AGENDA
Garden Grove City
Council
Monday, February 28,
2022
5:30 PM
SPECIAL MEETING
Community Meeting
Center, 11300 Stanford
Avenue, Garden Grove,
CA 92840 or Please click
the link below to join the
webinar:
https://ggcity.org/pension-
study Phone +1 669 900
6833 Webinar ID: 826
6699 6436
Steve Jones
Mayor
Diedre Thu-Ha Nguyen
Mayor Pro Tem - District 3
George S. Brietigam
Council Member - District 1
John R. O'Neill
Council Member - District 2
Patrick Phat Bui
Council Member - District 4
Stephanie Klopfenstein
Council Member - District 5
Kim B. Nguyen
Council Member - District 6
COVID-19 Information : Members of the public can address the City Council during the public comment portion of the meeting in person or via e-mail. If you plan to attend the meeting in person, masks or face coverings are required to be worn if you are not vaccinated. If you feel ill or are showing symptoms of COVID-19, please consider submitting comments by e-mail. Instructions are available on the City's website at https://ggcity.org/city-council/meetings-participation
Meeting Assistance
: Any person requiring auxiliary aids and services, due to a disability, to address the City Council, should contact the City Clerk's Office 72 hours prior to the meeting to arrange for accommodations. Phone: (714) 741-5040.
Agenda Item Descriptions
: Are intended to give a brief, general description of the item. The City Council may take legislative action deemed appropriate with respect to the item and is not limited to the recommended action indicated in staff reports or the agenda.
Documents/Writings
: Any revised or additional documents/writings related to an item on the agenda distributed to all or a majority of the Council Members within 72 hours of a meeting, are made available for public inspection at the same time (1) in the City Clerk's Office at 11222 Acacia Parkway, Garden Grove, CA 92840, during normal business hours; (2) on the City's website as an attachment to the City Council meeting agenda; and (3) at the Council Chamber at the time of the meeting.
Public Comments
: Members of the public who attend the meeting in-person and would like to address the City Council are requested to complete a pink speaker card indicating their name and address, and identifying the subject matter they wish to address. This card should be given to the City Clerk before the meeting begins. General comments are made during "Oral Communications" and should be limited to matters under consideration and/or what the City Council has jurisdiction over.
GARDEN GROVE
Persons wishing to address the City Council regarding a Public Hearing matter will be called to the podium at the time the matter is being considered. Members of the public participating via teleconference should review the instructions on the City's website pertaining to Live Virtual Public Comments at https://ggcity.org/city-council/meetings-participation
Manner of Addressing the City Council : After being called by the Mayor, you may approach the podium, it is requested that you state your name for the record, and proceed to address the City Council. All remarks and questions should be addressed to the City Council as a whole and not to individual Council Members or staff members. Any person making impertinent, slanderous, or profane remarks or who becomes boisterous while addressing the City Council shall be called to order by the Mayor.If such conduct continues, the Mayor may order the person barred from addressing the City Council any further during that meeting.
Time Limitation
: When any group of persons wishes to address the City Council on the same subject matter, the Mayor may request a spokesperson be chosen to represent the group, so as to avoid unnecessary repetition.At the City Council's discretion, a limit on the total amount of time for public comments during Oral Communications and/or a further limit on the time allotted to each speaker during Oral Communications may be set.
PLEASE SILENCE YOUR CELL PHONES DURING THE MEETING.
STUDY SESSION
ROLL CALL:
COUNCIL MEMBER BRIETIGAM, COUNCIL MEMBER O'NEILL, COUNCIL MEMBER BUI, COUNCIL MEMBER KLOPFENSTEIN, COUNCIL MEMBER K.
NGUYEN, MAYOR PRO TEM D. NGUYEN , MAYOR JONES
1. Oral Communications
2. Discussion on Pension Obligation Bonds
3. Adjournment
Agenda Item - 2.
