Item 23 - Pension Debt Refinancing Update and Underwriter Selection

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structures) and analyze risks through our in-depth analytical and modeling capabilities. We would help the City tailor the POB financing plan to best achieve each of the City's financial objectives and policy goals. Towards that end, we offer the following structuring considerations: • Selection of UAL Amortization Bases — "Safety First" — As the City considers the optimal selection of UAL amortization bases, we recommend prioritizing prepayment of the Safety Plan UAL. Based on our POB experience, the City may gain greater General Fund benefit from prepaying the Safety Plan's UAL amortization bases than from the Miscellaneous Plan's UAL amortization bases (where some of the responsibility may reside outside the General Fund). As such, we have prioritized prepayment of the Safety Plan UAL bases to maximize the benefit to the City's general fund in our sample UAL funding scenarios. We discuss further below our approach to optimally selecting amortization bases. • Structuring Payments to Meet Savings Priorities — We would tailor the debt payment structure of the POBs to meet the City's savings objectives, particularly in light of its 10-year General Fund Outlook and existing UAL payment schedule. Accordingly, in our sample scenarios our priorities included: (1) at least a minimum level of annual savings in each of the next 5 years to reduce the projected gap between revenues and expenditures (as presented in the most recent budget's 10-year General Fund Outlook), (2) long-term budgetary savings relative to FY22 scheduled payments, and (3) no obligation increases in any future year relative to the current annual UAL payment schedule as well as no extension of final maturity. • Optimal Funding Level — The City presented two potential book -end UAL funding scenarios to City Council at its February 2nd meeting. We believe that the 50% UAL funding level will help the City mitigate risks associated with CalPERS investment returns and potential over -funding, while the larger funding scenario at 90% potentially would provide greater savings. We will help the City explore alternative funding percentages and payment structures to find the optimal funding level based on the City's desire for savings, its risk appetite and market conditions at the time of sale. • Taking Advantage of FY22 UAL Prepayment Option / Potential Short -Term Notes - The RFP states that the City expects to price its POBs by the end of the current fiscal year. Based on the documents provided, the City may be in a position to close prior to August 15t, and therefore take advantage of the annual UAL prepayment discount provided by CalPERS. This prepayment option would apply to the FY22 UAL payment. The rest of the UAL balance can be partially refunded by selecting amortization bases that yield the desired results and having those prepayments apply to payments beginning in FY23. If the transaction is not able to close by August 15`, BofA would be pleased to work with the City and its municipal advisor to explore structuring a short-term direct purchase note with a bank. Bank of America, N.A. ("BANA") has previously worked with the cities of Los Angeles, Oakland and San Jose to directly purchase similar notes, allowing those cities to take advantage of the annual prepayment discount. While this approach would be subject to credit/risk approval by BANA, and if approved would facilitate additional savings related to the FY22 UAL payment and provide flexibility for the City to price the long-term financing at a later date. Direct purchase notes can generally be executed relatively quickly, as BANA would not require a disclosure document nor direct ratings to close a short-term note. Other Bond Structuring Features. • Index Eligibility— Maturities issued with a par amount of $300 million or more qualify to become components of bond indices. These indices are important performance benchmarks for institutional investors, who seek to maintain investment returns in -line (or above) such benchmarks — helping to create a unique pocket of demand. We estimate an index -eligible maturity will reduce funding costs by approximately 0.10% if subject to a 10-year par call and 0.20-0.25% if subject to a make -whole call. • Dual Call Optionality— BofA recommends that the City utilize a "dual -call" structure with the bonds subject to a make -whole call prior to 10 years and a par call thereafter. While there is a strong preference in the taxable market for non -callable structures (or make -whole call), we see tremendous value in the City retaining call and restructuring flexibility. • Bond Insurance — S&P's latest review of the City's credit in June 2020 assigned an Issuer Credit Rating of "AA" to the City, which is equal to the ratings of Build America Mutual and Assured Guaranty — the leading bond �iins■uree�r1s in the municipal market. While, we do not see value in bond insurance at this time, we would reach 1Wiil_19 1 Page 9 BofA SECURITIES ��