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Item # 21
City of Santa Ana
20 Civic Center Plaza, Santa Ana, CA 92701
Staff Report
February 2, 2021
TOPIC: Consider Pension Debt Refinancing and Policy
AGENDA TITLE:
Consider refinancing the city's employee pension debt and adoption of the proposed
Unfunded Employee Pension Liability Cost Reduction Policy
RECOMMENDED ACTION
1. Determine whether to proceed with refinancing any portion of the pension debt. If City
Council wishes to proceed with pension debt refinancing:
a. Direct staff to propose a contract for bond counsel services to prepare a
resolution for City Council consideration authorizing the sale of pension
obligation bonds, which is necessary to begin the court validation process to
refinance the pension debt; and
b. Adopt the proposed Unfunded Employee Pension Liability Cost Reduction
Policy.
EXECUTIVE SUMMARY
The City's contributions to the employee pension plan continue to grow faster than the
City's revenue sources. On April 21, 2020, City Council directed staff to return with a
feasibility analysis for refinancing the employee pension liability to save money. Exhibit
1 to this report includes the feasibility analysis prepared by our Financial Advisor Urban
Futures Inc. (UFI) in cooperation with staff. Although we considered many different
methods for reducing pension debt costs, the most realistic strategy follows.
1. Refinance up to 90% of the pension debt by issuing taxable pension obligation
bonds, which could produce annual savings of up to approximately $3.8 million.
2. Use accumulated cash in the Water Enterprise fund to pay its $13.5 million pension
debt for water employees, and obtain less expensive tax-exempt debt financing for
planned water infrastructure projects.
There is a risk to refinancing the pension debt. If the employee pension plan consistently
outperforms CaIPERS assumptions over the next 20+ years, the City may pay more for
its pension debt, as discussed later in this report.
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 2
If the City Council decides to move forward with pension debt refinancing, the proposed
Unfunded Employee Pension Liability Cost Reduction Policy (Exhibit 3) is necessary to
establish parameters for refinancing and a plan for funding future pension debt, and
obtain the best credit rating possible.
DISCUSSION
The City provides a defined benefit pension plan to its full-time employees and part-time
employees who have worked more than 1,000 hours in a single year. A defined benefit
is a promise to pay a future benefit based on a formula incorporating salary and the
number of service years. The City contracts with the California Public Employee
Retirement System (CaIPERS) to administer the plan. CaIPERS collects contributions
from the City and its employees, invests the money, and makes pension payments to
retirees. CaIPERS employs actuaries to determine the contributions necessary to meet
future obligations.
When the market value of plan assets are less than the liability for benefits accrued to
date, there is an unfunded pension liability. The unfunded liability is a legal debt of the
City, and the City carries the risk of plan performance. The ratio of plan assets to the
liability is the "Funded Ratio". Ideally, the plan should have a funded ratio of 100% (assets
= liabilities). Annual contributions include a "Normal Cost" component for the current
accrual of benefits (expressed as a percentage of pensionable wages), and a payment to
reduce the unfunded liability (expressed as a dollar amount). If the City remits the annual
unfunded liability payment to CaIPERS by July 31, the City receives an early payment
discount of approximately 3.3%.
CaIPERS Annual Pension Payments
Normal Costs +
Benefits earned this year Unfunded benefits earned in prior
by employees years by employees+ retirees
o off Fixed
Payngfl $ Amount
$14 Million $48 Million
The City has two (2) different employee pension plans: one (1) for sworn public safety
officers, and one (1) for all other employees. Within each plan, there are two (2) levels of
benefits: one (1) for employees who became CaIPERS members after the California
Public Employee Pension Reform Act (PEPRA) effective January 1, 2013, and one (1)
for employees hired prior to PEPRA (referred to as "Classic" members).
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 3
Each year, CalPERS provides the City with an updated actuarial valuation report for its
plans, including the updated calculation of the unfunded liability and the required
contributions for the following year. The City typically receives the annual reports 12-15
months after the fiscal year end. For example, the City received the report for the year
ended June 30, 2019 in July 2020, which includes the required contributions for FY21-
22. A snapshot of relevant data follows, and the total unfunded liability at June 30, 2019,
for the Miscellaneous and Safety plans combined was $706,905,205.
Miscellaneous
Safety
June 30, 2019:
A: Market Value of
Assets
$645,902,345
$787,086,636
B: Accrued Liability
$948,084,339
$1,191,809,847
Unfunded Liability, A-B
$302,181,994
$404,723,211
Funded Ratio, A/B
68.1 %
66.0%
FY20-21
Normal Cost paid by
City
12.072% of pensionable
wages
23.581 % of pensionable
wages
Normal Cost paid by
Employees
8.0% Classic
6.5% PEPRA
12.0% Classic
13.0% PEPRA
Unfunded Liability
Payment
$23,390,827
$26,223,726
Discount for
Prepayment
$778,061
$872,293
Unfunded Liability
Funding Source
72% General Fund
18% Restricted Funds
100% General Fund
FY21-22
Normal Cost paid by
City
11.9% of pensionable wages
22.93% of pensionable
wages
Normal Cost paid by
Employees
8.0% Classic
7.0% PEPRA
12.0% Classic
13.0% PEPRA
Unfunded Liability
Payment
$26,113,041
$30,102,971
Discount for
Prepayment
$868,611
$1,001,331
CalPERS announced its investment return for the year ended June 30, 2020 was 4.7%,
which is less than the CalPERS 7% assumption. Therefore, we expect the unfunded
liability to grow, and the required contribution to increase for FY22-23.
The following chart summarizes CalPERS assumed rate of return, and actual investment
returns over the last 20 years. The average investment return over 20 years has been
5.8%, which is less than the current assumption of 7%. When actual CalPERS investment
returns are less than assumed, the required contributions increase.
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 4
30%
20%
10%
0%
-10%
-20%
-30%
CaiPERS Returns - Actual vs. Assumption
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Actual Assumption
The following chart summarizes the City's contributions over the last three (3) years, the
budget for the current year, and the CalPERS projections for the next six (6) years.
CalPERS projections used for this chart do not factor in the 4.7% investment return for
the year ended June 30, 2020.
Ca! P ERS Contributions in Dollars
$90,000,000
$80,000,000
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
ti� ti� ti° titi titi ti� ti°` tih ti� ti�
oll 0 Misc Normal Cast 0 Safety Normal Cast 0 Misc Liability Payment 0 Safety Liability Payment
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 5
The adopted budget for FY20-21 included an $18.6 million or 5.7% use of General Fund
balance to preserve existing service levels. Considering the projected increasing costs
for employee pension and the reduction of the Measure X sales tax rate from 1.5% to
1.0% in 2029, the City must find a way to generate additional revenue or reduce costs to
rebalance the budget. Refinancing the pension debt is one potential way to reduce costs.
The City has already taken the following steps to reduce its employee pension cost.
1. Employees pay the full employee contribution (some cities pay a portion of the
employee contribution).
2. Statewide PEPRA established the lesser benefit for new employees.
3. The City pays the required annual contribution to the unfunded liability by July 31
of each year to obtain an approximate 3.3% discount.
4. In 2016, the City established an irrevocable Section 115 Trust with an initial deposit
of $0.5 million, to set -aside money for future pension costs. The City has not made
any additional deposits to the Trust.
Development of Strategy
UFI and staff worked together to narrow the field of potential strategies for reducing the
City's pension debt. In general, the City can either make additional contributions to
reduce the debt faster, or refinance the debt with better terms.
In addition to the Memorandum (Exhibit 1), UFI has prepared a presentation (Exhibit 2)
to summarize the most feasible strategies as follows.
1. Refinance the pension debt by issuing pension obligation bonds. The bonds are
taxable and carry a higher interest cost than tax-exempt bonds. Although the
pension debt is a legal debt of the City, a court validation is necessary to proceed
without voter approval. The court validation process, as outlined below in "Next
Steps", can take up to six months. We will also need to determine the portion of
the pension debt to refinance. Refinancing less than 100% will help mitigate the
risk of paying more over the long-term, as discussed below.
2. Use Water Enterprise cash to reduce its $13.5 million pension debt for water
employees. The Water Enterprise has a plan to use the cash for water capital
projects. If the City employs this strategy, then the Water Enterprise will need
financing for these projects. The City can obtain separate tax-exempt financing
for water capital projects at better terms than taxable pension obligation bonds.
Risk of Paying More
When the plan outperforms assumptions (e.g. investments earn 9% instead of the
assumed 7%), the pension debt decreases. If the City were to refinance 100% of the
pension debt (not recommended), the amount of the debt is set; and if CalPERS
investments outperform the assumption, the City's pension debt will not decrease. This
may be an unlikely scenario, as CalPERS own actuaries have stated they believe the
investment portfolio will earn less than the 7% assumption over the long-term. However,
the risk exists. With savings achieved from potential bond interest rates ranging from 3%-
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 6
4% vs. CaIPERS charging 7% on the debt, CalPERS 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 CaIPERS
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, CaIPERS 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.