City of Garden Grove
INTER-DEPARTMENT MEMORANDUM
To: From:
Dept.: Dept.:
Subject: Discussion on Pension
Obligation Bonds
Date:
ATTACHMENTS:
Description Upload Date Type File Name
PowerPoint Presentation 3/1/2022 Backup Material PowerPoint_Presentation_- _Pension_Liability_Bonds.pdf
PENSION OBLIGATION BONDS
A TOOL FOR CONSIDERATION FOR MANAGING THE CITY’S UNFUNDED LIABILITY
BACKGROUND
CITY’S PENSION PROFILE
2
CITY HAS A VERY STRONG CREDIT RATING
BUT PENSION LIABILITY IS A CONCERN
Credit rating agencies provide an independent appraisal of the credit quality of government agencies
The City has an issuer credit rating from Standard & Poor’s (“S&P”) of ‘AA+’ • Reflects an upgrade of TWO NOTCHES in September 2021
• S&P labeled the City ‘ve ry strong’ (its highest qualitative category) in the areas of Financial Management, Liquidity, Budgetary Flexibility and Debt & Contingent Liabilities and ‘strong’ (second highest category) related to the area’s Economy and the City’s Budgetary Performance
S&P noted, however, the City’s large pension liability as an area of some concern and a constraint on further upgrade
Potential enhancement to the City's credit rating when financing the upcoming Civic Center/Police Facility project
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-S&P’s Rating Categories 3
COMPONENTS OF THE CITY’S PENSION COSTS
OF PRIMARY CONCERN IS THE UAL
Each year, three amounts are paid
to CalPERS; for FY 2023, these
are:
• City normal cost = $13.1 million
• Employee normal cost = $4.7 million
• Unfunded Accrued Liability (“UAL”) =
$27.6 million
The primary cost driver is the
UAL, which has increased >300%
since 2010
• Represents how much the City needs
to have in the future when people
actually retire
• Amortized over time at a discount
rate (proxy for CalPERS anticipated
earnings rate)
4
$350
$300
$250
$200
$150
$100
■ ■■
$50
$0
2010 2011 2012 2013
Growth in UAL
2015 2016 2014
Safety ■ Miscellaneous
2017 2018 2019 2020
FUNDED STATUS OVERVIEW
UAL EXCEEDS $300 MILLION AT MOST RECENT VALUATION
Note: Does not include the net impact from 21.3% return in 2021 and change to 6.8% discount rate. Does not consider funds held in Section 115 Trust.
Projected Combined UAL Payments
UAL Calculation Based on CalPERS 6/30/2020 Valuation
Miscellaneous Safety Total
A Present Value of Projected Benefits $394,410,411 $643,919,219 $1,038,329,630 B Entry Age Normal Accrued Liability $351,307,306 $581,960,501 $933,267,807 C Market Value of Assets (MVA) $240,644,136 $363,308,360 $603,952,496 D Unfunded Accrued Liability (UAL) B - C $110,663,170 $218,652,141 $329,315,311 E Funded Ratio C / B 68.5% 62.4% 64.7%
0 2
4 6
8 10
12 14
16 18
20 22
24 26
28 30
32 34
36 2022
2023
2024
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2031
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2033
2034
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2039
2040
2041
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2044
$ Millions
Miscellaneous
Safety
5
PENSION FINANCING
MANAGING PENSION EXPENSES
PENSION OBLIGATION BONDS
A MORE FREQUENT OCCURRENCE FOR CALIFORNIA LOCAL GOVERNMENT AGENCIES Over the past 3 years CA cities, counties and special districts have sold $6.9 billion of pension bonds, ranging in size from $5 million to $720 million, and rated between ‘AAA’ and ‘BBB+’ For City’s rating category and size, the cost of borrowing has ranged from 2.20% to 3.72% Sale Issuer Struc- Amount Final All-In
Date ture ($M) Maturity TIC
AAA Ratings
12/14/21 Poway POBs $43.83 2048 2.82%
09/02/21 Santa Cruz County POBs $124.20 2047 2.47%
04/28/21 Manhattan Beach POBs $91.28 2043 2.75%
10/27/20 Arcadia POBs $90.00 2040 2.70%
02/05/20 Pasadena POBs $131.81 2038 3.06%
08/22/19 Glendora POBs $64.42 2044 2.85%
AA+/AA Ratings
09/29/21 Corona POBs $276.71 2034 2.20%
08/26/21 Santa Ana POBs $425.83 2044 2.82%
08/17/21 Buena Park POBs $96.39 2043 2.39%
07/14/21 Covina POBs $62.80 2046 2.64%
05/26/21 El Segundo POBs $144.14 2040 2.59%
03/17/21 Huntington Beach POBs $363.65 2044 2.94%
03/03/21 Orange POBs $286.49 2044 2.75%
02/11/21 Chula Vista POBs $350.03 2045 2.53%
