Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
AGENDA MATTER:
CONSIDERATION OF A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BARSTOW
CONFIRMING THE ISSUANCE OF PENSION OBLIGATION BONDS PURSUANT TO AN INDENTURE
OF TRUST TO REFINANCE THE OUTSTANDING OBLIGATIONS OF THE CITY TO THE CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM, CONFIRMING AND APPROVING THE FINAL FORM
OF INDENTURE OF TRUST AND THE BOND PURCHASE AGREEMENT, APPROVING AN OFFICIAL
STATEMENT, AND APPROVING AND DIRECTING RELATED MATTERS
EXECUTIVE SUMMARY:
Pursuant to Resolution No. 5062-2021, adopted by the City Council on October 4, 2021, the City Council previously approved the issuance of one or more series of pension obligation bonds, directed staff to institute a judicial validation action, and directed staff to submit the necessary documents for an initial series of pension obligation bonds (“Pension Obligation Bonds”) to the City Council for approval.
On February 9, 2022, the San Bernardino Superior Court issued a judgment that the pension obligation bonds are legal, valid and binding.
On March 9, 2022, S&P Global Ratings assigned a rating of “A+” with a stable outlook for the Pension Obligation Bonds.
Staff has worked with the City’s bond counsel and disclosure counsel (Jones Hall, A Professional Law Corporation), municipal advisor (Fieldman, Rolapp & Associates, Inc.) and underwriter (Hilltop Securities Inc.) to prepare the documents required to sell the Pension Obligation Bonds.
There are certain risks attached to the issuance of the Pension Obligation Bonds that arise from the uncertainty of CalPERS’ future investment returns, which are summarized below.
DISCUSSION:
Background. Currently, the City offers retirement benefits to its employees through CalPERS. Through CalPERS, the City contracts to provide pension and OPEB benefits to its Miscellaneous (non-public safety employees) and Safety-Police employee groups.
The City has contracted with CalPERS to provide pension benefits to its Miscellaneous and Safety-Police employee groups since, at least, January, 1951. CalPERS is a multi-employer pension trust with 2,890 participating employers. Currently, the City’s funded status of its CalPERS pension plan is 75.4% as of the latest actuarial valuation and its unfunded actuarially accrued liabilities are $33,330,491. These liabilities accrue interest at a rate equal to the pension system’s discount rate. In FY2021-22, the City’s UAL payment for the Miscellaneous Classic group equaled 25.24% of payroll (total payment 39.26% of payroll) and the UAL payment for the Safety Classic group equaled 42.28% of payroll (total payment
65.99% of payroll). These actuarially accrued liabilities accrued interest at a rate equal to the discount rate of the plan of 7% through June 30, 2021. In November, 2021, the discount rate was reduced to
6.8% per CalPERS’ funding risk mitigation policy enacted as a result of CalPERS achieving a 21.3% rate of return for the year ended June 30, 2021. For fiscal year 2021-22, the City’s annual required contribution (ARC) to fund the UAL equaled $2,361,632 for the Miscellaneous and Safety-Police employee groups. The City refunded this contribution for the fiscal year 2021-22 in order to achieve Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
savings of over $78,000. Per the most recent actuarial valuation issued in July, 2021, the City’s ARC to fund the UAL payment for fiscal year 2022-23 will equal $2,761,339, an increase of $400,000 from the current fiscal year. CalPERS’ investment return of 21.3% in the fiscal year ended June 30, 2021 resulted in actuarial gains which will reduce the total UAL across each of the City’s pension plans. Also, the reduction in the discount rate to 6.8% will increase the total UAL across each of the City’s pension plans.
The impact of these two factors is estimated as a net reduction to the total UAL of $12.38 million. These factors will be reflected in the City’s actuarial valuation reports issued and dated July, 2022. The table below provides a summary of the City’s estimated UAL balances, as of June 30, 2021, for the City’s classic Miscellaneous and Safety Plans only.
Estimated CalPERS UAL as of June 30, 2021
Refinancing Opportunity. Due to historically low interest rates, the City has an opportunity to refund the UAL for CalPERS employee groups.
The savings and interest rates presented in this report are only estimates based on current market conditions as of the date of this report, and may change due to market movements in rates prior to the date of closing. Interest rates have been volatile in recent months as a result of inflationary pressures resulting from the COVID-19 pandemic and as a result of international events, such as the war in Ukraine.
Proposed Pension Obligation Bonds. By issuing Pension Obligation Bonds to refinance the City’s UAL for all employee groups in CalPERS, staff estimates that, based on current market conditions, the savings will amount to over $2.50 million and the average annual savings will be approximately $138,969 over the existing 16 year amortization period of the UAL. Based upon the proposed level debt service payments for the Pension Obligation Bonds, the City’s savings would be significantly higher during the first few years of the repayment schedule. Upon issuance of the Pension Obligation Bonds, staff estimates that the City’s UAL will be paid in full as of that date. The Pension Obligation Bonds would be issued for the same number of years as remain on the existing UAL amortization schedule per CalPERS. The net interest cost is projected to be approximately 4.53% and the average coupon rate is anticipated to be approximately 4.45%. The CalPERS liability continues to accrue interest at 6.80% until it is paid off.