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 7
2. It shall be the City's policy to consider an additional discretionary payment to
reduce the unfunded pension liability during each annual budget process, when
staff identifies accumulated fund balance in excess of reserve policy requirements.
3. It shall be the City's policy to propose reductions of the City's normal cost
contribution during labor negotiations, based upon the plan funding ratio and the
City's current and forecasted financial position.
4. It shall be the City's policy to consider paying down the unfunded pension liability
when there is at least $20 million of cash available for capital projects, and it is
feasible and economically prudent to issue tax-exempt debt for the projects.
5. It shall be the City's policy to consider adding money to the Section 115 Trust
account during each annual budget process.
6. It shall be the City's policy to consider issuing pension obligation bonds only if the
following criteria exist.
a. The City Council must conduct a public meeting to consider the results of
an analysis quantifying the risk probability of the City paying more over the
life of the bonds.
b. To maximize potential savings, the bond interest rate must be at least 30%
less than the plan's current discount rate.
c. To ensure the City benefits from the possible scenario of actual plan results
exceeding Ca/PERS assumptions shortly after issuing debt, the bonds must
not exceed 90% of the unfunded liability.
d. The bond structure must not extend the life of the debt.
e. The City must not use bond proceeds to pay the normal cost of the pension
plan.
Next steps
If the City Council directs staff to move forward with the pension debt refinancing, staff
will need to propose a contract for bond counsel services, and the bond counsel will need
to write a resolution for the City Council to consider authorizing the sale of pension
obligation bonds.
After adoption of the resolution, bond counsel can move forward with the court validation
process with the Orange County Superior Court, which may take up to six (6) months.
During that same time, the City can release a Request for Proposals (RFP) for bond
underwriting services to ensure the best pricing and service. Once the City receives its
court validation, the bond financing team (staff, bond counsel, financial advisor, and
underwriter) will propose a bond indenture, bond purchase agreement, and Preliminary
Official Statement for City Council consideration. The City can sell the bonds only after
City Council approves these additional documents.
A summary of the process follows, and each step requires City Council approval.
Consider Pension Debt Refinancing and Policy
February 2, 2021
Page 8
Proposed
Contract for Bond
Counsel Services
February 16,
2021
Proposed
Resolution
necessary to
begin the Court
Validation
Process
March 16, 2021
RFP and
Proposed
Contract for
Underwriting
Services
concurrent with
Court Validation
Process
By September
2021
Proposed Bond
Indenture, Bond
Purchase
Agreement, and City sells Bonds
Preliminary November 2021
Official
Statement
October 2021
If the City obtains its court validation in less than six (6) months, the City could sell its
bonds sooner than November 2021.
FISCAL IMPACT
Based on current market conditions, the City could save $3.8 million annually by
refinancing 90% of the pension debt. If the City Council directs staff to proceed with
refinancing the pension debt, staff and the City's Financial Advisor will provide updated
savings estimates with each future staff report.
EXHIBIT(S)
1. Memorandum dated December 10, 2020 from Michael Busch, CEO of Urban Futures
Inc. to Kathryn Downs (the Feasibility Analysis from City's Financial Advisor)
2. Proposed Unfunded Employee Pension Liability Cost Reduction Policy
Submitted By:
Kathryn Downs, Executive Director Finance and Management Services
Approved By: Kristine Ridge, City Manager
EXHIBIT 1
T iW�
1 _ Financial Solutions
TO: KATHRYN DOWNS, EXECUTIVE DIRECTOR AND CITY TREASURER
FINANCE AND MANAGEMENT SERVICES AGENCY, CITY OF SANTA ANA
FROM: MICHAEL BUSCH, CEO
DATE: DECEMBER 10, 2020
RE: STRATEGIES FOR ADDRESSING CALPERS PENSION LIABILITY
This memorandum has been drafted in conjunction with the development of a customized
pension model used to analyze and evaluate solutions to address the City of Santa Ana (the
"City") pension liabilities, based on the most recent actuarial reports dated, June 30, 2019. We
have analyzed several potential strategies and developed two pension obligation options for
consideration and outlined the necessary validation process required prior to the issuance of
bonds.
The analysis below is based on our eight (8) step process for analyzing CalPERS pension plans
their associated liabilities and to draw upon financial strategies to address current and future
liabilities. The objective of the study is to provide a summary of pension plan cost drivers and
develop a financial plan necessary to fund increasing liabilities.
D
Afy Issues,
Oresources &
4 Options
5
AlignOptions
with O.
Resources
Present
Recommended
Options &Actions
Implement Plan
& Execute
8 1 Continual follow-up and monitoring
4 Key Factors Driving Pension Liabilities
Prior to legislative changes facilitating changes to CaIPERS retirement plans, the State of
California and CaIPERS member agencies, many local agencies were considered "super funded",
which means they had over 100% of their respective CalPERS plans funded. However, in 1999
and 2001, SB 400 and AB 616 were passed by the legislature granting member agencies to
enhanced existing benefits for safety and miscellaneous plans. The allowance of enhanced
benefits allowed for future retirees to capture a higher benefit level based on prior service with
a current employer. The retroactive benefit was unfunded and immediately created unfunded
liabilities in most, if not all pension plans, upon adoption.
The remaining four (4) drivers are based on the following:
1. CalPERS Plan Investment Returns;
2. Cost of Living Adjustments;
3. Demographics (Life Expectancy); and
4. CalPERS Contribution Policies
With the adoption of the Public Employees' Pension Reform Act (PEPRA) in January 2013, the
ability to provide enhanced benefits was eliminated. However, the remaining four drivers remain
in effect and continue to impact the funding status of CalPERS plans throughout the state. In the
sections below, we will focus on the impacts of investment returns and CaIPERS policy changes
including demographics and contribution policy changes.
Pension Plan Reporting Basics
CalPERS provides two annual "aggregate" actuarial reports for the City's Miscellaneous and
Safety employees, respectively. Each group of employees has two tiers: 1st Tier or Classic, and
PEPRA. The actuarial reports group together both tiers into a single report. — they only provide
a single unfunded accrued liability (UAL).
The plans are funded through two (2) categories: 1) Normal cost; and 2) Unfunded Accrued
Liability.
Normal Costs - Since Normal Costs are based on a percentage of payroll, they are directly linked
to the size of the City's payroll and are reported by tier. A portion of these payments are made
by City employees based on negotiated terms.
Unfunded Accrued Liability ("UAL") - Similar to most CaIPERS Plans across the state, the City's
UAL represents a financial shortfall of the Plan to meet current benefit funding levels. As of the
actuarial report dated June 30, 2018, the UAL was $681 million. The City's most recent UAL for
June 30, 2019 is $707 million, reflecting an increase in of $25.8 million from the prior year (see
chart below).
MISCELLANEOUS
Accrued Liability (AL) $ 916,997,454
Market Value Assets (MVA) 623,923,788
SAFETY
$1,162,151,002
774,128,328
COMBINED
$ 2,079,148,456
1,398,052,116
UAL = AL-MVA $ 293,073,666 $ 388,022,674 $ 681,096,340
69% 67% 67%
-RDV
MISCELLANEOUS
Accrued Liability (AL) $ 948,084,339
Market Value Assets (MVA) 645,902,345
UAL = AL-MVA $ 302,181,994 $ 404,723,211 $ 706,905,205
69% 66% 67%
SAFETY COMBINED
$1,191,809,847 $ 2,139,894,186
787,086,636 1,432,988,981
CAPERS' actuarial reports are drafted with a 2-year delay. In practical terms, the June 30, 2019
report provides information about the FY 21-22 UAL and required UAL payment. As a result, the
corresponding UAL balance of $706.9 million (reported on June 30, 2019), is adjusted upward for
the upcoming fiscal year (FY21-22) to a projected amount of $709.9 Million. The change in value
reflects payments made and interest accrued toward the UAL from June 30, 2019 until June 30,
2021 (FY 2021-22).
CaIPERS uses the FY 21-22 figure to calculate pay-off amounts on POBs or pre -payments (ADPs).
Consequently, we will use the more current projected $709.9 million figure for the UAL for the
remainder of our analysis.
PENSION PLAN FUNDING AND FORECASTING
Amortization Bases
In January 2013, after the adoption of PEPRA pension reform legislation, CalPERS began requiring
members to make fixed dollar payments toward their UAL (as opposed to payments based on
of payroll). The City's UAL is comprised of a series of amortization bases. Each amortization
base operates like a loan to CaIPERS, with 7.0% interest rate; and has a different repayment term
(maturity), ranging from 5 to 20 years. CalPERS shortened the repayment term from 30 to 20
years in 2019.
