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Staff Report
City Council
Item No. 6.C
Meeting Date: March 23, 2022
From: Tami Scott, Administrative Services Director
Title: Lease Revenue Bonds, Series 2022A (Federally Taxable)
City Council
RECOMMENDATION:
Adopt Resolution No. 2022 -___ of th e City Council of the City of Cathedral City Authorizing and Approving the Issuance of Cathedral City Public Financing Authority Lease Revenue Bonds, Series 2022A (Federally Taxable), in the Aggregate Principal Amount Not to Exceed $35,000,000 Approving th e Execution and Delivery of a Site and Facility Lease, Lease Agreement, Continuing Disclosure Agreement, Bond Purchase Agreement and Preliminary Official Statement; and Authorizing Certain Actions and Execution of Documents Related Thereto;
Adopt Resoluti on No. 2022 -___Resolution of the Cathedral City Financing Authority Authorizing and Approving the Issuance of Cathedral City Public Financing Authority Lease Revenue Bonds, Series 2022A (Federally Taxable), in the Aggregate Principal Amount Not to Exceed $ 35,000,000 Approving the Execution and Delivery of a Site ad Facility Lease, Lease Agreement, Assignment Agreement, Bond Purchase Agreement and Preliminary Official Statement; and Authorizing Certain Actions and Execution of Documents Related Thereto.
EXECUTIVE SUMMARY
On September 15, 2021, the City Council approved Resolution No. 2021 -28 to refund City of Cathedral City (“City”) obligations to the California Public Employees’ Retirement System (“CalPERS”) and, among other things, to initiate a valida tion action in connection with the potential issuance of Pension Obligation Bonds for such purpose.
On February 23, 2022, the City Council approved Resolution No. 2022 -10 to rescind Resolution No. 2021 -28 to terminate the validation action and to not proc eed with the issuance of Pension Obligation Bonds.
Due to the current low interest rate environment, the City has an opportunity to potentially generate future savings by refinancing its Unfunded Accrued Liability (“UAL”) with CalPERS for financial saving s. Pursuant to the latest CalPERS annual valuation report as of June 30, 202 0, for the City’s Police, Fire and Miscellaneous retirement plans, the aggregate UAL is approximately $4 6.3 million (balance as of 6/30/2 0) and
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reflecting the then CalPERS interest rate of 7.0% (called “discount rate”) to amortize the UAL with a 23 -year maturity term. Based on recent information provided by CalPERS, the City’s aggregate UAL is approximately $2 7.7 million, which reflects the CalPERS investment gains in FY 2020 -21 of 21.3% and the discount rate of 6.8%, which was changed by CalPERS’ Board in November 2021. Additionally, the CalPERS unilaterally changed the final maturity term from 23 years to 15 years.
Current bond market condition indicates the City may be able to is sue 12 -to-14-year bonds at approximately 3.84% (Scenario 1) to 3.74% (Scenario 2) interest (all -in true interest cost). Projected cumulative savings ranges from $5.9 million (Scenario 1) to $7.0 million (Scenario 2), with present value (PV) savings (discou nting back future savings in today’s dollars) ranging from $4.4 million to $4.6 million. PV savings as a percentage of UAL paid off ranges from 16% to 17%.
In addition to the pension refinancing, and as part of the City's continuing ongoing effort to control costs, staff explored the benefits of refinancing the Cathedral City Financing Authority Lease Revenue Refunding Bonds (Capital Facilities Projects), Series 2015A (Taxable) (“Series 2015A”) secured by rental payments made from the City’s General Fund. Currently, a refinancing of the Series 2015A Bond produces less than 3% PV savings. However, in order to provide flexibility in the event interest rates decline to achieve a minimum 3% PV savings, the financing documents include provisions to refund the Series 2015A Bonds. Pursuant to the City’s debt policy, refunding bonds can only be issued if they produce at least 3% present value savings.
The proposed refinancing’s will be achieved through issuance of Lease Revenue Bonds by the Cathedral City Financing Authority (“Authority”). The City will agree to make lease payments from its General Fund under a lease/leaseback of certain real property (which is expected to consist of the City Hall) (“Leased Property”).
