8D Consent 2011 0919 - Laserfiche WebLink

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Authorizing Pension Obligation Bonds DISCUSSION September 19, 2011 Effective June 30, 2004, Ca1PERS created risk pools by pooling assets and liabilities across groups of employers to produce large risk sharing pools intended to dramatically reduce or eliminate large fluctuations in employers' contribution rates caused by unexpected demographic events. Ca1PERS combined the retirement plans for all public agencies with less than 100 active members to reduce the volatility of employer contribution rates. CalPERS also created for each member a side fund to amortize each agency's June 30, 2003 unfunded liability over a fixed term at a fixed interest rate. A negative side fund, like San Leandro's Safety Plan, causes the required employer contribution rate to be increased by the amortization of the side fund. The safety side fund is distinct from the City's other Ca1PERS plans and liabilities. Side funds are retired over a fixed term with a fixed amortization schedule based on Ca1PERS' actuarial earnings assumption rate (7.75 %). The City's plan has the side fund scheduled to be fully amortized by June 30, 2024. The City's actuary has estimated the outstanding side fund balance at $24.4 million as of June 30, 2011. For pension obligation bonds to provide the City cost savings, the interest rate, including the cost of issuance, must be significantly less than the interest rate Ca1PERS charges to amortize the side fund. These bonds are not tax exempt under Federal regulations. Therefore, the taxable bonds must be placed at a rate significantly less than the 7.75% charged by Ca1PERS to realize savings. The 13 -year amortization period for the City's side fund frames the savings opportunity being considered. U.S. Treasury yields continue to be low because of the ongoing national and global economic turmoil and uncertainty. In just the past two months, rates have dropped significantly lower. The City's underwriter estimates that the City's pension obligation bonds could be sold at an all -in interest rate, including the cost of issuance, of around 4.61 %. This results in a potential reduction of over 3.0% in the interest rate paid by the City, a potential General Fund savings of approximately $480,000 annually through 2024. Validation Proceedings The issuance of the pension obligation bonds requires a validation proceeding in the Alameda County Superior Court. To commence the validation, the City Council provides the authorization by approval of the resolution for issuance of the bonds and filing of the validation and then Bond Counsel files the necessary court action. The process is a public notice of the City's intent to issue bonds to refinance existing pension - related debt. At best, the process would proceed with no public challenges, and the validation would be ratified by the Court within about 120 days of the filing. Since the bonds are payable from all legally available funds of the City, validation is necessary to affirm Bond Counsel's position that the bonds are exempt from the Constitutional Debt Limit because the bonds are issued to refund a pre- existing obligation imposed by law for vested pension benefits. Once the validation has been completed, the bond issue will be returned to the City Council for final authorization. 2