C
AL
PERS UAL R
ESTRUCTURING
P
ROJECT
U
PDATE
ON
2022 P
ENSION
O
BLIGATION
B
OND
AND
N
EXT
S
TEPS
J
ANUARY
25, 2022
City of Rialto UAL Restructuring Update
Discussion Topics
2
Underwriter RFP Selection Discussion
POB Market Update
Rialto UAL Update: Impacts of 21.3% FY 2021 CalPERS
Returns and Discount Rate Reduction from 7.0% to 6.8%
Updated POB Savings Analysis
Next Steps
Appendix
–
Additional Market Update Detail
Underwriter RFP
Evaluation and Recommendation
3
RFP was sent to 11 qualified firms; 9 responded
Based on in depth review by NHA, top 4 firms included:
BofA
($1.75/bond fee), JP Morgan ($1.75/bond fee); Stifel
($2.00/bond fee), Ramirez ($2.25/bond fee)
Responses were analyzed based on (1) experience, (2) depth of quantitative capabilities (scenario modeling) including risk assessment, (3) credit and marketing strategies to obtain lowest interest rate, and (4) fees
Recommendation
BofA
as Senior Manager (70
-
80%)
JP Morgan as Co
-
Manager (20
-
30%)
Market Update
–
Recent UAL Restructurings
Since 2020, about 80
agencies have issued
UAL Restructuring bonds
for over $7.0 billion in
UAL funded
Interest rates have
ranged from 2.54% to
about 4.25%
Vast majority of
agencies to come to
market in 2021 have
achieved 2.50%
-
3.25%
interest rates given
reduction in credit
spreads (see Appendix)
Slight uptick in rates for
January 2022 POBs:
1/12 La Habra (AA+):
3.04% rate
1/19 Lakeside Fire (AA
-
):
3.35%
4 Rialto UAL Expected to Drop from $142M to $107M
Estimated
New Payments Shown in Navy Blue
$-
$2
$4
$6
$8
$10
$12
$14
$16
$18
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
Millions
Current UAL Payments
Projected UAL Payments (6.8% Discount Rate)
New payments expected to be
reduced to ≈ $12.0
-
$12.5M level
through 2030 based on recent 21.3%
returns and 6.8% discount rate
5 $-
$2
$4
$6
$8
$10
$12
$14
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
Millions
Projected UAL Payments (6.8% Discount Rate)
19-Year POB (100% Funding)
19-Year POB (83% Funding)
19-Year POB (67% Funding)
Note:
Figures shown are preliminary estimates for illustration.
Assumes CalPERS earns 6.8% investment earnings.
Preliminary POB Options Based on Lower Size UAL
67% ($72M) vs. 83% ($89M) vs. 100% ($107M) of UAL Paid Off UAL Restructuring estimated to
reduce payments from $12.5M
to between $7.6
-
$8.2M
6 Note:
Figures shown are preliminary estimates for illustration. Assumes CalPERS earns 6.8% investment earnings.
Preliminary POB Options Based on Lower Size UAL
67% ($72M) vs. 83% ($89M) vs. 100% ($107M) of UAL Paid Off 7 Metrics
19 -
Year POB
(100% Funding)
19 -
Year POB
(83% Funding)
19 -
Year POB
(67% Funding)
UAL Funded ($)
$107,340,000
$89,092,200
$71,917,800
% UAL Funded (Current Asset Valuations)
76%
63%
51%
Funded Ratio (Current Asset Valuations)
92%
88%
84%
% UAL Funded (Projected After FY 2021 Returns & 6.8% Discount Rate) 100%
83%
67%
Funded Ratio (Projected After FY 2021 Returns & 6.8% Discount Rate) 100%
96%
93%
Maturity
19 Years
19 Years
19 Years
Average Life
10.8 Years
11.5 Years
12.4 Years
All
-
In Interest Rate
3.41%
3.47%
3.54%
Present Value Savings (%)
19.71%
19.25%
18.68%
Present Value Savings ($)
$21,158,291
$17,152,311
$13,434,845
Cumulative Savings
$17,323,480
$11,768,164
$6,548,929
Savings (2023
-
2032)
$38,914,468
$35,991,724
$33,235,180
Average Annual Savings (2023
-
2032)
$3,891,447
$3,599,172
$3,323,518
Size
-
Takeaways
100% funding provides higher savings than 67% and lower interest rate
About $570K more savings on an annual basis for next 10 years; over $10 million more savings on a cumulative basis ($17M vs $6.6M)
When might the smaller (67% of UAL) size be better?
If CalPERS had another great year (
i.e.