To authorize the issuance of the Bonds, the City Council must adopt Resolution No. 2022-XX, setting forth certain financial parameters and approve, authorize and direct execution of certain financing documents. The significant parameters in Resolution No. 2022-XX are: $35 million maximum principal; 4 .25% maximum all -in true interest cost; and 0.65% maximum underwriter’s discount. Based on current market conditions it is not anticipated that the entire $35 million will be required but would ensure sufficient cushion if there is a shift in conditions prior to issuance. The actual par amount of bonds will be a function of the final structure of the bond issue. Good Faith Estimates, as required by Government Code Section 5852.1, are provided as an attachment to the City Council Resolution.
BACKGROUND AND DISCUSSION:
PENSION REFINANCING
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The annual employer pension contributions are determined by actuarial valuation reports prepared by CalPERS for each of the City’s eight plans. The amount the City pays to CalPERS annually is comprised of two componen ts: Normal Cost (as a percentage of covered payroll; paid biweekly) and amortized UAL payment (paid monthly, or at the option of the employer, prepaid in lump -sum annually at a discount).
The Normal Cost represents the annual cost of service accrual for t he upcoming fiscal year for active employees. The UAL represents the unfunded portion of past service credit earned or accrued by the members who are currently receiving benefits, active members, and those entitled to deferred benefits. The UAL is the di fference between the present value of earned benefits and the market value of assets in the City’s CalPERS account. Each year, CalPERS calculates the difference between these two values: they true-up by adding new Amortization Bases to adjust for the chan ges in the UAL.
Based on the July 2021 CalPERS reports reflecting actuarial valuation data as of June 30, 2020, the City’s total UAL for the three largest pension plans was $4 6.3 million. In FY 2021-22, the City was required to pay CalPERS a combined tota l fixed dollar UAL payment of $3,025,030 and estimated total normal costs of approximately $2,462,739 (paid with biweekly payroll). The annual payments for these three plans total $5,487,769.
Table 1 – CalPERS Pension Funded Status as of June 30, 2020
MISC FIRE POLICE TOTAL
CalPERS Actuarial Reports dated July 2021:
Actuarial valuation as of 6/30/2020
Entry Age Normal Accrued Liability (AL) 63,740,616 57,442,232 82,031,478 203,214,326 Plan’s Market Value of Assets (MVA) 48,981,527 45,078,256 62,813,744 156,873,527 Unfunded Accrued Liability (UAL) 14,759,089 12,363,976 19,217,734 46,340,799 Unfunded Ratio 30.1% 27.4% 30.6% 29.5%
Funded Ratio 76.8% 78.5% 76.6% 77.2%
As mentioned earlier, in FY 2020-21, CalPERS achieved an investment return of 21.3% which will result in positive (credits) UAL bases across each of the City’s pension plans.
The investment gains are estimated to total $24.6 million and will be reflected in the CalPERS annual valuation reports dated July 2022. Offsetting these gains is the reduction in the discount rate to 6.8%, which will add negative UAL bases totaling approximately $6.4 million. The below table provides a summary of the City’s Original Projected UAL balances as of June 30, 2021, and the current updated Projected UAL Balances for each of the City’s three largest pension plans.
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Table 2 – Original Projected Estimate CalPERS UAL as of June 30, 2021, and current Projected Estimate based on the 21.3% Investment Return.
