Agenda Report
Fullerton City Council
MEETING DATE: MARCH 15, 2022
TO: CITY COUNCIL / SUCCESSOR AGENCY
FROM: JEFFREY W. COLLIER, ACTING CITY MANAGER
PREPARED BY: ELLIS CHANG, DIRECTOR OF ADMINISTRATIVE SERVICES SUBJECT: PENSION OBLIGATION BONDS VALIDATION PROCEEDINGS
SUMMARY
Consideration of a resolution to approve and authorize judicial validation proceedings including related legal documents, a Professional Services Agreement with Urban Futures, Inc. to incorporate pension analysis services and a budget appropriation request for related actions.
RECOMMENDATION
Adopt Resolution No. 2022-XXX.
RESOLUTION NO. 2022-XXX – A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF FULLERTON, CALIFORNIA AUTHORIZING THE ISSUANCE OF BONDS TO REFUND CERTAIN PENSION OBLIGATIONS OF THE CITY, APPROVING THE FORM AND AUTHORIZING THE EXECUTION OF A TRUST AGREEMENT AND PURCHASE CONTRACT, AUTHORIZING JUDICIAL VALIDATION PROCEEDINGS RELATING TO THE ISSUANCE OF SUCH BONDS AND APPROVING ADDITIONAL ACTIONS RELATED THERETO Authorize City Manager, or designee, to execute and administer Professional Services Agreement with Urban Futures, Inc. and any extensions, in a form approved by City Attorney.
Approve $50,500 appropriation from General Fund for pension analysis, validation proceedings and other costs.
BUDGET POLICY PRIORITY STATEMENT
This item matches the following Budget Policy Priority Statement:
Fiscal and Organizational Stability.
FISCAL IMPACT
Staff requests a $50,500 appropriation from the General Fund budget to cover the cost of pension analysis ($15,000 - Urban Futures, Inc.), bond counsel costs for validation proceedings ($20,000 – Stradling, Yocca, Carlson and Rauth), City Attorney costs ($7,500 – Jones & Mayer) and other related costs such as court filing and process server fees ($8,000).
Should City Council decide to move forward with Pension Obligation Bonds (POBs), the City will incur all debt issuance related costs on a contingent basis and paid from the cost of issuance.
Adoption of Resolution No 2022-XX does not obligate the City to issue debt.
DISCUSSION
At the request of City Council, City Council held a study session on January 18, 2022 providing a high-level overview of the City’s CalPERS Unfunded Actuarial Lability (UAL) and an initial examination of POBs as a potential strategy to address the UAL. City Council directed staff to retain Urban Futures, Inc. (UFI) to perform an in-depth analysis and to retain validation counsel to initiate validation proceedings.
The $50,500 budget appropriation request covers costs related to implementing direction from the January 18, 2022 pension study session. This $50,500 budget request includes $15,000 for pension analysis, $20,000 for validation counsel, an estimated $7,500 for City Attorney and an estimated $8,000 for costs related to completing court requirements for validation proceedings.
Pension Analysis and Validation Proceeding Costs
City Council directed staff to engage UFI to provide in-depth pension analysis. The revised Professional Services Agreement with Urban Futures, Inc. (Attachment 4) extends the City’s engagement with UFI for municipal advisory services from 2023 to 2026 and incorporates the City’s engagement for pension analysis at a $15,000 cost. Should the City move forward with POBs or any other debt issuance or refundings, the agreement engages UFI on a contingent basis for municipal advisory services for debt issuance.
Staff, with support from UFI, bid out legal services for validation proceedings as well as for bond and disclosure counsel services. Bond and disclosure counsel services for a potential POB issuance are on a contingent basis. The City will only utilize the services after a favorable validation ruling and further pension analysis and if City Council decides to move forward with debt issuance to address the City’s Unfunded Accrued Liability (UAL). The City selected Stradling, Yocca, Carlson and Rauth (Stradling) as validation and bond counsel and Jones Hall as disclosure counsel. The total cost for Stradling to complete the validation proceedings totals $20,000 plus out-of-pocket costs.
Validation Resolution
If a public entity chooses to move forward to issue POBs, the entity will initiate Validation Proceedings. Validation Proceedings mean a court “validates” pension obligation bonds as a refunding of an existing debt. The City must file a validation action with the Orange County Superior Court to obtain authorization to issue POBs. The validation proceedings can take 90 to 120 days in Orange County (Attachment 2), including a 30-day appeal period after the City receives judgment. Staff recommends initiating validation proceedings at this time, due to the expected timeframe to complete the validation process.