The City's projected $709.9 million UAL is comprised of 46 amortization bases, each with a
distinct repayment schedule:
• Miscellaneous Plan: 24 Amortization Bases in the totaling $298,799,264
• Safety Plan: 22 Amortization Bases in the totaling $411,056,199
Year Reason Ramp Term Balance Payment
1 2006 Fresh Start
NO
17
(1,507,124)
(124,360)
2 2007 Benefit Change
NO
7
27,869,276
4,635,532
3 2007 Benefit Change
NO
8
130,319
19,335
4 2009 Assumption Change
NO
10
28,921,692
3,566,035
5 2009 Special (Gain)/Loss
NO
20
29,368,098
2,172,502
6 2010 Special (Gain)/Loss
NO
21
10,805,290
774,689
7 2011 Assumption Change
NO
12
12,883,043
1,374,350
8 2011 Special (Gain)/Loss
NO
22
(7,380,480)
(513,938)
9 2012 Payment (Gain)/Loss
NO
23
5,629,785
381,500
10 2012 (Gain)/Loss
NO
23
(264,265)
(17,908)
11 2013 (Gain)/Loss
100%
24
100,344,691
6,995,473
12 2014 Assumption Change
100%
15
45,039,235
4,528,967
13 2014 (Gain)/Loss
100%
2S
(63,668,260)
(4,319,063)
14 2015 (Gain)/Loss
100%
26
32,611,483
2,156,496
15 2016 Assumption Change
80%
17
16,268,114
1,197,052
16 2016 (Gain)/Loss
80%
27
37,941,296
1,984,485
17 2017 Assumption Change
60%
18
13,723,657
747,182
18 2017 (Gain)/Loss
60%
28
(21,124,364)
(830,159)
19 2018 Method Change
40%
19
6,357,217
231,819
20 2018 Assumption Change
40%
19
30,754,017
1,121,458
21 2018 (gain)/loss
40%
29
(12,919,487)
(343,422)
22 2019 AL Significant Increase
NO
20
145,398
13,268
23 2019 Non -Investment (Gain)/
NO
20
3,048,449
278,180
24 2019 Investment (Gain)/Loss
20%
20
3,822,184
83,568
26,113,041
Year Reason Ramp Term Balance Payment
1 2005 Fresh Start
NO
16
$ (2,854,990) $
(245,832)
2 2006 Benefit Change
NO
6
1,718,764
327,131
3 2009 Assumption Change
NO
10
14,943,657
1,842,548
4 2009 Special (gain)/loss
NO
20
31,977,596
2,365,540
5 2010 Special (gain)/loss
NO
21
(11,794,554)
(845,615)
6 2011 Assumption Change
NO
12
16,001,458
1,707,020
7 2011 Special (gain)/loss
NO
22
(4,374,826)
(304,640)
8 2012 Payment (gain)/loss
NO
23
8,240,551
558,418
9 2012 (gain)/loss
NO
23
74,450,415
5,045,102
10 2013 (gain)/loss
100%
24
140,663,232
9,806,257
11 2014 Life Exp. + 2.0/2.5 yrs.
100%
15
53,834,472
5,413,381
12 2014 (gain)/loss
100%
25
(84,294,374)
(5,718,276)
13 2015 (gain)/loss
100%
26
59,710,283
3,948,455
14 2016 7.50%to 7.375%
80%
17
19,877,718
1,462,656
15 2016 (gain)/loss
80%
27
50,404,089
2,636,340
16 2017 7.375%to 7.25%
60%
18
22,905,190
1,247,070
17 2017 (gain)/loss
60%
28
(32,653,354)
(1,283,233)
18 2018 Method Change
40%
19
5,325,258
194,188
19 2018 7.25% to 7.00%
40%
19
38,800,765
1,414,886
20 2018 (gain)/loss
40%
29
(1,474,209)
(39,187)
21 2019 Non -Investment (Gain)/Lc
No
20
5,185,187
473,164
22 2019 Investment (Gain)/Loss
20%
20
4,463,871
97,598
r ,102,971
The annual UAL payment is an aggregate of 46 loan amortization schedules, which is equal to
$56.2 million for FY 21-22, as illustrated in the chart above.
New Bases
CalPERS adds a new Amortization Base to the existing liability each year, including "credits" for
positive investment performance above the discount rate of 7.0%. Based on the CalPERS
Actuarial Amortization Policy, investment gains and losses, a change in actuarial assumptions or
actuarial methods, and changes in plan provisions are amortized over a period of 20 years.
Specific to investment gains and losses as recognized in the City's valuation shall be the annual
amount determined in accordance with the following schedule:
• Year 1: 20% of base payment
• Year 2: 40% of base payment
• Year 3: 60% of base payment
• Year 4: 80% of base payment
• Years 5 through 20: base payment
New bases are based on a combination of policy changes referred to as a "change in
methodology" approved by the CalPERS Board and investment performance. For example, a
change of methodology was reported for 2018 when CalPERS added a new Amortization Base to
account for the reduction in the Discount Rate from 7.25% to 7.00%. In the following year,
CalPERS reported a 6.70% investment return on June 30, 2019. This minimal investment loss
(compared to 7.0% benchmark) will be reflected in the up -coming June 30, 2019 actuarial report
released in July 2020.
Impact of COVID-19
Due to the impact of COVID-19 on the economy and capital markets, we anticipated that CAPERS
will not meet its investment target of 7.0% for fiscal year 2019-20. In July 2020, CaIPERS reported
an investment return of 4.7%. Like the prior year, actual investment performance will be
reported as a loss when compared to the 7% discount. We will know the exact figures when
CaIPERS will release the June 30, 2020 actuarial report in late summer 2021.
UAL Payment Schedule
The City will be required to pay a fixed dollar UAL payment of $56.2 million in FY 21-22, in
addition to the annual normal costs of approximately $16.5 million. If the City elects to make the
UAL payment in July 2021 (as opposed to evenly spread payments over FY21-22), which reduces
the UAL payment to roughly $54.3 million.
The City's UAL payment
scheduled has two peak
$70,000,000
dates: in FY 2027-28 at $72.9
$60,000,000
million and in FY 2030-31 at
$so,000.000
$73 million — a 30% increase
sao.000,000
when compared to the FY 21-
$M.000,000
22 payment of $56.2 million.
$20,000,000
$10,000,000
CALPERS PENSION PLAN
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ADMINISTRATIVE & LEGAL
CONSTRAINTS
Plan Termination Payment
UAL Amortization Payment Schedules
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With PEPRA, the California Legislature took steps to reduce
pension benefits for new hires and required new employees
to pay 50% of the annual normal costs. However, PEPRA
Legislation also protected the benefits for all "classic"
employees (hired before 2013).
As a result of PEPRA, the Public Employee Retirement Law
(PERL) now includes a provision that states that benefits for
"Classic" employees cannot be reduced for service/liability
already accrued. We understand this provision could be
challenged in court, however, major judicial revisions to
CaIPERS pension benefits is very unlikely, without a major
reversal to or reinterpretation of the California Rule.
CaIPERS routinely includes a termination payment amount in its actuarial valuations. Based on
the most recent CaIPERS report, the estimated termination cost is roughly 2 billion. This is the
estimated amount the City would need to pay to CalPERS to exit the system. Upon receiving this
payment, CaIPERS would assume the full responsibility of paying all retirees and current
employees benefits earned to date. The Termination Payment is calculated using a conservative
discount rate (US Treasury Bond rate). In most cases the Termination Payment is viewed as cost
prohibitive to fund.
Alternatives to CaIPERS
Notwithstanding the financial and legal constraints, we have included below a brief discussion
regarding the City's theoretical options.
Defined Contribution Plan (DCJ—The City would reduce its retirement costs if it converted
to a defined contribution (DC) plan — effectively transferring future performance and
funding risk to employees. Under a DC plan, the City would only be required to make its
share of annual contributions; employees would assume the risk forthe outcome/funding
level. Under a DC plan, by definition, there are no UAL (unfunded accrued liability)
payments — the employee assumes general control over investment decisions and
assumes the risk of its outcomes. This option requires termination of the CaIPERS
contract, with the termination payment noted above. Therefore, this option is not
feasible.
Under current interpretation, the California Rule effectively requires employers to
provide substantially similar retirement benefits to its employees. Employers outside of
the CalPERS system are required to pay into social security, which adds a 6.2% payroll
requirement.
Split Agency/ Mixed Plan (DCJ — CalPERS does not allow an agency to create a split or
mixed plan. CalPERS prohibits is participants from offering current employees'
participation in the CalPERS system and new employee participate in a DC plan.
Alternative Defined Benefit Pension Plan — The City could possibly retain greater control
over the investment process if it were to transfer its assets ($1.4 Billion) over to another
pension plan/investment manager. In which case the liability would transfer over to the
new provider. This alternative will require full approval of both CalPERS and the
bargaining units. Moreover, due to the California Rule, we would assume that required
annual pension contributions would essentially remain the same. To date, no public
agency has transferred management of its pension plan from CalPERS to another plan
manager. Such a move would require significant legal analysis, and a probable court
challenge. Although hypothetically it appears legally and financially feasible — it would
likely require a full transfer of assets and liabilities and thus provide limited savings.