Original
Projected UAL
Balance as of
6/30/2021
Estimated
Funded
Ratio
Current
Projected
UAL Balance
as of 6/30/2021
Estimated
Funded
Ratio
Plan 1417, Miscellaneous, Tier 1 $14,287,293 77.6% $8,702,306 86.3% Plan 1418, Fire, Tier 1 11,875,033 79.3% 7,002,852 87.8% Plan 1419, Police, Tier 1 18,783,566 77.1% 12,048,489 85.3% Total $44,945,892 $27,753,647
Estimated Savings of POBs Financing at 100% of UAL (3 Largest Plans) For the CalPERS Plan 1417 Misc Tier 1, Plan 1418 Fire Tier 1 & Plan 1419 Police Tier 1 proposed for the pension refinancing, the UAL is projected to be $27,753,647 as of June 30, 2022. As mentioned earlier, the City may be able to issue 12 -to-14-year Bonds at approximately 3.84% (Scenario 1 ) to 3.74% (Scenario 2) interest (all -in true interest cost). Projected cumulative savings ranges from $5.9 million (Scenario 1) to $7.0 million (Scenario 2), with present value (PV) savings (discounting back future savings in today’s dollars) ranging from $4.4 million to $4.6 million. PV savings as a percentage of UAL paid off ranges from 16% to 17%. Table 3 below provides estimated savings for each of the two scenarios being evaluated.
It is important to note that the UAL and related required annual paym ents are not static amounts. Each year, CalPERS adds new Amortization Bases to account for actuarial gains and losses. The UAL and related payments are 1) increased if CalPERS performs worse than the actuarial assumptions or changes assumptions such as r educing the discount rate (currently at 6.8%), and 2) decreased if CalPERS performs better than actuarial assumptions and the investment returns exceed the current discount rate of 6.8%. Actuarial assumptions include the investment rate of return/discount rate, salary increases, retirement rates, mortality, and various others.
Table 3 – Estimated Savings of POBs Financing at 100% of UAL (3 Largest Plans)
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Scenario 1: $400k Annual Savings- 14-Year Term, 2036 Final Maturity Fiscal Year UAL Payments to
CalPERS at 6.8%
$400K Annual
Savings Debt
Service at 3.84%
Estimated
Savings
Present Value
Savings
2022-23 3,378,196 2,973,079 405,117 387,859 2023-24 3,858,963 3,454,403 404,560 373,005 2024-25 3,667,026 3,265,667 401,359 356,372 2025-26 3,328,755 2,923,869 404,886 346,212 2026-27 2,974,815 2,571,330 403,485 332,258 2027-28 2,532,774 2,139,328 393,445 312,012 2028-29 2,642,223 2,246,123 396,100 302,503 2029-30 2,754,737 2,355,464 399,273 293,653 2030-31 2,870,401 2,471,771 398,630 282,340 2031-32 2,989,304 2,589,792 399,512 272,503 2032-33 2,903,817 2,503,796 400,021 262,762 2033-34 2,810,120 2,405,795 404,325 255,770 2034-35 2,624,843 2,221,188 403,656 245,906 2035-36 2,005,730 1,613,395 392,335 230,172 2036-37 257,021 - 257,021 145,212 Total 41,598,724 35,734,999 5,863,725 4,398,539
100% MISCELLANEOUS FIRST TIER, SAFETY FIRE AND POLICE
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Scenario 2: 12-Year Term, 2034 Final Maturity
Fiscal Year UAL Payments to
CalPERS at 6.8%
2034 Final Maturity
Debt Service at
3.74%
Estimated
Savings
Present Value
Savings
2022-23 3,378,196 3,202,795 175,401 168,110 2023-24 3,858,963 3,670,434 188,529 174,173 2024-25 3,667,026 3,485,498 181,528 161,655 2025-26 3,328,755 3,151,597 177,158 152,071 2026-27 2,974,815 2,801,132 173,683 143,709 2027-28 2,532,774 2,365,489 167,284 133,421 2028-29 2,642,223 2,482,996 159,227 122,414 2029-30 2,754,737 2,591,942 162,795 120,641 2030-31 2,870,401 2,702,081 168,320 120,236 2031-32 2,989,304 2,818,434 170,870 117,653 2032-33 2,903,817 2,730,077 173,740 115,314 2033-34 2,810,120 2,644,001 166,120 106,278 2034-35 2,624,843 - 2,624,843 1,618,710 2035-36 2,005,730 - 2,005,730 1,192,285 2036-37 257,021 - 257,021 147,271 Total 41,598,724 34,646,475 6,952,249 4,593,941
100% MISCELLANEOUS FIRST TIER, SAFETY FIRE AND POLICE
Risks Associated with Pension Refinancing Bonds
1. Poor market timing risk . A large loss (e.g., from a s tock market crash) soon after Bond proceeds are invested by CalPERS will cause a larger loss to the City in the near-term (by causing a larger layer of UAL being created with the inclusion of the
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Bond proceeds loss). However, the following data may indica te that the “poor market timing” risk may be mitigated in the long run with the CalPERS average annual investment returns being greater than the Bond interest costs. Caveat:
Please note that there is no guarantee that past results will be indicative of the future performance.