02/09/21 Downey POBs $113.59 2044 2.63%
07/01/21 Redondo Beach LRBs $226.18 2049 2.82%
08/03/21 Whittier POBs $133.90 2046 2.59%
02/02/21 Monterey Park POBs $106.34 2043 2.67%
01/13/21 El Cajon POBs $147.21 2043 2.84%
10/14/20 Torrance LRBs $349.52 2043 3.45%
06/04/20 Riverside POBs $432.17 2045 3.69%
05/12/20 Ontario POBs $236.59 2050 3.72%
04/22/20 Riverside County POBs $720.00 2038 3.53%
Recently Issued California POB Issues Greater than $40 Million Sale Issuer Struc- Amount Fi nal All-In
Date ture ($M) Maturity TIC
AA- Ratings
08/17/21 Commerce POBs $27.88 2041 2.65%
11/19/20 Coachella POBs $17.59 2035 2.99%
11/10/20 Gardena POBs $101.49 2039 3.33%
09/17/20 Azusa POBs $70.08 2040 3.18%
08/13/20 Pomona POBs $219.89 2046 3.52%
06/10/20 Carson POBs $108.02 2050 3.38%
06/02/20 Inglewood POBs $101.62 2050 3.91%
09/24/19 Hawthorne POBs $121.87 2049 3.61%
02/20/19 Baldwin Park POBs $54.09 2044 4.29%
A+/A Ratings
07/23/20 West Covina LRBs $204.10 2044 3.72%
12/02/20 Ukiah LRBs $49.88 2049 3.92%
06/09/20 El Monte POBs $118.73 2050 3.71%
A- Rating
05/27/20 Montebello POBs $153.43 2045 4.02%
BBB+ Rating
10/29/20 Placentia LRBs $52.95 2045 4.25%
Recently Issued California POB Issues Greater than $40 Million 7
==
WHAT IS A PENSION OBLIGATION BOND
ESSENTIALLY A LOAN TO PAY OFF DEBT TO CALPERS
Unfunded Accrued Liability
City owes $329 million to CalPERS
City pays the discount rate (7%, now 6.8%)
Effective cost is an adjustable rate that
increases when earnings targets aren’t met
New UAL can be added if CalPERS’
assumptions change or future interest
earnings are below the discount rate
Final payment is 2045
Pension Obligation Bond
City would owe $329 million to investors
City would pay 3%-3.5% (est.) on the bonds
Bond rate is a fixed interest rate that does
not change for the term of the bonds
New UAL can be added if CalPERS’
assumptions change or future interest
earnings are below the discount rate
City can modify to meet its objectives
8
STRUCTURING ALTERNATIVES
CITIES HAVE TAKEN VARIED APPROACHES
City of Whittier – 2021 Pension Obligation Bonds
UAL Funded: $56.9 million | All-InTIC: 2.60%
Strategy - Consistent debt payment for easier budgetary control and financial planning
Whittier, facing a steep increase in its CalPERS payments, saw POBs as a way to level out its payment obligation. The modified level approach will allow the City to direct cash flow savings into reserves while maintaining level payments in most years and savings in every year.
City of ChulaVista – 2021 Pension Obligation Bonds
UAL Funded: $348.2 million | All-InTIC: 2.54%
Strategy - Building up reserves with cash flow savings
Chula Vista structured its POB to wrap around existing General Fund debt service and, in combination, sculpt an aggregate 1% escalating debt service obligation. A pension management policy was adopted to direct early years’ savings towards bolstering reserves.
$0
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$45
2022
2024
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Millions
Other GF Debt Service POB Debt Service
UAL Payment + GF Debt
9
"' $18
C
~ $16 - Debt Service -UAL Payment
~ $14
$12
$10
$8
$6
$4
$2
$0
N st <D 00 0 N st <!)
N
0 N
0 ~ ~ f9 f9 23 f9
N N N N N N N N
- -
STRUCTURING ALTERNATIVES
CITIES HAVE TAKEN VARIED APPROACHES
City of Santa Ana – 2021 Pension Obligation Bonds
UAL Funded: $424.6 million | All-InTIC: 2.82%
Strategy – Staggered POB issuance; alleviate cash flow burden Santa Ana wished to maintain level total pension payments over the next 10 -years, then have them decline to a lower level structure. The POBs were sculpted in a way to create an all-in level structure in combination with the unrefunded portion of the UAL.
City of Corona – 2021 Pension Obligation Bonds
UAL Funded: $275.6 million | All-InTIC: 2.23%
Strategy - Match current cash flow, and reduce debt payment period by 10 years to achieve higher savings
Corona sought to take its savings in the form of a shorter time period for repayment. This ‘accelerated’ approach has the city repaying its CalPERS liability 10 years earlier than otherwise scheduled.