CALIPERS FUNDING OPTIONS
In 2017, UFI created a pension focus group consisting of 25 public agencies with growing CalPERS
plans liabilities. After roughly a year of study, we determined many agencies understood the
causes of growing pension liabilities, but very few, if any, had a plan to fund increasing UAL
payments. This next section is a focus on UAL funding options including the following:
1. Targeting Strategies
2. Use of Reserves & One -Time Monies for Addition Discretionary Payments (ADPs)
3. Leveraged Refunding
4. Tax -Exempt Exchange
5. Pension Obligation Bonds
Targeting Strategies
Before we commence the discussion regarding funding options, it is important to understanding
the impact of using "targeting strategies". When making Additional Discretionary Payments
(ADPs), assuming the City has available cash to do so, CalPERS requires each agency to specify
the Amortization Bases to apply payments.
The primary purpose of developing
a customized pension model is to
determine, with precision, the
financial impact of each funding
solution.
Making Additional Discretionary
Payments (ADPs), the City is
principally prepaying a loan.
The City has a total of 46
Amortization Bases (totaling $710
million UAL), with terms ranging
from 6 years to 29 years.
$180,000
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
$0
TARGETING STRATEGIES
$1 Million UAL: 10-Year vs.30-Year Amortization
■ 10 Year = $1,413,000 Payments
■ 30 Year = I
111
Payments
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
The City should consider applying additional monies toward its UAL based on its financial
objectives:
• Maximize Total Interest Costs Savings - target long-term Bases (e.g., 30 year).
• Maximize Short -Term Cash Flow Savings - target short term Bases (e.g., 5-15 year).
All future funding decisions will utilize the concept of targeting strategies to tailor the application
of additional payments to meet the City's financial objectives.
Use of Reserves & One Time Monies for Additional Discretionary Payments (ADPs)
The unfunded liability is comprised of 46 Amortization Bases, which are effectively loan payments
to CalPERS @7.0%. The City should always consider the "opportunity cost" of its
financial/investment decision in context of this ever-growing pension liability.
Evaluating the Opportunity Cost requires you to decide whether to continue to fund/increase
reserves or to pay down the UAL. Currently, the City's pension liability is accruing at 7.00% rate,
while the City's investments are earning 1.016% as of October 2020. Under these investment
parameters, the City should seek to pre -pay its UAL when excess reserves or 1-time monies
become available.
The City should consider making $13.5 million in Additional Discretionary Payments (ADPs)
to Ca1PERS. The Water Enterprise share of the unfunded liability is $13.5 million and is
staffed by non -sworn personnel. To maximize overall savings, the ADP should target
Miscellaneous Base #16 (amortized over 27 years) = $37.9 million.
By making $13.5 million in ADPs (from Water Fund reserves) and selecting Base #16 the City
would eliminate $31 million in UAL payments (Net savings = $17.5 Million)and would fully fund
the Water Enterprise's current UAL.
$5,000,000
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
ADP Base #16 - $13.5 Million Water Fund
■ Original Payments
N M lf1 tG n O 01 O rl N M Ln W N W M O 1-1 N M 1* 0 W N W
O O O O O O O O O O O O O O O O O O O O O O O O O O O
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 N N
• Pro-Rata reduction in balance & payments
• $31 Million Total Savings / $17.5 million Net Savings
Leveraged Refunding
The City will be presented with opportunity to refund its outstanding bonds periodically. In such
instances, the City should consider a "Leveraged Refunding". A leveraged refunding structures
the refunding bonds with "up -front" savings in the first few years, then applies these savings to
pay for a portion of the City's UAL. When applied to a long-term base, the saving from the bond
refunding could be leveraged in 2.0 — 2.5X times greater pension cost savings.
SANTA ANA DEBT PROFILE There are a few refunding
$14,000,000
■1994Lease Revenue opportunities that will be
s12,000,000 ■2014Private Placements available to the City's the next 4-8
■ Streetlights
$10,000,000 ■800MHz years. One opportunity we have
■ SCE
$8,000,000 identified is through the Successor
$6,000,000 Agency which has two refunding
$4,000,000 Tax Allocation Bonds (TABS),
which were issued in 2018 totaling
$2,000,000
= ■ ■ _ _ - $73 million. Only $3.5 million of
$0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 the 2018A bonds Will be callable in
2028 — they City should retain
18.7% of such savings, which would be realized by the General Fund in the form of greater RTTPF
revenues from the Successor Agency. Although nominal, these refunding present an opportunity
to address a potential downturn in revenues when the City's Measure X sales tax decreases in
2029 and the City's UAL peak payments occur (2028).
Tax -Exempt Exchange
Making cash payments to CaIPERS provides the greatest interest cost savings. The concept of
tax-exempt exchange is a financing mechanism that can provide significant savings. Tax -Exempt
Exchange requires a 4-step process:
1. Identify capital projects to be funded with accumulated cash balances
2. Issue tax-exempt bonds to finance these projects, instead of paying cash
3. Select Amortization Base to pre -pay, using the cash originally planned for the capital
project
4. The City would use its budgeted expenditures to pay the debt service on bonds issued for
capital projects, instead of making payments to CaIPERS.
Listed below is a sample savings assumption using the tax-exempt strategy funding a $5.3 million
CIP projects with tax-exempt bonds rather than cash. For illustation, the City could finance $10
million in traditional capital improvement that it would pay from General Fund monies (e.g., $3
million per year). As noted in the chart below, the red shaded area is a representation of the UAL
payments for Miscellaneous Base #10, which is equal to $10.8 million. The blue bars represent
new annual debt service payments, for the $11.0 million in tax-exempt bonds that would be
issued under a tax-exempt exchange strategy. The total savings equal $9.0 million over 20 years
— 63% of the amount financed. $2.6 million derived from this strategy.
Tax -Exempt Exchange
$1,400,000
$11 Million Tax -Exempt Bonds
$9.0 Million Deferred UAL Savings
$1,200,000 $6.8 Million NPV Savings - 63%
■ UAL Payments Misc. Base #6
$1,000,000 Debt Service
$800,000
$600,000
$400,000
$200,000
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Tax-exempt exchange can be viewed as an alternative to ADPs from reserves and is best suited
as a strategy to manage future pension liabilities.
Pension Obligation Bonds (POBs)
Given recent and substantial increases in UAL's across the state many local agencies are seeking
funding options to effectively reduce annual payments with the goal of retaining reserves and
current service levels.
The passage of PEPRA and the change to a fixed amortization schedule and dollar payment
amounts, Pension Obligation Bonds (POBs) have come back into discussion and study. Combined
with all-time historic lows in the taxable municipal bond market, POBs have become more
prominent and accepting to municipal bond investors. Since 2017, sixteen POBs exceeding $50
million in issuance size have been issued in California. As noted, most are in Southern California
with issuance on average of $187 million (see chart below).
Issuance Summary
Sale Date Issuer Issue Par
($mm)
Ratings
(S&P/M/F)
Final
Maturity
Bond Structure
Final Repayment
UAL Structure
All -In
TIC
Pricing Result
30- TIC
year Spread to
11/19/20 Coachella
POBs
$17.60
AA-/-/-
2035
2045
Level
2.99%
1.58%
141
11/12/20 Gardena
POBs
101.50
AA-/-/-
2039
2048
Level
3.33%
1.75%
158
10/27/20 Arcadia
POBs
90.00
AAA/-/-
2040
2044
Level
2.70%
1.57%
113
09/17/20 Azusa
POBs
70.08
AA-/-/-
2040
2045
Level
3.13%
1.43%
170
08/13/20 Pomona
LRBs
219.89
AA -/-/A+
2046
2046
Proportional
3.52%
1.38%
214
07/24/20 West Covina
POBs
204.10
A+/-/-
2044
2044
Proportional
3.68%
1.24%
244
06/09/20 El Monte
POBs
117.73
A+/ -/A-
2050
2043
Proportional
3.38%
1.53%
185
06/08/20 Carson
POBs
108.02
AA-/-/-
2050
2043
Proportional
3.71%
1.59%
212
06/04/20 Riverside City
POBs
432.17
AA/ -/AA-
2045
2045
Proportional
3.69%
1.61%
208
06/02/20 Inglewood
POBs
101.62
AA-/-/- (AGM)
2050
2046
Proportional
3.91%
1.48%
243
05/12/20 Ontario
POBs
236.59
AA/ -/AA-
2050
2049
Proportional
3.72%
1.38%
234
04/22/20 Riverside Co
POBs
720.00
AA/A2/-
2038
2046
Proportional
3.53%
1.22%
231
02/05/20 Pasadena
POBs
131.81
AAA/-/-
2045
2043
Proportional
3.06%
2.14%
92
08/22/19 Glendora
POBs
64.40
AAA/-/-
2044
2046
Proportional
2.85%
2.11%
74
09/24/19 Hawthorne
POBs
121.87
AA-/A3/-
2049
2045
Level
3.61%
2.09%
152
07/25/18 La Verne
POBs
54.27
AA+/-/-
2044
2046
Level
4.26%
3.06%
120
05/31/18 Tulare County
POBs
251.22
AA-/A1/-
2037
2037
Level
4.23%
3.00%
123
10/30/17 Monrovia
POBs
111.55
AA-/-/-
2047
2047
Level
4.05%
2.83%
122
10/31/17 Inglewood
POBs
52.80
-/A3/- (AGM)
2047
2047
Level
4.55%
2.88%
167
In addition to POB's issued to date, eleven agencies have initiated the process to issue bonds.