CalPERS
Historical
Returns
$1,000,000
Investment
$1,000,000
Investment
$1,000,000
Investment
Year In 2008 In 2009 In 2010
2021 21.3% $2,249,246 $2,370,122 $3,118,581
2020 4.7% 1,854,284 1,953,934 2,570,966
2019 6.7% 1,771,044 1,866,222 2,455,555
2018 8.6% 1,659,836 1,749,036 2,301,364
2017 11.2% 1,528,394 1,610,531 2,119,119
2016 0.6% 1,374,455 1,448,319 1,905,683
2015 2.4% 1,366,257 1,439,681 1,894,317
2014 18.4% 1,334,236 1,405,938 1,849,919
2013 13.2% 1,126,888 1,187,448 1,562,432
2012 0.1% 995,484 1,048,982 1,380,240
2011 21.7% 994,490 1,047,934 1,378,861
2010 13.3% 817,165 861,080 1,133,000
2009 -24.0% 721,240 760,000 n/a
2008 -5.1% 949,000 n/a n/a
Compound Annual
Rate of Return: 5.96% 6.36%
8.46%
2. Poor investment earnings risk . Bond proceeds invested by CalPERS might fail to earn more than the City’s interest costs over the term of the Bonds, resulting in an increased UAL for the City.
The success of the Bond financing is dependent upon two variables: 1) Bond interest costs and 2) CalPERS investment performance. The invested Bond proceeds may lose value if the market declines; however, they are long -term debt instruments, and the success of the Bond financing cannot be determined until final maturity of the debt. The proposed Bond financing presents a significant savings potential (approximately 21% present value savings (Scenario 1) based on the current market condition and 16% present value savings based on the maximum interest rate per Resolution No. 2022 -XX), which provides a cushion against the investment loss or underperformance. If CalPERS experiences a significant loss or underperformance over the life of the Bonds, then the savings/advantage of debt financing could be eliminated.
The following are the long-term investment returns published by CalPERS.
10.3% for the 5-year time period.
8.5% for the 10-year time period.
6.9% for the 20-year time period.
8.4% for the 30-year time period.
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3. CalPERS discount rate reduction risk . A key factor for the actuarial calculations is the discount rate (currently 6.8%), which is the rate of return that CalPERS assumes it will earn on its investments. CalPERS has ch anged its investment allocations and has taken a more conservative outlook by incrementally reducing its discount rate.
The following are the historical CalPERS discount rates. The lower the discount rates, the higher the contribution rates are for the lo cal governments. CalPERS has discussed the possibility of lowering the discount rate again in the future, which would increase the City’s UAL and pension costs and reduce the probability for the success of the POBs financing.
CALPERS Discount Rate
Time Period %
1992-1994 8.75%
1994-1997 8.50%
1997-2003 8.25%
2003-2011 7.75%
2011-2016 7.50%
2016-2017 7.375%
2017-2018 7.25%
2018-2021 7.00%
2021-2022 6.80%
SERIES 2015A REFINANCING
In July 2015, the City through the Cathedral City Financing Aut hority, sold the Series 2015A taxable Lease Revenue Bonds in the total principal amount of $3.768 million , and were originally issued to refinance the Authority’s 1997 taxable Lease Revenue Bonds. The Series 2015A Bonds were sold via private placement and were purchased by City National Bank. The Series 2015A Bonds’ leased asset is City Hall and are secured by the City’s General Fund lease payments. The Series 2015A Bonds are currently outstanding in the principal amount of $1.997 million with a fixed inte rest rate of 4.25%. While the Series 2015A Bonds’ final maturity is August 1, 2027, the Series 2015A Bonds are eligible to be prepaid, in full, with no prepayment penalty.