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20 25
30 35
2022
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$ in Millions
Debt Service UAL Payments
$-
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Millions
2021 POBs UAL (Post 2021 POBs)
UAL (Pre 2021 POBs)
10
-
- -
ADVANTAGES OF PENSION BONDS
POTENTIAL FOR FASTER PAYOFF AND SUBSTANTIAL SAVINGS
Proactively taking steps to get a handle on our pension expenses is the right thing to do
Financially
Responsible
Could reduce our cost of borrowing in half (or more)
Historic Low
Interest Rates
We have an ability to sculpt the payment plan to our needs, either paying off sooner or capturing cash flow savings Cash Flow Savings
Could reduce our overall costs by 30% (+/-)Overall Savings 11
RISKS OF PENSION BONDS
RISKS INCLUDE EXTREME MARKET RETURNS AND SQUANDERED SAVINGS If CalPERS’ average investment return is less than the bond rate, then the pension bond would not result in savings to the City Market Risk If CalPERS over-performs, City could end up with its plans more than 100% fundedSuper-Funded Plan
The bonds cannot be paid off for ten years; after the 10 year mark, the bonds can be refinanced or paid down
Locked In for 10
Years
A future Council could take the savings and spend them on projects/services that don’t enhance the City’s financial position Squandered Savings
12
PENSION “SAVINGS” OVERVIEW
IMPACT FROM VARYING INVESTMENT RETURNS
(E) Accumulate Losses
(C) Generate Savings
(not as high as Expected Savings)
(A)
Earn
Additional
Savings
Approx. Bond
Rate (3.25%)
Actuarial
Rate (6.80%)
(D) Break Even
(B)
Achieve Expected
Savings
13
-------------------------------------------
V" J-
CURRENT PAYMENT PLAN
CITY IS SCHEDULED TO PAY $592 MILLION OVER NEXT 23 YEARS $0
$5
$10
$15
$20
$25
$30
$35
$40Millions
Scheduled UAL Payments
14
HYPOTHETICAL PENSION FINANCING
“MODIFIED LEVEL” STRUCTURING APPROACH
Analysis assumes a refinancing of 100% of FY20 UAL
Estimated to generate NPV savings of $102.6 million
Estimated POB Payments at 100% UAL Funding
$0
$5
$10
$15
$20
$25
$30
$35
$40
2023
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2045
Millions
Debt Service
UAL Payments
FY UAL Payments POB Payments Gross "Savings”
2023 $27,602,539 $21,895,195 $5,529,980
2024 29,260,907 21,897,923 6,912,464
2025 31,087,379 21,896,294 8,360,559
2026 30,538,546 21,897,214 7,616,207
2027 30,770,855 21,896,454 7,578,558
2028 31,551,298 21,896,422 7,988,840
2029 32,353,200 21,897,868 8,382,323
2030 33,177,153 21,897,776 8,761,958
2031 34,023,764 21,897,978 9,126,735
2032 32,492,578 21,893,770 7,729,512
2033 32,183,136 21,893,826 7,270,609
2034 29,849,030 21,893,872 5,446,567
2035 28,989,662 21,894,340 4,706,908
2036 27,574,698 21,898,341 3,648,571
2037 25,125,494 21,893,729 2,012,715
2038 23,824,987 21,897,200 1,163,298
2039 22,435,748 21,896,329 315,390
2040 21,427,846 21,423,820 2,281
2041 21,847,096 21,845,378 943
2042 17,519,760 17,519,593 89
2043 15,236,512 15,235,844 344
2044 12,916,455 12,915,155 649
2045 113,595 108,717 2,360
Totals $591,902,238 $461,283,032 $130,619,207
NPV Savings ($) $102,557,861
NPV Savings (%) 31.14%
All-In TIC 3.24%
15
-
HYPOTHETICAL PENSION FINANCING
“ACCELERATED” STRUCTURING APPROACH
Analysis assumes a refinancing of 100% of FY20 UAL
Estimated to generate NPV savings of $121.7 million
Estimated POB Payments at 100% UAL Funding
FY UAL Payments POB Payments Gross "Savings”
2023 $27,602,539 $27,268,476 $334,063
2024 29,260,907 28,910,954 349,953
2025 31,087,379 30,714,085 373,294
2026 30,538,546 30,173,789 364,757
2027 30,770,855 30,398,245 372,610
2028 31,551,298 31,169,518 381,780
2029 32,353,200 31,965,177 388,023
2030 33,177,153 32,775,546 401,607
2031 34,023,764 33,611,980 411,784
2032 32,492,578 32,101,745 390,833
2033 32,183,136 31,797,201 385,935
2034 29,849,030 29,488,956 360,074
2035 28,989,662 28,641,164 348,499
2036 27,574,698 - 27,574,698
2037 25,125,494 - 25,125,494
2038 23,824,987 - 23,824,987
2039 22,435,748 - 22,435,748
2040 21,427,846 - 21,427,846
2041 21,847,096 - 21,847,096
2042 17,519,760 - 17,519,760
2043 15,236,512 - 15,236,512
2044 12,916,455 - 12,916,455
2045 113,595 - 113,595
Totals $591,902,238 $399,016,836 $192,885,403
NPV Savings ($) $121,699,646
NPV Savings (%) 36.96%
All-In TIC 2.83%
16 $0
$5
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Millions
Debt Service
UAL Payments
-
TIMELINE FOR ISSUANCE
PENSION OBLIGATION BONDS REQUIRE JUDICIAL VALIDATION
Judicial validation is utilized to begin the POB process This would allow the Agency to confirm that the
pen
sion liability is an obligation imposed by law and
the POBs would be exempt from the Constitutional
debt limit
The process for authorizing the POB would first
require a resolution of issuance from the City Council
