Meeting Date: July 3, 2012
Prepared by: Jason Stilwell
City Council
Agenda Item Summary
Name: Consideration of a Resolution authorizing the issuance of Pension Obligation Bonds to refinance the outstanding side fund obligations of the City to the California Public Employees' Retirement System (PERS) and authorizing institution of judicial validation proceedings.
Description: This agenda item enables the City Council to consider beginning the process to refinance the Side Fund obligation. If the City Council chooses to use this opportunity, it would issue taxable pension obligation bonds ("POB") secured by the General Fund to prepay its CalPERS Side Fund obligation. Under current bond market conditions coupled with the City's strong position, estimated annual interest rates may be reduced by up to 50% and the amortization period reduced to ten years. The proposed transaction would refinance an existing obligation to take advantage of low bond market rates. It would not ch'!flge the benefits owed to existing or prior City employees.
Overall Cost:
City Funds: The City has the ability to restructure the two outstanding side fund obligations for significant interest and cash flow savings.
Staff Recommendation: Adopt the Resolution authorizing the issuance of pension obligation bonds to refinance the outstanding Side Fund obligations of the City to the California Public Employees' Retirement System (CalPERS)
Important Considerations: This item pertains to one of the Key Projects adopted by the City Council on January 10, 2012 as part of the City Administrator 2012 Goals. The key project is to begin implementing CalPERS Committee recommendations. The Committee had four major recommendations with the first being to "pay the side fund debt as soon as possible." The combination of adopting the second tier
and refinancing the Side Fund will have a very positive impact on the future fiscal stability of the City and is a key component of the City's long-term sustainability plan.
Reviewed by:
Jason Stilwell, City Administrator Date
TO: MAYOR BURNETT AND COUNCIL MEMBERS
FROM: JASON STILWELL, CITY ADMINISTRATOR
DATE: JULY 3, 2012
SUBJECT: PENSION OBLIGATION BONDS TO REFINANCE CalPERS SIDE FUND OBLIGATION
RECOMMENDATION: Adopt Resolution authorizing the issuance of pension obligation bonds to refinance the outstanding Side Fund obligations of the City to the California Public Employees' Retirement System (CalPERS)
DISCUSSION: This item pertains to one of the Key Projects adopted by the City Council on January 10, 2012 as part of the City Administrator 2012 Goals. The key project is to begin implementing CalPERS Committee recommendations. The Committee had four major recommendations with the first being to "pay the side fund debt as soon as possible."
In 2003, when the City's pension plans were pooled with other small cities and agencies, CalPERS reviewed the contributed assets and estimated liabilities of the City's pension plans. It determined that at the time the liability values for the two plans exceeded the asset values by roughly $6 million. At the time, other small cities also had assets that were not equal to their liabilities. CalPERS sought to realign the assets and liabilities
creating what it calls a Side Fund. The Side Fund is treated as a loan from CalPERS to the City. The interest rate on this loan is 7.75%. As of June 30, 2011 the Side Fund debt for the City's two funds total over $6.1 million.
This agenda item enables the City Council to consider beginning the process to refinance the Side Fund obligation. If the City Council chooses to use this opportunity, it would issue taxable pension obligation bonds ("POB") secured by the General Fund to prepay its CalPERS Side Fund obligation. Under current bond market conditions coupled with the City's strong position, estimated annual interest rates may be reduced by up to 50% and the amortization period reduced to ten years. The proposed transaction would
refinance an existing obligation to take advantage of low bond market rates. It would not change the benefits owed to existing or prior City employees.
The City Administrator has asked NHA Advisors and the firm Jones Hall to develop information for the City Council to consider. If approved by the City Council, NHA Advisors will represent the City's interests through the process as the City's financial advisor and Jones Hall will serve as the City's bond counsel in connection with the issuance and sale of the Bonds and the judicial validation process. Both firms have
expertise in this work, are well respected, and will offer professional guidance to the City staff. These consultants constituted the core team that undertook the City of Santa Cruz's recent POB issuance process.
The issuance of POB requires what is called a "validation procedure" in the local Superior Courts. For a validation, the City Council provides initial authorization to issue the bonds and then files a court action, publicly noticing the City's intent to issue bonds to refund its existing CalPERS obligation. If there is no challenge, the validation is ratified by the Superior Court typically within 90 days of its filing. Because the bonds are payable from all legally available funds of the City (which is also true for the existing CalPERS obligation), validation is necessary to affirm bond counsel's position that the POB are exempt from the Constitutional Debt Limit because they are issued to refund a pre-existing obligation imposed by law (vested pension benefits). Once the validation procedure has been completed, the POB issue will be brought back before the City Council one more time for final authorization. Beginning the process at this time should, assuming the validation process meets its typical schedule, enable the City to lock in interest rates in late October or early November, 2012.
The City Council adopted a second tier retirement formula for new employees. This will significantly reduce the future costs of providing retirement benefits to employees. The chart below shows the impact in CalPERS contribution rates before and after the second retirement tier. In addition the chart demonstrates the impact the Side Fund has on the City's retirement rates.
CaiPERS Contribution rates before and after second tier
Mise EEs
Safety EEs
First Tier
FY 12-13 Rates
Rates are based on June 30, 2010 valuation
Second Tier
FY 12-13 Rates
The Side Fund wi II continue to be pa id off by the first tier pian si nee all the past service on which itis based belongs
to those current members who wi II continue in the first ti er.
The combination of adopting the second tier and refinancing the Side Fund will have a
very positive impact on the future fiscal stability of the City and is a key component of
the City's long-term sustainability plan.
FISCAL IMPACT: The City has the ability to restructure the two outstanding side fund
obligations for significant interest and cash flow savings.