In order to achieve savings from the current low interest rate environment and assuming a refinancing achieves a minimum PV savings of 3%, the City would save approximately $44,851 in gross total savings over the term of the allocable portion of the Series 2022A Bonds. Average annual cash flow savings will be approximately $ 7,475. On a fiscal year basis, t he refinancing will not extend the final term . However, the final maturity date for the Series 2022A bonds would be December 1, 2027, instead of August 1, 2027, which is the existing final payment date for the Series 2015A Bonds. The following table depicts the projected annual savings on a bond year basis through the end of the term.
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Estimated Cashflow Savings
SERIES 2015A REFINANCING
Fiscal Year
Prior Debt
Service
Refunding Debt
Service Annual Savings
06/01/2023 $ 378,498 $ 372,334 $ 6,163 06/30/2024 377,493 372,280 5,212 06/30/2025 374,999 365,564 9,435 06/30/2026 374,974 367,887 7,087 06/30/2027 378,269 369,284 8,985 06/30/2028 377,863 369,895 7,968 $ 2,262,094 $ 2,217,243 $ 44,851
Documents to Approve
Adoption of the proposed resolutions by the City Council and the Authori ty Board of Directors will approve and authorize the Mayor, the City Manager, the Administrative Services Director, or their respective designees to approve the legal documents in connection with the refinancing. The City is only a party to the Site and Fa cility Lease and the Lease Agreement, but the other referenced documents are essential to the transaction.
• Indenture
• Site and Facility Lease
• Lease Agreement
• Assignment Agreement
• Bond Purchase Agreement
• Continuing Disclosure Agreement
• Preliminary Official Statement
Indenture. The Indenture is a contract between The Bank of New York Mellon Trust Company, N.A. (the “Trustee”) and the Cathedral City Public Financing Authority (the “Authority”), under which the Bonds that the Authority is issuing for the benef it of the City are secured. The Indenture assigns certain duties to the Trustee and establishes the structure for the payment of the Bonds. The Authority appoints the Trustee as its agent to accept the Base Rental Payments (defined below) from the City made under the Lease Agreement and to divide these payments among the registered owners of the Bonds, according to the interest and principal payments due to each of them. The Trustee will accept for deposit a portion of the amount equal to the net proceeds of sale of the Bonds from the purchaser. The Bonds will be issued at a fixed rate of interest in accordance with the terms set forth in the Indenture.
Site and Facility Lease . Under the Site and Facility Lease, the City leases the Leased Property to the Authority. No money is exchanged under this document.
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Lease Agreement. Under the Lease Agreement, the City will lease back from the Authority the Leased Property and agrees to make annual rental payments (“Base Rental Payments”). Base Rental Payments wi ll represent fair market value for the Leased Property. The Lease Agreement also sets forth the obligation of the City to make its semiannual Base Rental Payments. This document details the insurance coverage requirements for the Leased Property.
Assignment Agreement. In addition, there will be an Assignment Agreement, to which only the Authority and the Trustee, and not the City, are parties. In the Assignment Agreement, the Authority assigns to the Trustee for the benefit of the Bondholder all of the Base Rental Payments it would otherwise be due under the terms of the Lease Agreement.
Bond Purchase Agreement . Under the Bond Purchase Agreement, Raymond James & Associates, Inc. will agree to purchase all of the Bonds, subject to the conditions provided therein, from the Authority for resale to individual purchasers of the Bonds at fixed interest rates.
Continuing Disclosure Agreement. Under the Continuing Disclosure Agreement, the City will undertake to provide annual reports and notice of certain enumerate d events to the Municipal Securities Rulemaking Board through the Electronic Municipal Marketplace Access (“EMMA”) website. The undertaking by the City in the Continuing Disclosure Agreement is required for the sale of the Bonds by federal securities law.
