Item 23 - Pension Debt Refinancing Update and Underwriter Selection

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STIFEL S&P. Therefore, based on our understanding of the City's available assets and the objective of achieving long-term financial sustainability, we do not recommend a lease revenue bond structure. C. The City has no outstanding General Fund bonded indebtedness. The City's last General Fund rating was provided by S&P in February 2016 as AA/Stable. Please discuss your credit strategy, including assumed credit rating for the proposed POBs, and any effect you believe the proposed POBs will have on the City's credit. Secure S&P Rating. When the uptick in issuance of POBs began about 18 months ago, underwriters were encouraging two ratings for any issue over $100 million. However, because of the different treatment of POBs among the three rating agencies, two ratings often meant split ratings with S&P higher than Moody's and Fitch. More recently, evidence suggests that the negative impact of split ratings is greater than the positive impact of having two ratings. Therefore, no matter the size of the 2021 POBs, we recommend a single rating from S&P. Estimated S&P Rating and Credit Strategy. S&P most recently affirmed the City's issuer credit rating at 'AA' in January 2020. Unfortunately, the outbreak of COVID-19 and subsequent Factor weight Score High Low Rating impact on the global economy just a few months later caused Institutional Framework Economy 10% 2.00 30% 3.00 1.00 1.65 1.64 1.94 AAA AA+ S&P to reevaluate all sectors of municipal finance. While we Management 20% 1.00 1.95 2.34 AA do not expect any downward rating action (especially since the Liquidity Budgetary Flexibility 10% 1.00 10% 1.00 2.35 2.85 2.84 3.24 AA - A+ City has maintained its strong credit profile), we do believe it Budgetary Performance 10% 3.00 3.25 3.64 A will be difficult to obtain an upgrade in the current economic Debt& Contingent Liabilities 10% 4.00 3.65 3.94 A - Estimated Score 2.20 3.95 4.24 BBB+ climate. As the City may already know, S&P takes a fairly Estimated POB Rating AA 4.25 4.54 BBB transparent, formulaic approach that heavily weighs the 4.55 4.74 BBB - strength of the local and regional economy, management practices and policies, budgetary performance, liquidity, and the debt and liability profile of the issuer. Using data from the 2020 CAFR and 2021 Budget, we estimate that the City would maintain its strong 'AA' rating. The credit story we plan to take to S&P will address the categories listed above; however, a primary focus will be on the City's underlying economic fundamentals in light of the COVID-induced economic contraction, the financial management policies, and Unfunded Employee Pension Liability Cost Reduction Policy it puts in place to ensure the long-term financial sustainability of the General Fund. Provided below are some initial credit thoughts. The only glaring weakness in S&P's 2016 rating report and something outside the City's control. However, since 2016, the City's median household income has grown nearly 40%, surpassing national levels. Market values have skyrocketed, with citywide values increasing by 26% over the past 5 years. Single family home growth has been equally impressive, growing by 44% since 2016. Management: Management continues to be one of the strongest areas of the City's overall credit profile. Comprehensive and fully integrated policies and practices that are regularly reviewed and updated. Most notably, the City recently strengthened its budget and reserve policy in 2017. As we intend to do for S&P during the review process, we have summarized the most important policies in the accompanying graphic. Budgetary Flexibility: Unlike many neighboring cities, the City has significantly strengthened its budgetary flexibility over the past year, with operating reserves growing by roughly $8 million to a total of $53 million, representing 16.6% of General Fund operating reserves (adopted policy goal). Budgetary Liquidity & Debt & Economy Management Performance Flexibility C Liabilities 30% 20% 10% 20% 10% I I! i Igll! rllil i Practice Description Strategic Plan Updated 2020; vision for the City's goals and priorities. c General Plan Updated 2020; long-range planning policies that reflect the aspirations p and values of residents, land owners, businesses, and organizations. m c 10-Year Forecast FYs 2021-30; takes into consideration economic indicators, trend analysis, judgmental forecasting, and opinions of the City's consultants a 7-Year CIP FYs 2021-27; street, park and traffic improvements, and other capital programs. Broken out by category for each year. Pension Policy Refinancing parameters and methods for funding future pension debt. Operating Budget FY 2021; quarterly reports to City Council. Debt Management Detailed guidance on debt management; in alignment with Strategic Plan and Capital Improvement Plan. 'o t: Securities Disclosure Ensures compliance with federal securities laws, promotes best m' 0 practices, and enhances internal controls and control environment. n Investment Safety, liquidity, yield, diversification. Investment report presented LL to Council on quarterly basis. Operating reserve at 16.67%to 20% of GF revenues. Economic Reserves Uncertainty Reserve at 1%to 10% of GF revenues. City of Santa Ana I Proposal to Provide Underwriting Services Page 12