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Home My WebLink About09/07/2010, C3 - ISSUANCE OF PENSION OBLIGATION BONDS council M"fi`D ° 9 acEnaa Repoat 1m CITY O F SAN LUIS O B I S P O FROM: Mary Bradley, Interim Director of Finance &Information Technology Prepared By: Debbie Malicoat, Finance Manager SUBJECT: ISSUANCE OF PENSION OBLIGATION BONDS RECOMMENDATION Receive and file status report on issuance of pension obligation bonds for the City's Public Safety"side fund". DISCUSSION Background On June 1, 2010 the Council received a report regarding the issuance of pension obligation bonds for the City's Safety Plan "side fund" obligations to the California Public Employees Retirement System (CalPERS) and authorized the issuance of a request for proposals (RFP) for underwriting services. The results of that RFP concluded in selecting Wedbush Securities as the underwriter for these bonds. Wedbush will join the financing team composed of the City's financial advisor (Fieldman Rolapp), bond counsel (Jones Hall) and an independent actuary that the City has used in the past for actuarial analyses (Bartel Associates). As discussed in the June 1, 2010 report, the sale of pension obligation bonds in funding the City's Safety Plan "side fund"has the potential to result in cost savings. With the financing team in place, staff began several due diligence steps in assessing the financial feasibility of issuing these bonds. "Side Fund" Investment Yield and the Potential for Cost Savings Under CalPERS regulations, the "side fund" currently earns an investment yield of 7.75% regardless of the performance of the CalPERS overall portfolio (higher or lower). This return represents a long-term cost savings with virtually no risk if pension obligation bonds can be sold at a lower rate than the current 7.75%yield on the"side fund." J, In the June 1, 2010 staff report, the investment yield was presented as "guaranteed" because that was the information staff had at the time. Since then, staff learned that the investment yield on the side funds is not guaranteed by CalPERS; the yield will change if CalPERS' overall actuarial yield assumptions change. CalPERS is currently reviewing its actuarial assumption for earnings and it is believed the yield for the side fund could be lowered by as much as 0.50%. However, it is unlikely that the CalPERS Board will have a final decision on yield assumptions until early 2011, and this change in investment yield assumption would impact the financial feasibility of the pension obligation bonds. C3 - 1 Status of Pension Obligation Bonds Page 2 The City's current "side fund" unfunded liability is $24 million and has 24 years remaining before it is fully amortized. An initial analysis shows that at current market rates, the net interest rate on pension obligation bonds (which would be sold as taxable bonds)would be about 6.75%. The 100 basis-point difference between the current Ca1PERS yield and interest costs on the bonds would result in General Fund savings of about $220,000 annually, or$5.2 million over the 24-year life of the issue. Recognizing that $220,000 in annual savings 24 years from now does not have the same value as $220,000 in annual savings today, the "present value" (PV) analysis results in $2.5 million in savings; or PV savings of 10.6%. For context, the City's Budget and Fiscal Policies indicate the City should refinance bonds whenever the PV savings are 5% or more: this is potentially twice that level. Uncertainty in the Market Given staff's opinion that Ca1PERS is likely to reduce the interest rate assumptions, the financing team has calculated the savings to the City with several different interest rate scenarios. This exercise revealed that a slight change in the Ca1PERS rate would yield significantly less savings over the 24-year term. For example, if the Ca1PERS rate drops just 25 basis-points, to 7.50%, the savings are reduced by half, to $2.6 million, which has a PV of 4.9%. If the rate drops by 50 basis-points, the savings is about $1.3 million over the 24-year term and has a PV of 2.7%. Under these scenarios, staff does not recommend issuing these bonds. However, there are potential scenarios that might make it advantageous to the City to issue bonds for the side fund. There are two factors that make debt financings challenging: time and uncertainty (risk). The more time involved or the more uncertainty