Item 23 - Pension Debt Refinancing Update and Underwriter Selection

Home Browse Search

STIFEL payment. We recommend shortening the POB amortization by 3 years to match the last significant UAL payment in FY 2043. While shortening would increase annual payments through 2039 by—$200,000, the City would save roughly $4 million in overall interest costs over the life of the POBs. We do not recommend extending the maturity beyond 2047 as S&P could view this as a corrective measure to address an imbalance (potential credit challenge). Evaluate Use of Insurance (D). In most circumstances, bond insurance (rated 'AA') does not 'pencil' on credits rated 'AA' or higher - and as detailed in the following question, we expect the 2021 POBs will achieve a 'AA' S&P rating. However, in recent months, some investors have been willing to pay a much higher price (resulting in a lower yield) for insured maturities. In the case of the recent Chula Vista and Orange POB pricings (both 'AA' rated), Stifel identified demand for insured maturities, which resulted in a net benefit of roughly 5 basis points. While we understand that the City's POBs won't likely come to market for some time, we recommend evaluating the use of insurance closer to the time of sale. A. Modified Level Payments: POB Payments Structured to Provide $45.0 $40.0 UAL Savings in Every Year. $35.0 B. Modest Upfront Savings: $30.0 $4 million in Upfront Savings to Bolster $25.0 General Fund/Pension Reserves; Minimal $20.0 Impact on NPV Savings $15.0 C. Shorten Final Maturity: $10.0 Final POB Maturity in 2044 (Last Prepaid $5.0 Safety Payment in 2047) $0.0 D. Evaluate Use of Insurance: Expected Net Benefit of —5 Basis Points on Terms 4. Ongoing Pension Management 3. Design Optimal Structure (Subject to Prevailing Market Conditions at Time of Sale) B: Upfront Savings: $4M to Bolster Reserves; Minimal Impact to NPV Savings A: 'Modified' Level Payments: UAL 'Savings' in Every Year C: Shorten Maturity: Match Last Significant Safety Payment (S&P Views Favorably) D: Insurance: May Provide Value on Term Bonds N N N N N N N M M M M M M M M M M 0 V V M It V V V V 0000000000000000000000000 N N N N N N N N N N N N N N N N N N N N N N N N N 2021 POBs —Prepaid Safety Bases Additional Discretionary Payments and Future POB Issues. A critical component to any successful comprehensive pension plan will be the proactive management of future liabilities. The City recently adopted the Unfunded Employee Pension Liability Cost Reduction Policy, which provides, among other things, guidelines for additional discretionary payments (e.g. surplus Measure X revenues, future TAB savings, future Water Bond savings for Miscellaneous Plan base prepayment, etc.) and the issuance of additional POBs. Strict adherence to the policy is important to ensure long-term fiscal health. Additional Thoughts and Considerations Annual CalPERS Prepayment and First POB Payment. We expect the City to continue its practice of prepaying its annual UAL liability by July 31 in order to realize a discount. Given the timeline of validation proceedings, the City could be in a position to price its POBs by late September or early October. To avoid 'double paying' in FY 2022, the City should consider delaying its first POB payment until FY 2023. We have assumed a long first payment date of December 1, 2022 as part of our 'Optimal Structure' detailed above. Select Convenient, Financially Viable POB Payment Dates. POB issuers typically select payment dates that mimic other General Fund debt, align with the fiscal year, or match large inflows of general fund tax revenue (generally November/December or May/June given large inflows of property tax revenues). We have assumed June (principal, interest) and December (interest) payment dates in our proposed structure. 'Wrap' Around Other General Fund Supported Debt. The General Fund currently supports multiple debt issuances, including the Police Station bonds (mature in FY 2024) and several private placements (varying maturities from FY 2024 to FY 2028). To minimize the impact to the General Fund over the next few years, the City could 'wrap' the 2021 POB payments around the other outstanding obligations. Of course, doing so would require deferring a portion of principal, which would result in a slightly more expensive structure. Lease Revenue Bonds vs. POBs. Over the past year, several municipalities have structured their pension financings as lease revenue bonds (LRBs) in an attempt to avoid lengthy validation proceedings and potential related legal challenges. However, LRBs require collateral (equal to the par amount of the financing) and are rated one notch lower than POBs by City of Santa Ana I Proposal to Provide Underwriting Services Page 11