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Resolution Authorizing Pension Obligation Bonds December 2, 2011 DISCUSSION 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 eliminate or at least reduce 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. Ca1PERS 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 Public Safety's, 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 the Ca1PERS charges to amortize the side fund. These bonds are not tax exempt under Federal regulations. Therefore, the taxable bonds, not to exceed the amount of $19,000,000, 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 yield continue to fluctuate weekly because of the ongoing national and global economic turmoil and uncertainty. In just the past number of months, rates have moved from 4.6% to 5.1% dropped significantly lower. The City's actuary and underwriter have estimated that the City's pension obligation bonds, together with the Water Pollution Control Plant Fund loan, will save the General Fund between $250,000 and 500,000 annually. The resolution approves the financing documents including the Indenture of Trust between the City and U.S. Bank National Association, Bond Purchase Agreement, and the Official Statement and Continuing Disclosure Certificate. These documents are presented in draft form as reviews and updating continue by the Financing Team, which include the City Attorney, Bond Counsel, Financial Advisor, Underwriter, Actuary, and Finance staff. These documents are available for Finance Committee reference, but are not included in the Committee agenda packet.