involved, the higher the interest cost of borrowing. During the 24-year life of these bonds there is a high degree of uncertainty about the Ca1PERS interest assumptions, which have a direct.impact on the financial feasibility of the bonds. For example, if the City were to issue shorter-term bonds to pay the side fund obligations, higher savings would be realized. Staff is exploring several alternatives to a 24-year bond term, including a phased approach that would take advantage of the lower borrowing rates for shorter-term bonds. The financing team continues to work diligently to come up with solutions and alternatives that are in the best interest of the City in both the short-term and the long-term. Next Steps The financing team will continue to monitor the financial market and CaIPERS' investment assumptions closely. In addition, staff will continue working with CalPERS to explore options that might make shorter-term financing possible. These actions could result in a situation where issuing bonds becomes financially feasible; in which case, staff would return to Council for authorization to issue bonds. In short, the staff recommends deferring action at thistime. CONCURRENCES The Human Resources Department concurs with this recommendation. C3 - ;, I � Status of Pension Obligation Bonds Page 3 FISCAL IMPACT There is no fiscal impact to deferring the issuance of bonds. Potential savings would not be realized unless the City were able to issue bonds for a term shorter than the 24-year amortization period of the"side fund,"or borrowing costs reduced substantially. ALTERNATIVES Direct staff to issue pension obligation bonds. Given the current borrowing costs associated with a 24-year bond term and the likelihood of an adjustment to the Ca1PERS investment yield, it is not anticipated that savings will be generated that are in compliance with the City's policies for refunding of debt, therefore, this option is not recommended. T:\Council Agenda Reports\Finance&IT CAR\Finance\2010\POB status,9-7-10.doc C3 - 3 I� From: Brett Cross[SMTP:BRETTCROSS@YAHOO.COMI RECEIVED Sent: Tuesday, September 07, 2010 4:20:55 PM SEP 0 a 2010 To: Council, SloCity Subject: Consent Items C-3 and Auto forwarded by a Rule SLO CITY CLERK I have a birthday dinner I need to attend and it is probably is more fun than going to the council meeting anyway,but I'd like to comment on two items on the consent agenda. One, is item C-3 Issuance of Pension Obligation Bonds. Isn't there some old adage that goes something like, "if it sounds too good to be true it probably is". I find it hard to believe that intelligent individuals could believe that the City could borrow funds for somewhere around 6 3/4%and then get a guaranteed return of 7 3/4%therefore earning I%on the "spread". The "markets" are much more efficient than that and if it was that easy everyone would be doing it. I'm pretty concerned about how and why it took some more due diligence to find out that maybe,just maybe, Ca1PERS couldn't guarantee that return. Who gave staff that information?. Two is item C-4, Santa Rosa Park Restroom Replacement. How much was RRM paid for architectural and construction documents for the project?. Because I'm not sure. Please tell me it wasn't $50,000. Because if it was the City should ask the Federal government for stimulus money because that is a lot of money to design a restroom. And budgeting$60,000 for construction management. So far the budgeted costs for non construction related expenditures looks to 1/3 the total cost of the actual bricks and mortar project. There is some discussion later about not using all of the construction management budget but regardless those cost both architecture and construction management are obscene. And I know the staff provided an analysis of site built vs pre- fab but that report lacked a lot-actual figures from prefab manufacturers. Mostly a discussion about transporting the pieces and something about Federal standards- some hoowee like that. You as council members should have been much more suspect and critical of that report than you were. Sincerely, Brett Cross ><f2l-/l.�D Cbl L�'l�hL C-t'COUNCIL J;-2DD DIR L'ICAD d+vl E"FIN DIR RED FILE LIAR <tenq ErVIRE CHIEF MEETING AGENDA Er�M�17ORNEY CT-PW DIR �/, IO I.LERK/ORIG 2-POLICE CHF DATRZ*a_ ITEM #-�� ❑ DEPT HEADS 1?REC DIR 'T-- Ir P1, B'CJTILDIR Ii 2'1;R DIR f;zi6tinlL .1 �4 car rn45;12- d z_e.-e,L