02-04-2020 - PowerPoint Item #6Agenda Item No. 6
Consideration of Issuance of Pension Bonds
Discussion
West Covina City Council Meeting
February 4, 2020
POB Timeline
Activity
Date
City Staff Recommends Muni Advisor, Underwriter Bond Counsel
1/22/2020
City Council Approves MA, UW, BC,Validation Docs
2/4/2020
Financial & Risk Analysis of POB Alternatives
2/18/2020
Rating Presentation
4/22/2020
Rating Issued
5/1 1/2020
City Council to Approved Issuance, POS, Indenture
5/ 19/2020
Bond Sale
6/5/2020
Finance Team
Todd Smith
Brian VVhItoorth. CFA
Managing Director
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Cardiff, California
Erc,nc, Ca ifcrnia
760.632.1347
310.401 K-17
Todd. Smilhohilltopsecuriies.com
Brian.WhitworthohII �ecurities.com
MunidpalAdvisors:
Tammy Ofek
Company,
Eric Scriaen
Advisors
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Principal t P. :Irian
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tammyo@woifco.net
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Mike --r- -.e , e..rs.eom
Don Hunt Russ Trice
Partner Partner
Los Angeles, California Los Angeles, California
213.592.9316 213.892.9317
Don. Huntanortorrosefulhright.com Russ.TricepnortorimsefuMghtcom
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Staff Recommendation:
■ That the City Council adopt Resolution No. 2020-08
❑ Authorizing the Issuance and Delivery of Pension Obligation Bonds,
approving the execution of a Trust Agreement, authorizing a validation
action, approving certain professionals for the refunding and related
matters.
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The City's Current CalPERS Situation: Why The Unfunded Liabilities?
■ CalPERS was founded in 1932 and currently has 2,890 member agencies including
the State, counties, cities, school districts and special districts
■ The City joined CalPERS in May 1966
■ The City has always paid its required contributions to CalPERS
■ Over the past few decades CalPERS system went from excess cash ("super -funded")
to being under -funded, thus creating unfunded liabilities
■ In general, unfunded liabilities of CalPERS agencies are the result of:
■ Lowering the CalPERS discount rate, from as high as 8.25% in 2004 to 7.0%
today
■ Investment losses, especially in 2008
■ Increased benefits offered by many employers between 1999 and 2012
■ Increased life expectancy
■ CalPERS' previous contribution policy, which eased the burden on employers
after the Great Recession, but did not make faster progress in paying off
unfunded liabilities
The City's Current Ca1PERS Situation
■ In the most recent actuarial study the combined funded ratio is 64.8% @ 7.0%
Discount Rate (combined for Safety and Miscellaneous plans)
■ At 6/30/20, the City is estimated to have a total unfunded liability of approximately
$200 million ($199,686,217)
■ Without POBs, CaIPERS projects that future required payments toward unfunded
liabilities will increase by $8.7 million (72%) from $12.3 million in FYE 2020 to a peak
of $21.0 million in FYE 2031.
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
Estimated Amortization Payments, 6/30/18 Actuarial
O.y'r O�'L Otis O,tib O,Ly Otid Oti1 Oti4 OtiA OHO O�ti 03ti 03M O„�b On�S 036 0�1 O„�0 OVA Ob0 Obi' Oati 0�3 ODP` Oby OP�O Ob1 0�0 Oa°j
ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti ti
-Misc@7.0% -Safety@7.0% -Total 7.0%
What is a Pension Obligation Bond ("POB")?
■ A bond issued by a municipality from which the proceeds are used to reduce
the accrued unfunded liabilities of its pension system (in this case, CaIPERS)
■ Bond proceeds are typically deposited into a retirement system (in the City's
case, CaIPERS), and are managed in a similar manner to existing investments
■ If investment returns at a retirement system are higher than POB borrowing
costs, budgetary savings to the municipality are very likely
• Unlike most municipal bonds, interest payments on POBs are generally taxable
for purpose of federal income taxes
The City's Goals for POBs
1 . Achieve fiscal sustainability and financial stability. The City will align
projected revenues/projected expenditures and adopt best management
practices
2. Change the payment pattern (e.g., a smooth pattern for bond repayment,
vs an irregular pattern with no bonds). A predictable payment pattern
makes budgeting easier
3. Obtain higher expected investment returns on investments at retirement
system (e.g., 7%) than borrowing cost (e.g.,—3.5-4.0%)
4. Leave amortization period unchanged
5. Raise the funded level of the pension plan (e.g., from 64.8% to 92.5%)
6. Establish a long-term legally sound plan well -suited to the City's needs
California Judicial Validation Overview
■ Pension Obligation Bonds are validated in California as obligations
imposed by law.
