Item 23 - Pension Debt Refinancing Update and Underwriter Selection

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RFP No. 21-025 EXHIBIT B was drafted 10 years ago under different market conditions; and, was drafted as a warning and in response to bad practices. It is important to note that are several issues that the GFOA points out to which all agencies should adhere to when issuing POBs (#1- #3). However, because of pension reforms and policy changes by CaIPERS in recent years, as well as adaptation in the POB market, we believe that these concerns have been addressed and warrant reconsideration in California. Each GFOA concern is listed below, along with our response in italics. 1. POBs are complex instruments, which incorporate the use of GICs, swaps, or derivatives. POBs should only be issued as plain vanilla fixed-rate bonds. 2. POBs are structured with "make -whole" calls, which make it more costly or difficult to refund in the future (than traditional tax-exempt debt). POBs are now structured with standard call features like traditional tax-exempt bonds. 3. POBs have been structured to incorporate annual normal costs, or in a manner that defers principal payments or extends principal payments over a longer period than the actuarial amortization period. POBs should not include normal costs (except for annual pre -pay amount), nor be structured with an extended repayment schedule -final maturity. 4. POBs increase a municipality's bonding capacity or turn a soft liability into a hard liability. An agency's Ca1PERS UAL liability is considered "debt" by the courts in California and GASB 68. Moreover, UAL payments are fixed dollar payments, like a traditional loan, which financed at a discount rate of 7.0%. POBs simply "refinance" your Ca1PERS liability at a lower rate. 5. Invested POB proceeds might fail to earn more than the interest rate over the term of the bonds, leading to increased liability for the government. The financial impact of POBs is dependent upon two variables: 1) Borrowing Rate on the Bonds and 2) Ca1PERS Investment Performance. POBs provide savings by refinancing UAL payments at a taxable fixed rate, as opposed to blended rate for a portfolio of assets (50% equities/22% fixed income 112% real estate 18% private equity/ 6% inflation assets /3% liquidity). Invested POBs may lose value if the market declines soon after issuance. It should be noted, if Ca1PERS underperforms the City's UAL will go up regardless if bonds are issued. However, the issuance of bonds may reduce the annual financial impact of losses from investment returns or policy changes made by the CaIPERS Board.