CITY COUNCIL: Refinancing & Refunding Option for the City's CalPERS Retirement Side Fund

Meeting Date: September 11 , 2012

Prepared by: Jason Stilwell

City Council

Agenda Item Summary

Name: Discussion of certain refinancing and refunding options for the City's CalPERS Retirement Side Fund.

Description: On July 3, 2012 the City Council directed the City Administrator to begin analyzing refinancing options for the City's CalPERS side fund. This item was one of the Key Projects adopted by the City Council as part of the City Administrator 2012 Goals. The CalPERS Committee had four major recommendations with the first being to "pay the side fund debt as soon as possible."

Fiscal Impact: The financing structure for the issuance of any pension obligation bond (POB) will be determined based on two specific components:

• The availability of a new sales tax revenue stream (a portion of which could be applied toward the Side-Fund POB and allow for a quicker payoff)

• POB Buyers - Potential investors in POBs include private placement providers (banks and investment groups) or investment banks which offer underwriting services and a distribution ofbuyers (both individual and institutional), also known as a public offering.

NHA Advisors and Jones Hall both recommended that the City approve the POB documents at its October meeting and be prepared to lock interest rates on the POB shortly after the November election results are known. If the POB is approved in October and is structured as a public offering, the City still retains its option to work directly with a private placement provider.

Staff Recommendation: Receive the report and provide direction.

Important Considerations: Assuming Council provides direction to staff at this meeting, NHA Advisors and Jones Hall will draft the appropriate legal documents, credit review, rating agency interaction, and selection of an underwriter. Once formal approval of the POB is complete at the October meeting, the City will be prepared to issue the POB shortly after the November 6 election. This November process (selling the POB to an underwriter) would lock in the term and interest rates and is anticipated to be completed in September. Once the validation procedure has been completed, the POB issue will be brought back before the City
Council one more time for final authorization. This schedule should enable the City to lock in interest rates in late October or early November 2012.

Reviewed by:

Jason Stilwell,  City Administrator  Date

CITY OF CARMEL-BY-THE-SEA

STAFF REPORT

TO: MAYOR BURNETT AND COUNCIL MEMBERS
FROM: JASON STILWELL, CITY ADMINISTRATOR
DATE: SEPTEMBER 11, 2012
SUBJECT: DISCUSSION OF CERTAIN REFINANCING AND REFUNDING OPTIONS FOR THE CITY’S CALPERS RETIREMENT SIDE FUND

RECOMMENDATION: Receive presentation and provide direction.

DISCUSSION: On July 3, 2012 the City Council directed the City Administrator to begin the process of analyzing refinancing options for the City’s CalPERS side fund. 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. One 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.”

Side-Fund Background – 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. CalPERS determined that the pension liabilities for the two plans exceeded the asset values by roughly $6 million. At the time, CalPERS found that other small cities also had assets that were not equal to their liabilities. As a result, 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. As of June 30, 2011 the Side-Fund balance for the City’s two pension programs totaled over $6.2 million. CalPERS adjusted the actuarial investment return rate to 7.50% in March 2012. The two Side-Fund program balances will be verified through the Lump Sum Payoff Amount letter that the City will request from CalPERS.

The Side-Fund payments will change if there are contract amendments or the actuarial investment return rate assumption is changed (as it did in March 2012).

The City’s two Side-Funds have amortization schedules that anticipate a final payoff in FY 2033-34 for the safety fund and FY 2022-23 for the miscellaneous Fund.

NHA Advisors, the City’s financial advisor, and Jones Hall, the City’s bond counsel, were asked to develop a financing program and additional information for the City Council to consider. As part of this financing program, options were analyzed to provide the City Council with projections under two scenarios: (1) the refinancing of the Side-Fund through the lower interest rates available in the capital markets (keeping the original terms for the two Side-Fund programs), and

(2) refinancing the Side-Fund programs under an accelerated structure recognizing a new revenue stream from a successful ballot initiative in November 2012.

The issuance of a pension obligation bond (“POB”) requires 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. The City Council initiated this action at its July 3, 2012 meeting. 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). Validation documents were submitted in a timely manner in July and the court process is anticipated to be complete in October.

After the September 11th discussion, the City Council will be required to take a formal action on the POB bond documents (resolutions and forms of financing documents) at an October meeting. Assuming there is direction to staff during the September 11th meeting, NHA Advisors and Jones Hall will commence drafting the appropriate legal documents, credit review, rating agency interaction, and selection of an underwriter. Once formal approval of the POB is complete at the October meeting, the City will be prepared to issue the POB shortly after the conclusion of the November election. This November process (selling the POB to
an underwriter) would lock in the term and interest rates and is anticipated to be completed in September. Once the validation procedure has been completed, the POB issue will be brought back before the City Council one more time for final authorization. This schedule should enable the City to lock in interest rates in late October or early November 2012.

FINANCIAL OPTIONS: The financing structure for the issuance of any POB will be determined based on two specific components:

• The availability of a new sales tax revenue stream (a portion of which could be applied toward the Side-Fund POB and allow for a quicker payoff)

• POB Buyers – Potential investors in POBs include private placement providers (banks and investment groups) or investment banks which offer underwriting services and a distribution of buyers (both individual and institutional), also know as a public offering

Private placement providers will only buy the entire POB (as opposed to an underwriter selling pieces off to multiple parties) and typically will not exceed terms of 10 years. This limitation could impact the ability to refinance the safety Side-Fund under its existing term (22 years remaining). If the sales tax initiative passes and the two Side-Fund POBs are structured as 10-year obligations, a private placement solution remains an option.

The primary difference in the sale of the POB through a private placement provider or underwriter is the requirement of a public rating (through one of the three major rating agencies – Standard & Poor’s, Moody’s Investor Service or Fitch Ratings) and the creation of the disclosure document (known as an official statement or offering memorandum). A private placement provider will typically do their own due diligence and credit review and will, therefore, not require the City go through the rating or disclosure work. This would save approximately $35,000-$40,000 which is then compared to the overall comparative analysis that NHA Advisors would do to determine if a private placement or public offering will result in a lower cost to the City.

In order to minimize the impact of these costs, the City could choose to wait until after the election to start the financing process. It is the recommendation of NHA Advisors and Jones Hall that the City approve the POB documents at its October meeting and be prepared to lock interest rates on the POB shortly after the November election results are known. If the POB is approved in October and is structured as a public offering, the City still retains its option to work directly with a private placement provider. The rating and disclosure document would serve as additional information that may not be required but available.