Preliminary Official Statement . The Preliminary Official Statement (the “POS”) is the document that describes the Bonds and their payment and redemption terms, material aspects of the City’s finances and operations, material risks and other matters of interest to potential investors. For example, the POS contains summary tables of the City’s assets and liabilities and revenues and expenses and recent budgets. The POS is the City’s responsibility under federal securities laws and should be reviewed closely f or accuracy and any misstatement of material fact or material omission. The City has been assisted in the preparation of the POS by its Disclosure Counsel.
Finance Team
Fieldman, Rolapp & Associates, located in Irvine CA is one of California’s oldest independent municipal financial advisory firms, who has assisted the City with its municipal offerings since 2012. Norton Rose Fulbright (“NRF”), a global law firm with lawyers across the US, Europe, Canada, Australia and many other countries, has been providing Bond and Disclosure Counsel services to the City since 2004. NRF has been instrumental assisting the City and the City’s non -profits with bond related litigation, tax issues, a defunct CFD, new bond issues for three of the largest Assessment Districts in the City and consistently providing legal guidance on both new issues and refunding debt to the benefit of the City and its Special Districts. Raymond James Inc (“RJ”), founded in 1962, has been the city’s underwriter for almost 10 years. Raymond Jam es is one of the premier underwriters for public offerings. It provides unique financing needs from new buildings and roads to reducing obligations through lower rates and shorter terms. Raymond James has been instrumental in assisting the City in refunding several outstanding obligations subsequently saving the Successor Agency and the City several million dollars, ultimately benefiting the City’s General Fund.
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Timing of Bond Issuance
The Bonds are proposed to be sold in mid-April and close around the end of April. Staff and the finance team will hold a credit presentation with Standard & Poor’s in mid-March and the rating is expected by March 31.
Fiscal Impact:
Payment of debt service of the Bonds is a liability of the General Fund. The estimated Gross Savings with respect to the proposed refinancing estimated as follows:
Pension
Refinancing
Term
Final Maturity
Estimated Gross
Annual Savings
Scenario 1 14-Year 2036 $ 5,863,725
Scenario 2 12-Year 2034 $ 6,952,249
LRB Refinancing
Term
Final Maturity
Estimated Gross
Annual Savings
Series 15A No change 5-Year 2027 $ 44,851
All financing -related costs will be paid from the Bond proceeds. Should City Council direct staff to move forward with the refinancing, staff recommends Scenario 2 for the pension refinancing, with an estimated gross savings of $6,952,249
If the Series 2015A refinancing achieves a minimum PV savings of 3%, total gross debt service savings would be approximately $72,768.
GOOD FAITH ESTIMATES related to the Cost of Issuance
Assuming an aggregate principal amount of 2022A Bonds of $30,280,000 are sold and based on market interest rates prevailing at the time of preparation of this information, a good faith estimate of the finance charge of the 2022A Bonds, which means the sum of all fees and charges paid to third parties (or costs associated with the 2022A Bonds), is $497,104 as follows:
Cost of Issuance Estimated Amounts
Bond Counsel $ 81,800
Disclosure Counsel 43,000
Municipal Advisor 57,000
Title Insurance 29,000
Trustee & Trustee’s Counsel 8,000
Printer 2,000
Rating Agency 34,000
Miscellaneous 45,484
Underwriter 196,820
Total $497,104
The foregoing information constitutes good faith estimates only. The actual interest cost, finance charges, amount of pro ceeds and total payment amount may vary from the estimates above due to variations from these estimates in the timing of 2022A Bond sales, the amount of 2022A Bonds sold, the amortization of the 2022A Bonds sold and
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market interest rates at the time of eac h sale. The actual interest rates at which the 2022A Bonds will be sold will depend on the bond market at the time of each sale. The actual amortization of the 2022A Bonds will also depend, in part, on market interest rates at the time of sale. Market inte rest rates are affected by economic and other factors beyond the City’s and the Authority’s control.
ATTACHMENTS:
Authorizing Resolution - Cathedral City
Authorizing Resolution - Cathedral City Public Finance Authority Indenture
Site and Facility Lease
Lease Agreement
Assignment Agreement
Bond Purchase Contract
Continuing Disclosure Agreement
Preliminary Official Statement