Item 40 - Refinancing City’s Pension Obligations with California Public Employees Retirement System

Home Browse Search

Resolution authorizing the issuance and refinancing of the City’s Pension obligations with CalPERS August 17, 2021 Page 2 1 9 9 3 Bond rates have recently began to increase, and the bond financing team expects rates will continue to increase slowly in the coming months. Therefore, staff recommends closing the bond issuance in September. Small rate increases can increase future bond payments dramatically. The CalPERS Board will make decisions about the discount rate and investment strategy in November. If the CalPERS Board decreases its assumed investment rate of return, which is the discount rate, the City’s pension debt will increase. This is a feasible scenario considering CalPERS recently earned 21.3% on its investments for FY20-21, which decreased the pension debt from an estimated $762.4 million at June 30, 2022 to an estimated $601.1 million at June 30, 2022. A reduction of the discount rate could return the pension debt balance to something near the higher amount. Part of the overall savings strategy includes requesting a “Fresh Start” shorter amortization period for the remaining pension debt with CalPERS. A CalPERS policy requires an additional cash payment on the pension debt in order to request the Fresh Start. Staff recommends the City request the Fresh Start after the CalPERS Board makes its November decisions regarding discount rate and investment strategy. To make the additional cash payment to CalPERS, staff recommends holding up to $40.0 million of the current year spending authorization in the City’s Section 115 Trust account, for use when requesting the Fresh Start after November. In turn, the City would use bond proceeds for the remaining FY21-22 required payment to CalPERS. This strategy allows the financing team to request the most advantageous Fresh Start and maximize savings once we have all the facts from upcoming CalPERS Board decisions. DISCUSSION Background The City contracts with CalPERS to administer its employee pension plans. Each year, the City receives an actuarial valuation report from CalPERS identifying the total accrued liability and the market value of assets. When the liability exceeds assets, the City has a net pension debt. CalPERS amortizes the pension debt and requires annual payments from the City. The pension debt accrues 7% interest annually (recently reduced to 6.8% as discussed below). The recommendation would allow the City to refinance the debt, potentially at a rate less than 3%, and reduce the City’s costs. The following table summarizes the project timeline. April 21, 2020 City Council directed staff to proceed with a feasibility analysis to refinance the pension debt. July 7, 2020 City Council approved the financial advisor contract with Urban Futures, Inc. (UFI), including preparation of the analysis. February 2, 2021 City Council received a comprehensive report, including the feasibility analysis, recommendations and a proposed Unfunded Employee