Item 23 - Pension Debt Refinancing Update and Underwriter Selection

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Additional Considerations. ■ Fiscal Year 2020 UAL Amortization Bases - In July 2020, CalPERS reported an investment return of 4.7%. This actuarial investment loss will be reflected as an additional UAL amortization base in the upcoming actuarial report. If the POB is issued after the release of the report, the City of Santa Ana may consider whether this base serves as one of the repayment bases for its financing plan. ■ Future Reduction in Actuarial Discount Rate — CalPERS Funding Risk Mitigation Policy allows for reductions in discount rates any year the actual investment return exceeds the discount rate by at least 2%. Should the current investment performance for fiscal year 2021 continue, it is possible we will see CalPERS activate the discount rate reduction which will increase the plans' UAL. • "Fresh Start" Option on Unrefunded UAL —The City may want to consider exploring the option of discussing with CalPERS a potential Fresh Start reamortization on the combined balance of the unrefunded UALs. This could be useful in sculpting debt service and savings objectives in the short-term for the 90% UAL prepayment scenario. To illustrate the potential benefits and considerations of this option, we provide an alternate 90% UAL funding scenario (Scenario 2 — Fresh Start) which provides an optimized structure under our assumptions and embeds a Fresh Start for the unrefunded Miscellaneous Plan UAL bases. Preliminary Credit Assessment. We suggest that the City obtain two credit ratings for a transaction larger than $350 million. There are several merits in pursuing two ratings, including: ■ Given the potentially large size of the financing (up to $600+ million depending on portion of UAL refinanced), two ratings will help broaden the City's investor base and attract certain investors that prefer (or are required by their bylaws) to purchase bonds with at least two ratings; ■ Our desk estimates that the current pricing advantage of having a pair of 'AA' category ratings as opposed to a sole 'AA' rating is approximately 10 basis points; and ■ Having two rating agency opinions will help investors validate the strong credit quality of the bonds, which may be particularly important in an uncertain market environment. Of the three rating agencies, we recommend that the City pursue ratings from S&P and Fitch. We do note that this could result in "split" ratings, as S&P consistently has rated California pension obligations at the same level as that issuer's GO or issuer credit rating ("ICR"), whereas Moody's and Fitch apply a notching differential between GO and POB ratings. Based on consultation with our underwriting desk, we believe that the City's bonds will be priced more favorably with two ratings, even if they are split, than with a single, higher rating, given the expected larger size of the proposed POBs. ■ S&P: S&P's rating is most widely used among California POB issuers and is well -received by market participants. The City's ICR of 'AA' was recently affirmed in June 2020. We would expect S&P to affirm that rating once again in connection with this transaction. The rating discussion likely will center on (1) how the City has adapted to the budget impacts of the pandemic, with a focus on fund balances and reserves projected for fiscal year-end 2021, and (2) how POBs serve the City's strategy for managing its pension liabilities. We estimate a POB rating of 'AA' from S&P as this would reflect no notching differential from the 'AA' ICR rating. We note that the City was in a strong financial position at the outset of the pandemic, and despite the budgeted use of reserves during fiscal 2021, expected to retain a healthy available Doperating fund balance at the close of the fiscal year. ■ Fitch: Although there is not an internal scorecard tool for Fitch, they traditionally evaluate GO credits in -line with S&P. However, we expect a one notch rating differential between their GO rating and POB rating. As such, we expect a Fitch issuer default rating ("IDR") of 'AA', which would translate to a POB rating of 'AA-'. Although the rating agencies have adopted a generally neutral view of funding pensions with bond proceeds, we believe that a well -structured financing can be credit -positive, helping the City to moderate the impact of pension contributions on its budget without creating or exacerbating out -year financial challenges. Rating agencies have come to view debt and pensions (especially for CaIPERS participants) as near -equivalent liabilities and as non -discretionary, fixed -cost payments. In fact, although bonded debt ratios will increase through the issuance of POBs, these will be offset by reductions in both overall fixed costs and CalPERS pension liabilities. 4)tPage 12 BofA SECURITIES �