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STIFEL
<br />Surgical Approach to Paying Off Safety Bases
<br />Base
<br />Year
<br />Reason
<br />Term
<br />Balance (2021)
<br />% Payoff
<br />$80.0
<br />,MiLf-
<br />3
<br />2009
<br />Assum Change
<br />10
<br />$14,943,657
<br />Full (100%)
<br />$Bo.o
<br />ty0
<br />6
<br />2011
<br />Assum Change
<br />12
<br />16,001,459
<br />Full (100%)
<br />$50.0
<br />11
<br />2014
<br />Assum Change
<br />15
<br />53,834,473
<br />Full (100%)
<br />$40.0
<br />$30.0
<br />14
<br />2016
<br />Assum Change
<br />17
<br />19,877,718
<br />Full (100%)
<br />$200
<br />16
<br />2017
<br />Assum Change
<br />18
<br />22,905,189
<br />Full (100%)
<br />$10.0
<br />18
<br />2018
<br />Assum Change
<br />19
<br />5,325,258
<br />Full (100%)
<br />$0.0
<br />rvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrv�s�rvry
<br />19
<br />2018
<br />Assum Change
<br />19
<br />38,800,765
<br />Full (100%)
<br />Short -Term Bases (Less than 20
<br />Years)
<br />$171,688,519
<br />45% of Total
<br />Recommended Approach AT ISSUANCE:$385M Payoff IRS%)
<br />$80.0
<br />—2021POBs
<br />4
<br />2009
<br />Loss
<br />20
<br />$31,977,596
<br />Full (100%)
<br />:$" 0
<br />60.0
<br />Miscellaneous Balance
<br />Safety Balance
<br />—Original UAL
<br />9
<br />2012
<br />Loss
<br />23
<br />74,450,415
<br />FUII (100%)
<br />$50.0
<br />10
<br />2013
<br />Loss
<br />24
<br />70,331,616
<br />Pro -Rats (50%)
<br />$40.0
<br />15
<br />2016
<br />Loss
<br />27
<br />27,722,249
<br />Pro -Rats (55%)
<br />$30.0
<br />$20.0
<br />21
<br />2019
<br />Loss
<br />20
<br />5,185,187
<br />Full (100%)
<br />$10.0
<br />22
<br />2019
<br />Loss
<br />20
<br />4,463,871
<br />Full (100%)
<br />$°°
<br />Long
<br />-Term
<br />Bases (20 Years or More)
<br />$214,130,934
<br />55% of Total
<br />rvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvrvry
<br />TOTAL (85% Funded Ratio)
<br />$385,819,453
<br />2. Mitigate Market Timing Risks
<br />Spread Rather than Concentrate Risk. While historic low interest rates have enticed nearly all recent POB issuers to
<br />refinance 100% of their UAL, the reinvestment side of the equation should carry equal importance in determining if, when,
<br />and how much to issue. As previously mentioned, we would not recommend that the City target the higher funded ratio.
<br />Underperformance on investments, especially in the first few years after issuance, can exponentially exacerbate an
<br />issuer's already burdensome debt and UAL profile. Furthermore, given that POBs are the most powerful tool in the
<br />toolbox, refinancing as much as possible today would significantly limit the City's options to manage future pension
<br />liabilities. If investment returns exceed expectations after the first few years post -issuance, the City could evaluate the
<br />need for a second issuance. Ultimately, while the prevailing sentiment is that a recession is not on the immediate horizon,
<br />the most prudent strategy will be for the City to spread, rather than concentrate market risk through multiple issuances.
<br />Lastly, as explained below, any future issue should be governed by the pension funding policy.
<br />3. Design Optimal Structure (Both Present and Forward -Thinking)
<br />Structure 'Modified' Level Repayments (A). We recommend a 'modified' level
<br />repayment structure, which is characterized by level payments over the first 19
<br />years that then decline in proportion to the prepaid UAL bases. An alternative
<br />approach is to structure level annual payments over the life of the POBs, which
<br />result in slightly lower payments overtime; however, this structure will produce
<br />negative savings in later years and generate less net present value savings
<br />overall (as illustrated in the accompanying graphic).
<br />'Modest' Upfront Savings with Minimal Impact on NPV Savings (B). The City
<br />has the option to structure upfront savings in the first few years by deferring a
<br />portion of principal - savings that, for example, can be used to bolster General
<br />Fund or pension reserves. While this structuring nuance would result in slightly
<br />higher POB payments (and lower UAL savings), the POBs could be structured so
<br />that NPV savings are nominally impacted. We incorporated this structuring
<br />nuance on the recent Orange POBs, generating $3 million in upfront savings
<br />while only impacting NPV savings by—$10,000.
<br />'Modified Level' Structure
<br />$45.0 (Slightly Higher Annual Payments; Higher NPV Savings)
<br />$40.0
<br />$35.0
<br />$30.0
<br />$t, 0 .Illlllllllllllll________.
<br />$10.0 Slightly Higher Annual Payments;
<br />550.0 .0 ----- Savings Every Year, Higher NPV Savings
<br />F------------ i---------
<br />$
<br />.........................
<br />2021 POBs —Prepaid Safety Bases
<br />Level Structure
<br />$45.0 (Lower Annual Payments; However, Low NPV Savings)
<br />$40.0
<br />$35.0
<br />$30.0
<br />$25.0
<br />_.....�NE■on
<br />z0.o $
<br />$15.0 _—
<br />-- ------------------------
<br />Sio.o Lower Annual Payments;
<br />$5.0 j__ Dissavings from 2042-44 j
<br />----------------
<br />$0.0-•
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<br />ry ry ry ^� 2021 POBsry —Prepaid Safety Bases ry ry ry ry ry ry
<br />Shorten the Final Maturity (C). To expedite the payoff of POB and UAL payments, several issuers have shortened the final
<br />POB maturity to match the last significant prepaid UAL payment. As you can see from the chart below, the prepaid Safety
<br />base payments peak around FY 2030, slowly decline through FY 2040, and then rapidly drop-off until the final FY 2047 UAL
<br />City of Santa Ana I Proposal to Provide Underwriting Services Page 10
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