■ Validation is necessary because all debt issued in California absent
a Constitutional exception must be voter -approved.
■ Validation involves a formal court proceeding in the County's
Superior Court and takes approximately 120 days, including:
■ City Council approves resolution
■ A complaint is filed in Superior Court
■ The Court orders notices published in a local newspaper
■ A deadline for responses occurs (commonly, there is no opposition)
■ Judgement is issued. Appeal period expires 30 days later
■ Bonds are issued
■ Once a final validation judgement is entered, investors have
assurance that the Pension Obligation Bonds are legal, valid and
binding without voter approval and the terms of the Trust Agreement
cannot be subject to challenge.
POB Example: $157.9 Million Bond
• Results in approximately 92.5% funded ratio at 7% discount rate
• Includes amortization bases up to 24 years, POB is 24 years
• Expected borrowing cost is 3.813% including all costs of issuance
• Produces large expected savings in most years (—$2.3-7.3 million)
• Has up to $6.5 million dissavings/additional cost in later years
• NPV Savings estimated at 22.3%, $44.8 million
$25,000,000
$2.3 to $7.3 million $0.1 to $6.5 million
of annual savings annually of
$zo,000,000 increased payments
$15,000,000 /
i
$10,000,000
$5,000,000
$0
O O O O O O O O O O O W W O W O O O O O O O O O O O
FN+ N W A lfi M V W lN0 O F+ N W A lfi O1 V W l0 O F+ N W A lli M
-$157.9 Million Bonds, A+ Rating -No Bonds 7.0%
*Bond interest rates as of _/2020
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Government Finance Officers Association* concerns regarding POBs
Note: Only one applies to the proposed transaction:
1. Invested POB proceeds might earn less than the borrowing costs
— This is indeed possible. Instead of CalPERS expected long term earnings rate of
7.0%, lower actual investment returns could occur. The chances of returns over a 25
year horizon below the 3.5-4.0% borrowing cost are low, but they do exist.
2. "POBs are complex instruments that carry considerable risk ... and may include swaps or
derivatives..."
— No. These are fixed rate bonds.
3. "Issuing taxable debt to fund the pension liability increases the jurisdiction's bonded debt
burden and potentially uses up debt capacity..."
— No. The Validation Proceeding will exclude POBs from any debt limit.
4. POBs are "typically issued without call options" making it more difficult to refund bonds if
interest rates fall or a different debt service structure is desired in the future.
— No. These bonds will be issued with par calls
5. "POBs are frequently structured in a manner that defers the principal payments..."
— No. These bonds will pay principal every year they are outstanding and have the
same final maturity as the underlying unfunded liability amortization.
6. "Rating agencies may not view the proposed issuance of POBs as credit positive..."
— We will be advocating for an upgrade from S&P due to the POBs and other changes
at the City.
Source: GFOA - Pension Bond Risks Jan 2015
POB Issuance Statistics
■ Since 1986 approximately:
❑ $106 billion in pension bonds have been issued
❑ $28 billion issued in California, from 80 issuers
❑ Recent local California pension bonds issued:
❑ AAA, Glendora, $64 million 2019
❑ AA+, La Verne, $52 million 2018
❑ AA, Monrovia $11.5 million 2017
❑ AA, City of Riverside, $32 million 2017
❑ AA-, Baldwin Park, $54 million 2019
❑ Post 2012, all POBs have been sold as fixed rate bonds
Data Sources: MSRB EMMA, IPREO, SDC, Bloomberg, Boston College
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