Three Orange County cities are in the process of issuing bonds including Orange, Huntington
Beach and Placentia. The total UAL for these agencies is over $2 billion (see chart below).
Chula Vista
Huntington
Beach
Orange
Downey
El Cajon
Monterey Park
Corona
Manhattan
Beach
$350,000,000
67.10%
67.40%
69.60%
70.40%
440,000,000
71.50%
72.60%
64.80%
65.50%
200,000,000
71.20%
71.30%
67.70%
68.00%
200,000,000
68.40%
68.60%
66.50%
66.40%
150,000,000
66.90%
67.40%
61.50%
62.00%
110,000,000
69.80%
70.50%
70.20%
71.30%
272,000,000
65.40%
67.90%
64.50%
63.50%
92,000,000
76.10%
76.10%
71.50%
71.00%
Covina
72,000,000
68.00%
68.00%
68.00%
69.00%
Commerce
31,000,000
70.00%
71.00%
NA
NA
Whittier
143,000,000
74.00%
75.00%
59.00%
60.00%
UDland
120.000.000
68.00%
68.40%
67.00%
68.60%
POB Sale in 2021 Q1
POB Sale in 2021 Q1
Validation approved Aug.
2020
POB Sale in 2021 Q1
POB Sale 2020 Q4
POB Sale 2021 Q1
POB Sale in 2021 Q2
POB Sale in 2021 Q1
Validation Initiated in Dec.
2020
Validation Initiated in 2021
Validation Initiated in 2021
Validation Initiated in 2021
As previously stated above, the City's projected $709.9 million UAL is comprised of 46
Amortization Bases with corresponding Amortization Schedules. These bases represent a series
of "loans", with a fixed repayment schedule with a 7.0% interest rate.
Given this context, Pension Obligation Bonds (POBs) in California may be viewed as a debt
"refinancing". POBs must be issued on a taxable basis because the pension benefits private
individuals (the City's current and former employees). Nonetheless, POBs present the only
financing tool available to significantly impact the City's required UAL payment schedule.
Options for City Council Consideration
Our study of the City's UAL and financial viability to meet its current and forecasted obligation
led us to assume two (2) POB funding options for City consideration; 1) a POB equal to 50% of
the City's current UAL; and 2) a POB equal to 90% of the City's current UAL.
In preparing the analysis for the 50% UAL option the following was taken into consideration:
1. POBs — 50% UAL
a. $358 Million POBs with Hybrid — Level Debt Service
b. 25-Year Final Maturity
c. Target Longest Safety Bases Only
$80,000,000
$70,000,000
$60,000,000
$50,000,000
50% UAL POB 25 Year (Safety Only): Hybrid Level Aggregate
$358 Million POB
$183 Million Deferred UAL Costs
$38 Million Budgetary Savings
$144 Million NPV Savings = 41%
AA- Scale + 25 bps = 3.16 TIC%
Misc. UAL Payments
Remaining Safety UAL
POB Debt Service
Budgetary Cash Flow Savings
• • Original UAL Payments
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0 ■+....
2022 2023 2024 2025 2026 2027 2028 2029 2030 20312032 2033 2034 2035 2036 2037 2038 2039 2040 20412042 2043 2044 2045 2046 2047 2048
-$10,000,000
In preparing the analysis for the 90% UAL option the following was taken into consideration:
2. POBs-90% UAL Million
a. $642 Million POBs with Hybrid — Level Debt Service
b. 25-Year Final Maturity
c. Misc. Base #14 & #16 remain outstanding
90% UAL POB Hybrid Level Debt Service
$80,000,000
$642 Million POB,
$254 Million Deferred UAL Costs
$70,000,000 • . $161 Million Budget Savings
. • $216 Million NPV Savings = 349/
AA- Scale + 25 bps = 3.00 TIC%
$60,000,000
• POB Debt Service
Misc. Base #14 & #16
$50,000,000
Budgetary Savings
• ... Original UAL Payments
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0 l� �... ...
2022 2023 2024 2025 2026 2022 2028 2029 2030 2031 2032 2033 2034 2035 2036 2032 2038 2039 2040 2041 2042 2043 2044 2045 2046 2042 2048
The chart below is a summary comparison of the two options. Because the average life of the
UAL payments for the 50% POB option is 24 years and the 90% option has an average life of 18.5
years the True Interest Cost (TIC) is higher for the smaller POB issuance. However, the 50% option
offers a greater percentage of savings.
It is important to delineate the difference between true budgetary savings and deferred UAL
savings. POBs refinancing the City's future UAL payments at a lower interest rate. The difference
between the scheduled UAL payments and the payments on the POBs represent deferred UAL
payments, which total $184 million or $253 million in deferred UAL payments / $145 million and
$217 million Net Present Value (NPV) for the 50% and 90% POB, respectively. In other words,
this amount represents the savings from what the City would be required to pay in the future.
Since these savings are predicated on future rising payments, this amount cannot be construed
as actual budgetary cash flows savings.
We measure budgetary cash flow savings by comparing the POB debt service versus the FY 21-
22 UAL payment amount of $56.2 million. As noted in the table below, the annual debt services
on POBs are equal to $51.6 million and $46.2 million for the 50% and 90% POB respectively. The
green shaded area in the chart above, illustrates true cash flow or budgetary savings realized
from a POB issue, which totals $37 million or $161 million for 50% and 90% POBs.
In either case, the savings from a POB is substantial.
Par Value
Total Debt Service
Avg. Annual Payment
Budgetary Savings
Deferred UAL Savings
NPV Savings
% Savings
T/C%
$ 357,800,000 $
641,865,000
528,044,092
884,946,714
51,696,630
46,171,181
37,742,327
160, 909, 48 3
183,699,037
253,872,795
144,759,624
217,109,100
41%
34%
3.1696
3.015vo
Monte Carlo Risk Analysis
These two POB savings scenarios were run through a Monte Carlo Simulation. Monte Carlo
simulation is a finance industry tool used to run several scenarios, based on randomly generated
interest rate scenarios to determine the potential outcome of a future event. In this case, the
model produced random portfolio rates of return over a 25-year period to compare the ending
portfolio value under a POB and making regularly scheduled UAL payments, also incorporating
POB savings and additional bases, which are discounted back at 7.0% rate. The model generates
10,000 scenarios to determine an expected value or probability of success.
$1,200
$1,000
$800
$600
$400
$200
$0
Monte Carlo Simulation
Ending Portfolio Balance
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
The Monte Carlo model projected an 87% and 84% probability of success under the 90% and 50%
POB scenarios. Additionally, both POB scenarios generated greater portfolio growth over the 25-
year period when compared to POB savings by 84% and 76% respectfully.
Probability of
Portfolio Growth
Success
Exceeding POB
Savings
90% POBs
87%
82%
50% POBs
84%
76%
We believe the combination of pension reform legislation, CAPERS' requirement for fixed dollar
UAL payments, and changes in the POB market, make it compelling to consider the issuance of
POBs are part of the City's pension funding strategy.
Understanding the Risks Associated with Pension Obligation Bonds
The Government Finance Officers Association (GFOA) has provided an advisory against the
issuance of POBs, noting 5 key issues or concerns. The GOFA's POB policy general advisory, which
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.
To offset market risk prior to the issuance of bonds, UFI recommends the City consider the
following:
• Taxable Bond Interest Rates
o The City should only issue POBs in a favorable interest rate environment
• Status of CalPERS investment returns historically and year to date; and based on FY 2018-
19 CalPERS data
o The 30-year average investment return for CAPERS is roughly 8.1%
o The 5-year and 20-year averages are 5.80% (below the 7% discount assumption)
o Significant losses (i.e., 20% decline) by CalPERS in the first 12-24 months would
impact savings
Validation Proceedings
In California, POBs do not require voter approval due to a judicially created exception to the State
Constitutional debt limitation. However, to obtain authorization to issue POBs, each agency is
required to file a validation action with its respective County Superior Court.
