that the discount rate and the investment rate are equivalent in future years (factors that can effect this are discussed later in Exhibit 5- Financial Advisor Memo).

As described in Exhibit 5- Financial Advisor Memo, while there are many options for selecting which portions of the existing UAL to fund and how to structure the POBs in terms of maturity and amortization, the decision to reduce the UAL by issuing POBs will have a positive impact on the City’s cashflow in the short term and is expected to provide a cost benefit for funding the UAL to the City over 24 years.    

VI.                     EXHIBITS

1.                     Schedule of amortization base  (pg. 5)

2.                     Projected UAL payment requirements  (pg. 6)

3.                     Level debt service to 2038 then declining to Maturity in 2044 (pg. 7)

4.                     Partial Funding (pg. 8)

5.                     Financial Advisor Memo on PERS Unfunded Actuarial Liability (pgs. 9-24)

 

Prepared by:  Tarik Rahmani, Director of Finance