Item 23 - Pension Debt Refinancing Update and Underwriter Selection

Home Browse Search

RFP No. 21-025 EXHIBIT B Consider Pension Debt Refinancing and Policy February 2, 2021 Page 6 4% vs. CalPERS charging 7% on the debt, CaIPERS investments would have to consistently outperform over the next 20+ years for the City to pay more. The proposed policy document (Exhibit 3) includes an example to illustrate this concept. UFI prepared a Monte Carlo analysis to quantify the risk associated with pension debt refinancing (see page 14 of Exhibit 1, which explains the methodology and the results). Based on current market rates and recent comparable transactions, the results indicate the City has an 87% probability of saving money with a 90% financing, and an 84% probability of saving money with a 50% financing. New Unfunded Pension Liability After Refinancing When actual plan results do not meet the assumptions (e.g. investments earn 5% instead of the assumed 7%), the pension debt increases. If the City refinances 100% of the pension debt balance at June 30, 2021, negative plan results for each successive year will generate new layers of unfunded liability amortized over 20 years. Therefore, the City will pay the debt service for the pension obligation bonds, plus a contribution to CalPERS for each new layer of liability. Savings Clarification For FY20-21, the City's budget for its contribution to the unfunded liability is $48.0 million ($49.6 million required contribution discounted by 3.3% for paying by July 31). By FY26- 27, CalPERS projects the annual contribution will grow to $71.4 million. If the City were to refinance 90% of the pension debt, the annual bond payment might be $40.1 million. It is tempting to say the pension debt refinancing would save $26 million in FY26-27 ($71.4 million projected by CalPERS, less bond debt service of $40.1 million and FY26- 27 contribution of $5.3 million for the remaining 10% pension liability). However, the City has not yet funded a $71.4 million contribution. The City currently funds only $48.0 million. Therefore, it is more accurate to say our annual budget savings is potentially $3.8 million (current budget of $48.0 million, less bond debt service of $40.1 million, and FY21-22 contribution of $4.1 million for the remaining 10% liability). The General Fund would benefit from approximately 86% of the savings or $3.3 million, as the General Fund pays for 100% of the Safety unfunded liability and 72% of the Miscellaneous unfunded liability. Proposed Policy Before refinancing the pension debt, the City needs a policy to guide refinancing parameters and outline methods for funding future pension debt. Credit rating agencies will look for such a policy to ensure the City Council has made an informed decision and has a plan. The proposed policy document (Exhibit 3) includes the following policy statements, fully explained in the document: 1. It shall be the City's policy to use a targeting strategy, and apply any Additional Discretionary Payments to loss bases at the beginning of an amortization cycle to maximize overall savings.