The judicial proceedings are largely an administrative matter, which is usually handled by a bond
counsel firm. Fees typically range between $25,000 to $35,000, plus court filing fees (additional
$3,000 to $5,000).
Required Legal Documents - Before the validation action is filed, the City Council must first adopt
a resolution: 1) authorizing the City to issue Pension Obligation Bonds (POBs) to refund its
CalPERS Unfunded Accrued Liability (UAL); and 2) authorizing judicial validation proceedings
related the issuance of such POBs. The authorizing resolution must also establish a not -to -exceed
par value and maximum interest rate. As part of its approval, the City Council will approve two
key legal documents, in substantially final form: Trust Indenture and Bond Purchase Agreement.
The Preliminary Official Statement (POS) will be drafted and approved by the City Council, after
the validation is approved.
Timeline - The validation proceedings require a 7-step sequential process, which under normal
conditions can take approximately 90 days or more. This process can be delayed if a protest is
made during validation period by any interested person or association and has been extended in
some cases by at much as 2-3 months due to COVID impacts on the courts. Because we do not
know the impacts of COVID on the court system at the time of a future validation action we are
outline the traditionally process and estimated timeline under pre-COVID conditions below:
Action
Revised Time
1 City Council passes a resolution authorizing the sale of POBs
2 File Validation Action with County Superior Court
3 Receive Order for Publication of Summons from the Court 2-3 weeks
4 Publish notice in local publication of general circulation 21 days
5 Waiting period to file petition- minimum 10 days 3-4weeks
6 Clerk enters and schedules hearing for default judgement 3-6 weeks
7 Hearing for Default Judgement
8 30-day Appeal Period
Bonds can be sold after the 30-day Appeal Period has ended. Staff must return to the City Council
to approve the POS and issuance of POBs.
EXHIBIT 2
City of Santa Ana
Council Policy
Mayor's Authorization
Subject
Council Approval Date:
UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION
POLICY
February 2, 2021
The City's contribution to fund employee pensions has increased at a faster rate than most other costs. As of June
30, 2019, pension plan assets account for only 67% of the accrued liability; and the plan administrator projects the
City's contribution will continue to increase in the future. This policy addresses strategies to reduce the City's cost
of its employee pension liability.
Background
The City provides a defined benefit pension plan to its full-time employees. A defined benefit is a promise to pay
future benefits, wherein the City makes annual deposits into the plan and carries the risk of plan assets investment
performance. If the plan's investment return is less than assumed, the City cost to provide the benefit increases.
The City has contracted with the California Public Employee Retirement System (CaIPERS) to manage the employee
pension plan. CAPERS collects contributions from the City and its employees, invests the money, and pays monthly
benefits to retirees. Ideally, the plan would be 100% funded, which means plan assets are equal to plan liabilities.
A plan with a low funded ratio is at risk for paying future promised benefits.
In response to the rising cost of public employee pensions after CaIPERS investment losses during the Great
Recession of 2009, and to ensure the future solvency of plans under contract with CaIPERS, California enacted the
Public Employee Pension Reform Act (PEPRA). All public employees hired after PEPRA became effective in January
2013 receive a lesser benefit than those "Classic" employees hired before PEPRA. Santa Ana Employees earn
benefits in one of the following four categories.
1. Classic Safety (sworn public safety employees);
2. PEPRA Safety;
3. Classic Miscellaneous (all other non -sworn City employees); or
4. PEPRA Miscellaneous.
The market value of investments in the Santa Ana plan is less than the liability for benefits already earned, and the
City has an Unfunded Pension Liability. Each year, the amount of the liability changes based upon actual plan results
and CaIPERS changes in assumptions. The liability grows when actual plan results do not meet CaIPERS assumptions,
such as retirees living longer than expected; or when CaIPERS changes its assumptions, such as reducing the
assumed rate of investment return. Conversely, the liability decreases when actual plan results exceed CaIPERS
assumptions, such as investments earning more than the assumed rate of return. CaIPERS also charges "interest"
on the unpaid liability each year, based on the plan's discount rate, equivalent to the assumed rate of return.
CaIPERS requires the City to make annual contributions to reduce the unfunded liability.
This policy addresses strategies to reduce the cost of the unfunded pension liability.
There are two basic strategies to reduce the City's cost for the unfunded pension liability:
1. Contribute more than required by CaIPERS (an Additional Discretionary Payment) to reduce the accrual of
interest; or
UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 1
2. Refinance the liability, which is a legal debt of the City, at a lower interest rate.
Within these two basic strategies, there are a variety of options and associated risks.
Application of Additional Discretionary Payments
When the City identifies funding for an Additional Discretionary Payment (ADP), there is a strategy to apply the ADP
to the unfunded pension liability.
The unfunded liability is comprised of layers or "bases" related to each year of actual plan results. Each base is
either a loss or gain. CAPERS amortizes most of the bases over twenty years to calculate the annual required
contribution to reduce the liability. Loss bases at the beginning of an amortization cycle are desirable targets for
an ADP to maximize overall savings. Conversely, loss bases at the end of an amortization cycle are desirable targets
to maximize short-term savings.
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.
Use Accumulated Fund Balance or One -Time Money
The City has a General Fund to account for unrestricted revenue; and many other "restricted" funds to account for
revenue with spending restrictions imposed by law, other governmental agencies, or legally enforceable
agreements. The City allocates its unfunded pension liability to each fund based upon the prior year normal cost
charged to the fund through payroll.
When the City receives more revenue than expected, or spends less than budgeted, a fund balance accumulates.
Much like spending from a savings account, accumulated fund balance is a one-time resource the City can use to
pay down a fund's allocation of the unfunded pension liability. The City has a separate "reserve" policy to establish
the minimum fund balance to keep on hand for emergencies and operational cash flow.
2. It shall be the City's policy to consider an additional discretionary payment to reduce the unfunded pension
liability during each annual budget process, when staff identifies accumulated fund balance in excess of
reserve policy requirements.
Negotiate with Employees
Employees are already required to contribute a portion of their pay to the employee pension plan. Even though
the City collects the employee contribution from the employee, the City reports the employee contribution to
CalPERS as an employer -paid contribution. This increases the employee income used to calculate the City's
contribution and the retiree benefit.
The City may negotiate with its labor groups to require larger contribution from employees, or to stop reporting the
employee contribution as employer -paid. Both options would reduce the City's normal cost contribution, and may
be difficult to negotiate without offering something in exchange.
3. It shall be the City's policy to propose reductions of the City's normal cost contribution during labor
negotiations, based upon the plan funding ratio and the City's current and forecasted financial position.
Use Cash Planned for Capital Proiects and Issue Tax -Exempt Debt
When the City has cash on hand to fund capital projects, the City may consider using the cash to reduce the
unfunded pension liability, and instead issue tax-exempt debt to pay for the project. Tax-exempt debt carries a low
interest rate, and this strategy effectively swaps a higher -rate debt for a lower -rate debt.
UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 2
The City funds most of its capital projects with restricted money. Therefore, the restricted fund's allocation of the
unfunded pension liability, and the cash available for the project, limits the use of this strategy. In addition, frequent
debt issues can negatively affect the City's credit rating.
4. It shall be the City's policy to consider paying down the unfunded pension liability when there is at least $20
million of cash available for capital projects, and it is feasible and economically prudent to issue tax-exempt
debt for the projects.
Irrevocable Section 115 Trust
As an alternative to making an ADP to CAPERS, the City can choose to set aside additional money in a Section 115
Trust. Money placed into the trust is irrevocable, meaning it cannot be withdrawn and used for another expenditure
of the City. The City has already established a Section 115 Trust with an initial small deposit.
There are two primary benefits associated with a Section 115 Trust. The City has more control over the investment,
and the City can use the Trust for rate stabilization. If there are future spikes in pension costs, the City could use
money from the Section 115 Trust to help pay some of the required CalPERS contributions. However, in order to
utilize the Trust, additional money must be set aside in advance.
5. It shall be the City's policy to consider adding money to the Section 115 Trust account during each annual
budget process.
Pension Obligation Bonds
The City may consider issuing Pension Obligation Bonds (POBs) to refinance its unfunded pension liability. In a low
interest rate environment, issuing POBs can significantly reduce the City's cost. However, there is risk associated
with the refinancing. If actual pension plan results consistently exceed CalPERS assumptions over a long-term
period, the City may pay more overall. The following illustrates this concept.
Scenario: The City refinances its pension obligation at 3.75%; and CalPERS assumes a 7% investment return, yet
consistently earns a 9% return over a 30-year period.
$90
$80
$70
$60
$50
$40
$30
$20
$10
Year Year Year Year Year Year Year Year Year Year Year Year Year Year Year
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Baseline Scenario
Baseline is the Ca1PERS projection from the June 30, 2019 Actuarial Valuation Report. Dollar
amounts are in millions.
For the first 11 years in this scenario, the City would save money; but over the entire 30-year period, the City would
pay $444 million more.
UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 3
The Government Finance Officers' Association (GFOA) issued an advisory against POBs based upon a variety of
reasons such as the potential for invested proceeds to earn less than the interest owed on the bonds, structuring
the debt over a longer term than the original amortization period, and the potential for the bonds to consume the
agency's legal debt capacity. The following policy points can help mitigate these concerns.
6. It shall be the City's policy to consider issuing POB's only if the following criteria exist.
a) The City Council must conduct a public meeting to consider the results of an analysis quantifying the risk
probability of the City paying more over the life of the bonds.
b) To maximize potential savings, the bond interest rate must be at least 30% less than the plan's current
discount rate.
c) To ensure the City benefits from the possible scenario of actual plan results exceeding Ca1PER5
assumptions shortly after issuing debt, the bonds must not exceed 90% of the unfunded liability.
d) The bond structure must not extend the life of the debt.
e) The City must not use bond proceeds to pay the normal cost of the pension plan.
UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 4
lJ ORANG
Pension Refinancing Options
L -1
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,w Financial Solutions
ORANO
hrg
SANTA ANA
�VUFI
Tonight's Goal
Should we proceed with pension refinancing?
If yes:
• Direct staff to propose a bond counsel contract
• Adopt the proposed Unfunded Employee Pension
Liability Cost Reduction Policy
Tonight's action will not obligate the City to issue
refinancing bonds
SANTA ANA
Why Refinance Pension Debt?
City's pension cost grows faster than City revenue
• Estimated to grow 40% over the next 7 years
• City can refinance pension debt at 3-4%, vs. the 7%
charged by CaIPERS
• Refinancing can help create more predictable level
debt payments
IF CaIPERS outperforms assumptions consistently
over the next 20+ years, the City could pay more with
refinancing
�VUFI —
`�N DR4 NVF
Our Process
Analyze Pension liability
• Review Actuarial Reports, CAFR, & Model Bases
• Develop Pension Model
Evaluate Funding Strategies
• Budget & Financing Approaches
• Base Selection: Cash Flows vs. Savings
Pension Refinancing Analysis
• Recession Scenarios
• Market Timing Risk: Stress Test + Monte Carlo Simulation
Stakeholder Education & Communication
• City Council Presentation
• Adopt Pension Funding Policy
Develop Specific Plan + Implementation
• Pension Management Plan
q UFI
SANTA ANA
q�UFI
Comprehensive Approach
Pension
Model
Budget
&
CIP
Forecasting
& Revenue
Cliffs
Funding
Strategies
Policy
Constraints
Debt Service
& Reserves
cession &
Contingency
Planning
Proposed
Pension
Liability Cost
Reduction
Policy
addresses a
comprehensive
approach
Pension Debt
Overview
WUF , I
Unfunded Accrued Liability
(UAL = Pension Debt)
MISCELLANEOUS SAFETY COMBINED
Accrued Liability (AL) $
Market Value Assets (MVA)
UAL = AL-MVA $
916,997,454 $1,162,151,002 $ 21079,148,456
623,923,788 7741128,328 11398,052,116
293,073,666
69%
MISCELLANEOUS
Accrued Liability (AL) $ 948,084,339
Market Value Assets (MVA) 645,902,345
UAL = AL-MVA $ 302,181,994
69
WUF , I
$ 388,022,674
67
$ 6811096,340
67%
SAFETY COMBINED
$1,191,809,847 $ 2,139,894,186
787,0861636 11432,988,981
$ 404,723,211
66%
$ 706,905,205
67
2° o
3 �
Amortization Bases
Layers of Liability/(Asset) based on actual annual experience
Year
Reason
Ramp Term
June 30, 2019
1
2006
Fresh Start
NO
17
(1,541,128)
2
2007
Benefit Change
NO
7
32,701,223
3
2007
Benefit Change
NO
8
148,699
4
2009
Assumption Change
NO
10
31,696,131
5
2009
Special (Gain)/Loss
NO
20
29,579,873
6
2010
Special (Gain)/Loss
NO
21
10,838,947
7
2011
Assumption Change
NO
12
13,733,629
8
2011
Special (Gain)/Loss
NO
22
(7,376,144)
9
2012
Payment (Gain)/Loss
NO
23
5,607,564
10
2012
(Gain)/Loss
NO
23
(263,221)
11
2013
(Gain)/Loss
100%
24
100,300,176
12
2014
Assumption Change
100%
15
46,677,512
13
2014
(Gain)/Loss
100%
25
(62,621,643)
14
2015
(Gain)/Loss
100%
26
31,205,036
15
2016
Assumption Change
80%
17
15,553,637
16
2016
(Gain)/Loss
80%
27
35,371,912
17
2017
Assumption Change
60%
18
12,655,874
18
2017
(Gain)/Loss
60%
28
(19,195,295)
19
2018
Method Change
40%
19
5,584,776
20
2018
Assumption Change
40%
19
26,831,729
21
2018
(gain)/loss
40%
29
(11,435,367)
22
2019
AL Significant Increase
NO
20
126,996
23
2019
Non -Asset (Gain)/Loss
NO
20
2,662,634
24
2019
Investment (Gain)/Los
20%
20
3,338,444
'@�rUFI
Year
Reason
Ramp
Term
June 30, 2019
1
2005
Fresh Start
NO
16
$ (2,937,840)
2
2006
Benefit Change
NO
6
2,091,015
3
2009
Assumption Change
NO
10
16,377,191
4
2009
Special (gain)/loss
NO
20
32,208,187
5
2010
Special (gain)/loss
NO
21
(11,831,291)
6
2011
Assumption Change
NO
12
17,057,934
7
2011
Special (gain)/loss
NO
22
(4,372,256)
8
2012
Payment (gain)/loss
NO
23
8,208,025
9
2012
(gain)/loss
NO
23
74,156,553
10
2013
(gain)/loss
100%
24
140,600,831
11
2014
Life Exp. + 2.0/2.5 yrs.
100%
15
55,792,670
12
2014
(gain)/loss
100%
25
(82,908,692)
13
2015
(gain)/loss
100%
26
57,135,136
14
2016
7.50% to 7.375%
80%
17
19,004,711
15
2016
(gain)/loss
80%
27
46,990,724
16
2017
7.375% to 7.25%
60%
18
21,123,048
17
2017
(gain)/loss
60%
28
(29,671,462)
18
2018
Method Change
40%
19
4,647,516
19
2018
7.25% to 7.00%
40%
19
33,928,210
20
2018
(gain)/loss
40%
29
(1,304,860)
21
2019
Non -Asset (Gain)/Loss
No
20
4,528,943
22
2019
Investment (Gain)/Loss
20%
20
3,898,918
�N ORA(yve
.O C`0
3 �
p 2 •
Pension Debt By Plan at June 30 2019)�,,LmAm MA M2
Total Liability (Misc. Plan): $948 Million Total Liability (Safety): $1.2 Billion
02.2
Ilion
IAL
q�'UFI
Pension Debt By Plan (at June 30, 2019)
$1,400,000,000
$1, 200, 000, 000
�. Iii 111 111
:11 111 111
.11 111 111
� 11 111 111
$ 200, 000, 000
$0
WUF , I
M isc
Plan Liability
$948,084,339
Safety
Plan Liability
$1,191, 809, 847
ORA,,
0 2
$70,000,000
$60,000,000
$50,000,000
$40,000,000
$30,000,000
$20,000,00(i
$10,000,000
'@�rUFI
CaIPERS Estimate of UAL Payments
UAL Amortization Payment Schedules
$72.9M $73.OM
$71.4M I $71.1M
$69.5M $69.3M I
$67.SM- - ■ - - ■$67.9M
$67�OM
M
$59.7M
■
'L`° ti^ 'L00 'L0) MO �ti �ti ,�3 3� �y 3(0
,yo ,yo ,yo ,yo ,yo ,yo ,yo do do ,yo ,yo ,yo ,yo ,yo ,yo
■ Safety ■ Misc. -
>50.7M
$48.1M
EM $45.1 M
$42.8M$41.5M
.3M
$25.8M
. $21.6M
$4.6M
1
■$=.1M
�^ �0 M0) �° ati ati �3 a°` oy o0
,y0 ,y0 ,�O ,y0 ,ti0 ,ti0 ,ti0 ,ti0 ,y0 ,y0 ,ti0
Toolbox Approach to
Pension Liability
Management
WUFI
` N ORA,,,
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fl SANTA ANA
f
Nt
q�UFI
Pension Management Toolbox
1. Allocate Pension Debt costs to funds with personnel
costs
2. Section 115 Trust
• Set aside additional money for future CaIPERS payments to
stabilize costs over time
• More control over the investments
3. Use of Reserves & One -Time Monies to make additional
discretionary payments
• 1.0% City Investment Return vs 7.0% CaIPERS Discount Rate
4. Tax -Exempt Exchange
• Use accumulated cash for capital projects and issue tax-exempt
debt at a lower rate than taxable pension refinancing bonds
5. Issue Bonds to Refinance the Debt
Additional Discretionary
Payments (ADPs)
WUFI
`n Example of ADP Targeting Strategy
We select which layers to pay, which can make a big difference in savings
10-Year Strategy:
• Utilized for
short term
budget /cash
flow relief
30-Year Strategy:
• Utilized for
maximum
interest cost
savings
WUF , I
$1801"
$160,000
$140,000
$120,000
$100,000
$80,000
$60,000
$40,000
$20,000
TARGETING STRATEGIES
$1 Million UAL: 10-Yearvs. 30-YearAmortization
■ 10 Yea r = $1,413,000 Payments
■ 30-Year = $2,761,000 Payments
1 2 3 4 5 6 7 8 9 10 1112 13 14 15 16 17 18 19 20 2122 23 24 25 26 27 28 29 30
fj SANTA ANA
WUF1
Targeting Strategy Considerations
A specific example
Water Fund pension debt for Water employees is
$13.5 million.