City of Carmel-by-the-Sea
CaiPERS Side Fund Analysis
Summary of Most Recent CaiPERS Side Fund Report
Side Fund Balance
Fiscal Year in which UAAL is Fully Amortized
Side Fund Amortization Payment for FY 2011-2012
Side Fund Amortization Payment for FY 2012-2013
Report Amortization Period
Proposed Bond Par Amount
CaiPERS Amortization at 7.50%
Total Debts Service
Total Side Fund Amortization
PV Savings
P V Savings as~ of Payoff
ATTACHMENTS:
1. Resolution
Safety
$3,375,278
5/30/2034
$ 232,851
$ 240,419
22
$3,495,000
Safety
$5,575,390
7,391,050
425,692
12.61~
Misc. Total
$2,750,158 $5,125,435
5/30/2023
$ 308,301 $ 541,152
$ 318,321 $ 558,740
11
$2,850,000 $6,345,000
Misc. Total
$3,585,915 $10,262,306
4,081,273 $11,472,323
411,194 $ 836,887
14 .95% 13.66%
CITY OF CARMEL-BY-THE-SEA
CITY COUNCIL
RESOLUTION 2012-
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF CARMEL-BY-THE-SEA AUTHORIZING THE
ISSUANCE OF PENSION OBLIGATION BONDS TO
REFINANCE THE OUTSTANDING SIDE FUND
OBLIGATIONS OF THE CITY TO THE CALIFORNIA
PUBLIC EMPLOYEES’ RETIREMENT SYSTEM AND
AUTHORIZING INSTITUTION OF JUDICIAL
VALIDATION PROCEEDINGS
WHEREAS, the City of Carmel-by-the-Sea (the “City”) is a contracting member
of the California Public Employees’ Retirement System (“PERS”), and under its contract
with PERS the City is obligated to make certain payments to PERS in respect of retired
employees under the Side Fund program of PERS which amortizes such obligations over
a fixed period of time (the “PERS Side Fund Obligations”); and
WHEREAS, the City is authorized under the provisions of Articles 10 and 11 of
Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code,
commencing with Section 53570 of said Code (the “Bond Law”), to issue its bonds for
the purpose of refunding certain outstanding obligations of the City, including the PERS
Side Fund Obligations; and
WHEREAS, in order to refund all or a portion of the PERS Side Fund
Obligations and thereby realize interest savings, the City proposes at this time to
authorize the issuance of its bonds under the Bond Law for the purpose of refinancing the
PERS Side Fund Obligations in whole or in part; and
WHEREAS, the City Council wishes at this time to authorize the issuance of
such bonds and the institution of judicial proceedings to determine the validity thereof;
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of
Carmel-by-the-Sea as follows:
Section 1. Authorization of Bonds. The City Council hereby authorizes the
issuance of its bonds, notes or other obligations (the “Bonds”) under the Bond Law for
the purpose of refunding all or a portion of the unfunded accrued actuarial liability
represented by the PERS Side Fund Obligations, as reported to the City by PERS. The
principal amount of the Bonds shall not exceed the amount required to refunded such
accrued actuarial liability plus an amount required to pay all costs of issuing the Bonds.
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Section 2. Material Provisions of Bonds. The Bonds shall be issued under an
Indenture of Trust (the “Indenture”) between the City and Union Bank, N.A., as trustee
(the “Trustee”), in substantially the form on file with the City Clerk. The final form of
the Indenture shall be subject to approval by resolution of the City Council adopted
following the conclusion of proceedings described in Section 3. The Bonds shall be
subject to the following limitations:
(a) The Bonds shall mature over a term not exceeding the amortization
period which has been established by PERS for the PERS Side Fund
Obligations.
(b) Interest on the Bonds will be calculated at a fixed rate, which shall
not exceed the maximum rate of interest permitted by law.
(c) Principal of and interest and redemption premiums (if any) on the
Bonds shall be payable from the General Fund of the City and from
any other source of legally available funds of the City. The Bonds
shall not constitute an obligation of the City for which the City is
obligated to levy or pledge any form of taxation.
(d) Proceeds of the Bonds, except to the extent required to pay the costs
of issuing and underwriting the Bonds, shall be deposited with the
Trustee and applied to discharge the PERS Side Fund Obligations of
the City in whole or in part.
Section 3. Institution of Judicial Validation Proceedings. The City Council
hereby authorizes the filing of an action to determine the validity of the Bonds, the
Indenture and related matters in the Superior Court of Monterey County, under the
provisions of Sections 860 et seq. of the Code of Civil Procedure of the State of
California. The firm of Jones Hall, A Professional Law Corporation, as bond counsel to
the City, is hereby directed, in concert with the City Attorney, to prepare and cause to be
filed and prosecuted to completion all proceedings required for the judicial validation of
the Bonds, the Indenture and related matters.
Section 4. Engagement of Professional Services. The firm of NHA Advisors,
LLC is hereby retained as financial advisor to the City in connection with the issuance
and sale of the Bonds, and the firm of Jones Hall, A Professional Law Corporation, is
hereby retained as bond counsel to the City in connection with the issuance and sale of
the Bonds and the judicial validation thereof. The City Administrator is hereby
authorized and directed on behalf of the City to execute an agreement with each of said
firms in the respective forms on file with the City Clerk.
Section 5. Effective Date. This Resolution shall take effect from and after the
date of approval and adoption thereof.
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PASSED AND ADOPTED by the City Council of the City of Carmel-by-the-Sea
this 3rd day of July, 2012, by the following vote:
AYES: COUNCIL MEMBER:
NOES: COUNCIL MEMBER:
ABSENT: COUNCIL MEMBER:
SIGNED:
JASON BURNETT, MAYOR
ATTEST:
Heidi Burch, City Clerk
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