The recommended action allows the City to take the next step in making POBs available as a “tool in the toolbox” without committing the City to the sale of POBs. City Council adoption of Resolution No. 2022-XX provides the requisite authorization needed to initiate the judicial validation proceedings (Attachment 3). City Council will provide direction regarding the debt structure and approve a resolution authorizing the sale of debt and the Preliminary Official Statement, prior to any sale of POBs.
Resolution No. 2022-XX authorizes the following:
Appoints U.S. Bank Trust Company, N.A., as the trustee and approves the substantially final form of Trust Agreement that describes the material provisions and parameters of each series of POBs and authorizes certain officers (“Authorized Officers”) to make changes as deemed required and to execute and deliver the Trust Agreement Authorizes the issuance of Taxable Pension Obligation Bonds (the “Bonds”), subject to the terms and conditions set forth in the Trust Agreement, provided that: 1) the principal amount of the Bonds does not exceed the lesser of $285.25 million or the sum of the City’s remaining UAL plus the annual required pension costs due and payable to CalPERS within 18 months (the “Current Obligation”) plus costs of issuance of the POBs, 2) the issuance of the Bonds results in net present value savings to the City as determined by Authorized Officers 3) the Bonds do not mature later than the last date through which CalPERS has determined for the amortization of the City’s UAL Authorizes the issuance of one or more series of Additional Bonds, including refundings of previously issued Bonds, in the future, provided that: 1) the principal amount of each series of POBs does not exceed the City’s remaining UAL plus the Current Obligation plus costs of issuance of the POBs, 2) the issuance of each series of POBs results in net present value savings to the City as determined by Authorized Officers and 3) each series of POBs does not mature later than the last date through which CalPERS has determined for the amortization of the City’s UAL Authorizes Authorized Officers to select one or more Underwriters and approves the substantially final form of the Bond Purchase Agreement specifying the terms and conditions upon which POBs would be sold to the Underwriter(s) Authorizes Authorized Officers to negotiate and execute bond insurance and a debt service reserve fund insurance policy for the Bonds, if economical, and any other documents necessary to issue the Bonds Authorizes the City Attorney and Stradling Yocca Carlson & Rauth (Bond Counsel) to prepare and file all proceedings required for judicial validation of the POBs Directs staff to work with the financing team to prepare the remaining required financing documents (i.e., Preliminary Official Statement, Continuing Disclosure Agreement, documents required by CalPERS) and bring back to City Council for final approval before the sale of POBs.
To reiterate, adoption of Resolution No. 2022-XX does not obligate the City to issue POBs. The Orange County Superior Court requires the resolution to initiate judicial validation proceedings. Successful validation provides City Council with the option of issuing POBs within the parameters of the approved resolution as one potential strategy to address the City’s outstanding UAL.
Staff expects to return to City Council with additional pension analysis and to seek direction before proceeding with a potential POB debt issuance. Should City Council direct the issuance of POBs, staff will bring a Preliminary Official Statement to City Council for consideration.
SB 450 Good Faith Estimates
In accordance with California Government Code Section 5852.1, the attached resolution contains good faith estimates with respect to the POBs. Staff based the good faith estimates on the maximum authorized amount of $285.25 million required to refinance the City’s $283 million UAL as of June 30, 2020 and associated finance charges for the bonds. Staff based estimates market conditions as of February 2022.
Staff expects the City will receive its FY 2020-21 CalPERS actuarial report, as well as additional information on the expected return for FY 2021-22, prior to the potential issuance of POBs. Based on current estimates, the City expects to receive a net credit of approximately $69 million for FY 2020-21, which should reduce the total UAL to approximately $214 million. Staff will assess this information and present to City Council, along with updated market conditions, in determining the recommended size and structure of a POB issuance.
Next Steps
If City Council adopts the resolution, Bond Counsel plans to file the validation action with the Superior Court of Orange County on or about March 16, 2022. As mentioned previously, judicial validation proceedings can take anywhere from 90 to 120 days. In the meantime, UFI will continue to work on an in-depth pension analysis. Once the City receives a validation ruling, UFI and City staff will present the results of the analysis and seek City Council direction with respect to the potential POB issuance. In addition, staff, in coordination with UFI, will prepare a Pension and Other Post Employment Benefit Liability Policy for City Council consideration.
Should City Council decide to move forward with issuing POBs, staff will submit the remaining financing documents for the POBs (i.e., Preliminary Official Statement, Continuing Disclosure Agreement, documents required by CalPERS) for City Council approval.
Attachments:
Attachment 1 – Presentation
Attachment 2 – Background on Validation Proceedings
Attachment 3 – Draft Resolution No. 2022-XX
Attachment 4 – Professional Services Agreement with Urban Futures, Inc.
Validation Proceedings
March 15, 2022 - Page 5