• If we pay Misc. Base #4 with a 10-year amortization,
we save $11.3 million
• If we pay Misc Base #16 with a 27-year
amortization, we save $17.5 million
Recommended ADP for Base #16
$5,000,000
$4,500,000
$4,000,000
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
WUF , I
ADP Base #16 - $35,371,912
■ Original Payments
N M M tD r- w N O N M 4* Ln W la w M O N M 4* M w n 00
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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 N N
• Allocated $13.5 Million from the Water Enterprise
Funds 38% of Base #16 UAL
• Pro -Rats reduction in balance & payments
$17.5 Million in Interest Costs Savings
• Reduction of $31 Million In Total Annual UAL Payments
Bond Trends and Options
WUF , I
SANTA ANA
Recent Refinancing Activity
Issuer
Par Value
Pricing Date
El Cajon
$ 147,210,000
1/13/2021
Coachella
17,590,000
12/8/2020
Ukiah
49,875,000
11/30/2020
Gardena
101,490,000
11/24/2020
Arcadia
90,000,000
10/27/2020
Placentia*
52,950,000
10/26/2020
7 Torrance*
349,515,000
10/12/2020
Azusa
70,075,000
9/30/2020
Pomona
219,890,000
8/20/2020
10 West Covina*
204,095,000
7/30/2020
11 San Bernardino
5,9451000
7/23/2020
12 San Bernardino
13,905,000
7/23/2020
13 El Monte
21,000,000
6/30/2020
* Lease Revenue Bond
WUF , I
Issuer
Par Value
Pricing Date
North Co Fire
20,305,000
6/11/2020
]Lt
Riverside
4321165,000
6/11/2020
16
Carson
108,020,000
6/10/2020
17
Montebello
153,425,000
6/10/2020
18
Fort Ord
30,405,000
6/10/2020
1c.
El Monte
118,725,000
6/9/2020
20
Inglewood
1011620,000
6/2/2020
21
Ontario
236,585,000
5/21/2020
22
Larkspur
18,295,000
5/14/2020
23
Riverside Co
719,995,000
5/6/2020
24
Pasadena
131,805,000
2/26/2020
2E
Orange Co
463,895,000
1/14/2020
2E
Orange USD
33,595,000
12/19/2019
TOTAL
$ 3,912,375,000
` N ORA,,,
0 "
fj SANTA ANA
WUF , I
Upcoming Refinancing Activity
Issuer Par Value Pricing Date
Downey
$ 200,000,000
2/11/2021
San Fernando
451000,000
2/15/2021
Monterey Park
220,000,000
3/1/2021
Orange
290,000,000
3/1/2021
Chula Vista
30010001000
Q12021
Huntington Beach
350,000,000
Q12021
El Segundo
150,000,000
4/1/2021
8
Manhattan Beach
92,500,000
5/19/2021
9
Corona
272,000,000
Q2 2021
10
Covina
72,000,000
TBD
11
Commerce
31,000,000
TBD
1i
Corte Madera
50/000/000
TBD
13
Whittier
143,000,000
TBD
TOTAL
$ 2,215,500,000
SANTA ANA
q�UFI
Refinancing Options for Santa Ana
1. Issue Bonds for SO% of Pension Liability
• $350 Million Bonds with Hybrid —Level Debt Service
• 25-Year Final Maturity
• Target Longest Safety Bases
2. Issue Bonds for 90% of Pension Liability
• $642 Million Bonds with Hybrid —Level Debt Service
• 25-Year Final Maturity
• Misc. Base #14 & #16 remain outstanding
N. ORA,,,
,F
_ G
y Scenario #1 50% Refinancing
50% UAL POB 25 Year (Safety Only)
$80,000,000 Par Value $ 357,790,000
Deferred UAL Savingsl $ 183,002,882
• • •. •.•• NPV Savingsl $ 144,438,666
$70,000,000 .. ..
NPV % 41%
•' 3.17%
$60,000,000 . • ' • . •
$50,000,000 . • � Misc. UAL Payments
•. � Remaining Safety UAL
• � POB Debt Service
$40,000,000
... Original UAL Payments
$30,000,000
$20,000,000
$10,000,000 •
$0 •i ... - -
2022 2023 2024 2025 2026 2027 2028 2029 2030 20312032 2033 2034 2035 2036 2037 2038 2039 2040 20412042 2043 2044 2045 2046 2047 2048
�UFI
`�N DR4 NVF Z \�
Scenario #2 90% Refinancing
90% UAL POB Hybrid Level Debt Service
$80,000,000 Par Value
UAL Savings
•••..• •••.• NPV Savings
$70,000 000 • • •' • • • •' ••
• NPV
. • • •. TIC
$ 641,865,000
$ 253,872,795
$ 217,109,100
34%
3.01
$60,000,000 . • • • • • • • • ' • .
.' •� POB Debt Service
$50,000,000 ' • Misc. Base #14 & #16
•
• . • • • Original UAL Payments
$40,000,000 • • • • •
$30,000,000 •
$20,000,000
$10,000,000 •
$0 Li•. .....
2022 2023 2024 2025 2026 2027 2028 2029 2030 20312032 2033 2034 2035 2036 2037 2038 2039 2040 20412042 2043 2044 2045 2046 2047 2048
WU F , I
SANTA ANA
WUFI
Refinancing Savings Matrix
Par Value $ 35718001000
Total Debt Service 528,044,092
Avg. Annual Payment 51,696,630
Budgetary Savings 37,742,327
Deferred UAL Savings 18316991037
N PV Savings 14417591624
% Savings 41%
TIC% 3.16%
$ 64118651000
88419461714
46,171,181
1601909,483
25318721795
21711091100
34%
3.01 %
` N ORA,,,
0 "
SANTA ANA
Compare Estimated Payments
No Refinancing $1,298,053,648 $0
50% Refinancing
90% Refinancing
$1,115,050,766
$1,044,180,853
$183,002,882
$253,872,795
Total Estimated Payments = Refinancing Bond Payments + Remaining CoIPERS Liability Payments
Based on Ca1PERS estimate of future payments and market
conditions in December 2020. Final numbers will likely change.
WUF , I
Investment Return
Risk Analysis
WUF , I
G
0 2
CaIPERS Investment Return
CalPERS Could Outperform Their Return Assumption (7%) and Reduce UAL; Or
CalPERS Could Underperform Their Return Assumption and Increase UAL
CaIPERSAn nua I InvestmentPerforma nce
21.7%
20.11�9 5%
19.1%
20.0%
18.4%
16.3%
16.6%
14.5%
15.3%
15.01%
12.5%
12.3%
13.3%
13.2%
10.5%
1
%
11.2%
10.0•�
8.6%
2.4%
-5.0%
-6.1%
-7.2%
CaIPERS Annual Return
-15.0%
_ CaIPERS Avg. Return =7.79%
-20.0%
24.0%
-25.0%
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Pension Refinancing can help avoid an increase of the City's pension debt
when CalPERS investment returns are less than the 7% assumption.
WUF1 —
` N ORA,,,
0 "
Z / CO
Qr � i, �{
SANTA ANA
$3,500
$3,000
Monte Carlo Simulation
Monte Carlo Simulation
Ending Portfolio Balance
$2,500
$2,000 -
$1,500
$1,000
$0
1 2 3 4 5 6 7 8 9 1011121314151617181920 2122 2324 25
Probability of Success
Results change with each iteration
and Bond Structure
• 87% with 90% Refinancing
• 84% with 50% Refinancing
• Monte Carlo Simulation compares ending portfolio balance: Pension
Bonds vs CALPERS UAL payments over 25 years.
• Calculates results based on running 10,000 different (random) scenarios
• CalPERS Return over 25-year period
• Expected Return = 7.0% (Standard Deviation = 10.6%)
WUF , I -
Policy Consideration
WUF , I