followed by a 12-15 week review by Orange County
Superior Court
Some cities are avoiding the validation process by
issuing taxable lease revenue bonds
This approach requires the use of leased assets
Timeline Milestone
Week 1 City Council approves financing and authorizes filing of validation action
Complaint for validation filed
Application to obtain order directing issuance,
publication, and service of summons filed
Week 2 Hearing on application to obtain order directing issuance, publication, and service of summons held
Special summons issued by Clerk of the Court
Week 3 Special summons published in newspaper for first time Week 6 Request for entry of default against all persons filed Week 7 Default entered against all persons by Clerk of the Court
Default judgement package filed
Week 8 Hearing to request entry of default judgment of
validation
Default judgment of validation entered
30-day appeal period begins
Week 12 Deadline to appeal default judgment of validation 17
STIFEL DISCLOSURES
MUNICIPAL ADVISOR RULE
18 General Disclaimer: Stifel, Nicolaus & Company, Incorporated (“Stifel”) has prepared the attached materials. Such material consists of factual or general information (as defined in the SEC’s Municipal Advisor Rule). Stifel is not hereby providing a municipal entity or obligated person with any advice or making any recommendation as to action concerning the structure, timing or terms of any issuance of municipal securities or municipal financial products. To the extent that Stifel provides any alternatives, options, calculations or examples in the attached information, such information is not intended to express any view that the municipal entity or obligated person could achieve particular results in any municipal securities transaction, and those alternatives, options, calculations or examples do not constitute a recommendation that any municipal issuer or obligated person should effect any municipal securities transaction. Stifel is acting in its own interests, is not acting as your municipal advisor and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934, as amended, to the municipal entity or obligated party with respect to the information and materials contained in this communication. Stifel is providing information and is declaring to the proposed municipal issuer and any obligated person that it has done so within the regulatory framework of MSRB Rule G‐23 as an underwriter (by definition also including the role of placement agent) and not as a financial advisor, as defined therein, with respect to the referenced proposed issuance of municipal securities . The primary role of Stifel, as an underwriter, is to purchase securities for resale to investors in an arm’s‐ length commercial transaction . Serving in the role of underwriter, Stifel has financial and other interests that differ from those of the issuer. The issuer should consult with its own financial and/or municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate.
These materials have been prepared by Stifel for the client or potential client to whom such materials are directly addressed and delivered for discussion purposes only. All terms and conditions are subject to further discussion and negotiation. Stifel does not express any view as to whether financing options presented in these materials are achievable or will be available at the time of any contemplated transaction.
These materials do not constitute an offer or solicitation to sel l or purchase any securities and are not a commitment by Stifel to provide or arrange any financing for any transaction or to purchase any security in connection therewith and may not relied upon as an indication that such an offer will be provided in the future. Where indicated, this presentation may contain information derived from sources other than Stifel. While we believe such information to be accurate and complete, Stifel does not guarantee the accuracy of this information . This material is based on information currently available to Stifel or its sources and is subject to change without notice. Stifel does not provide accounting, tax or legal advice; however, you should be aware that any proposed indicative transaction could have accounting, tax, legal or other implications that should be discussed with your advisors and/or counsel as you deem appropriate.
Pension Risk D isclaimer: Pension Obligation Bonds (“POBs”) are a source of financing for unfunded actuarial liabilities of pension funds and can serve a valuable function. However, the success of a POB financing is dependent on a number of assumptions proving to be accurate, and the failure of any of these assumptions is a risk that a government issuing POBs should consider.