Set forth below is a projected Pension Obligation Bonds savings analysis based on current market conditions.
Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
Staff previously disclosed the proposed costs of issuance for the Pension Obligation Bonds prior to the City Council’s October 4, 2021 action. As explained at that time, costs of issuing a pension obligation bond issue of this size (approximately $21.29 million) is usually approximately 2% of the par amount of the bond issue or $425,800. Staff was able to reduce the issuance costs to $386,425 in total or 1.82% plus a contingency of $23,250. Any remaining contingency funds are used to pay down debt.
Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
Ratings. On March 9, 2022, S&P Global Ratings assigned a rating of “A+” with a stable outlook for the Pension Obligation Bonds. A copy of the ratings report is attached.
Pension Obligation Bond Risks. It is important to understand that the actual savings that the City will realize from refinancing its CalPERS UAL through issuance of the Pension Obligation Bonds are dependent on two factors: (1) actual interest rates at the time of pricing the new bonds (the estimates in this report are based on current market conditions) and (2) future CalPERS returns, which is an unknown at the time of bond issuance and outside the City’s control. The rule of thumb for evaluating the benefit of a UAL restructuring is that the City will be better off (i.e. the UAL refunding will produce positive savings) if CalPERS earns more than the interest rate on the Pension Obligation Bonds (currently projected to be
4.52%). If CalPERS earns less than the interest rate on the Pension Obligation Bonds, then the City’s overall pension costs (debt service on the Pension Obligation Bonds plus payments to CalPERS) would be higher than they would have been if the City had not issued pension obligation bonds. While past performance does not guarantee future results, CalPERS’ historical 30-year returns are 8.0%, 6.9% for the last 20 years on average, 8.5% for last 10 years and 10.4% for the last 5 years.
Judicial Validation. On February 9, 2022, the San Bernardino Superior Court issued a judgment that the Pension Obligation Bonds are legal, valid and binding, that pension liabilities are obligations imposed by law, and, therefore, that the Pension Obligation Bonds are exempt from the debt limitation requirements set forth in Article XVI, Section 18 of the California Constitution.
Financing Documents. Staff recommends final approval of the following documents:
Bond Purchase Agreement: This agreement between the City and Hilltop Securities Inc., the underwriter of the Pension Obligation Bonds, will describe the final interest rates and bond maturities. It also details the conditions under which the underwriter will purchase the Pension Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
Obligation Bonds.
Indenture of Trust: This agreement between the City and U.S. Bank Trust Company, National Association, as trustee, describes the security for the Pension Obligation Bonds (any legally available source of revenues, including amounts on deposit in the General Fund) and establishes the mechanics for payment of debt service on the Pension Obligation Bonds.
Preliminary Official Statement: The Official Statement describes (i) the Pension Obligation Bonds and related legal documents (described in the sections entitled “THE BONDS” and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS”), (ii) the City’s finances (described in the section entitled “CITY FINANCIAL INFORMATION”), and (iii) potential risks to prospective investors in the Pension Obligation Bonds (described in the section entitled “RISK FACTORS”).
The Preliminary Official Statement (often referred to as the “POS”) is distributed by the underwriter to prospective investors prior to the bond sale so that investors can make informed purchase decisions. The POS is the equivalent of a prospectus in the private sector. The Final Official Statement is sent to purchasers after the terms of the sale are finalized.
The distribution of a POS is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor considering a purchase of the Pension Obligation Bonds.
Material information is information that there is a substantial likelihood that a reasonable investor would consider important in deciding whether to buy or sell bonds. Materiality is determined in the context of all facts and circumstances.
The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over the City’s compliance with the federal securities laws, has issued guidance as to the duties of the City Council with respect to their approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761 / January 24, 1996) (the “Release”), the SEC stated that, if a member of the City Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the bonds, whether relating to their repayment, taxexempt status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the POS. In the Release, the SEC stated that the steps that a member of the City Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts.
Continuing Disclosure Certificate: The Continuing Disclosure Certificate, attached as an appendix to the Official Statement, obligates the City to provide updated information to the bond markets on an ongoing basis. Disclosure is required annually, and on an exceptional basis for certain significant listed events.
FISCAL IMPACT:
Proceeds of pension obligation bonds will be used to refund for savings the City’s unfunded accrued liability (“UAL”) to the California Public Employees’ Retirement System (“CalPERS”). By refunding 100% of CalPERS’ estimate of the UAL, staff estimates that, based on current market conditions, the City can achieve savings of over $2.50 million in total. Contributions to CalPERS for the following year will be Regular Meeting
03/21/22 07:00 PM
Finance
Marc Puckett
Bond
Doc ID: 4973
AGENDA ITEM
reduced to fund a UAL payment related to any remaining UAL not paid off by bonds and the normal cost contributions.
RECOMMENDED ACTION:
Adopt Resolution Number ___- 2022 confirming approval of Pension Obligation Bonds and related documents.