20% returns), the City could be 100% funded
without having issued debt for that remaining 1/3 of UAL
If starting from 100%, City would be > 100% funding and have trapped assets
Trapped assets (overfunding) are still assets of the City, they essentially serve as a shock absorber for new future UAL that gets added on (surplus can be used to absorb that new UAL without any impact to City)
Additionally, if there was a significant market crash (CalPERS loses over ≈
20%
immediately), the City would be better off issuing the smaller POB than the larger
However,
as long as
the market crash was below 20% negative return, the City would be better off under the larger POB size
Once the Underwriter is selected, NHA and City Staff intend to work through several additional POB sizing, term and risk assessment analyses and provide that to Council in January/February as part of the final recommended Plan of Finance
8 Revisiting Risks
Primary Benefits
•
Fiscal Sustainability Tool: Ability to
“re
-
shape” the City’s pension debt
payments
•
Near
-
Term Budgetary Savings
•
Interest Rate Savings “Arbitrage”: City
can borrow at rates much lower
(currently
≈
3.5%) than what CalPERS
charges on UAL debt (6.8%)
•
Increase Funding Ratio
•
Flexibility to Modify Maturity
Primary Risk:
Reinvestment &
Market Timing Risk
•
Savings are ultimately dependent on
future CalPERS returns, which are
unknown at time of issuance
(primary concern of GFOA)
•
Present value savings occur
if
CalPERS earns greater returns than
pension bond interest rate
•
Near
-
term losses exacerbate this risk
given large lump sum deposit into
the market
These risks will be
quantified through
a
stress testing
process
with NHA
and Underwriter to
better understand
the impacts of
potential poor
investment
performance by
CalPERS
What if CalPERS
only earns 5%? 6%
What if there is
another 2008
-
like
recession?
Stress testing results can be provided at City
Council approval or other meetings as desired
9 City of Rialto UAL Restructuring
Tentative Next Steps
10 •
Jan 12 Update to EDC; Jan 25 Presentation to City Council •
Underwriter selected
•
Provide preliminary structuring options analysis and stress testing January
•
Present final recommended POB sizing/structure; POS and Pension Funding Policy Approval
•
Credit Rating Presentation
•
Validation Process Concludes (actual timing TBD)
February/March
•
Price Bonds/Lock Interest Rate
March
•
Closing and Pay Off UAL with CalPERS
March / April
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Jan-92
Jan-97
Jan-02
Jan-07
Jan-12
Jan-17
Jan-22
Market Update
Treasury Rates and Other Considerations
11
On Wednesday 1/5, the release of December FOMC minutes indicated the Fed believes it may be warranted to increase the federal funds rate sooner or at a faster pace than previously expected
Futures market currently anticipates a high likelihood of a rate hike by the Fed’s mid -
March meeting
Demand for taxable bonds, like POBs, is still high and should remain that way for next couple of months given heavy redemptions (additional cash to be invested)
0.80%
1.30%
1.80%
2.30%
2.80%
Jan-21
Feb-21
Mar-21
Apr-21
May-21
Jun-21
Jul-21
Aug-21
Sep-21
Oct-21
Nov-21
Dec-21
Jan-22
30 -
Year Treasury Rates (Jan. 2021
-
Present)
Recent NHA Client UAL Restructurings (Public Offerings) Interest Rate (Blue) and Credit Spread (Orange) Trends
12 4.03%
3.69%
3.72%
3.44%
3.25%
2.84%
2.64%
2.54%
2.75%
2.92%
2.74%
2.97%
2.63%
2.56%
2.89%
2.82%
2.64%
2.84%
2.91%
3.15%
3.06%
2.92%
3.07%
2.90%
3.04%
3.35%
0 50
100
150
200
250
300
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Montebello
Riverside (City)
West Covina
Torrance
Gardena
El Cajon
Monterey Park
Chula Vista
Orange
Hungtington Beach
Manhattan Beach
Corte Madera
CMPA
El Segundo
Auburn
Redondo Beach
Covina
San Fernando
Sanger
Stanislaus CFPD
Lakeport
Montclair
National City
Poway
La Habra
Lakeside FPD
May
2020
June
2020
July
2020
Oct.
2020
Nov.
2020
Jan.
2021
Feb.
2021
Feb.
2021
Mar.
2021
Mar.
2021
Apr.
2021
Apr.
2021
May
2021
May
2021
May
2021
July
2021
July
2021
Aug.
2021
Aug.
2021
Sep.
2021
Oct.
2021
Oct.
2021
Nov.
2021
Dec.
2021
Jan.
2022
Jan.
2022
$150M
$430M
$200M
$350M
$101M
$147M
$106M
$350M
$286M
$364M
$91M
$19M
$27M
$144M
$17M
$226M
$63M
$32M
$19M
$12M
$8M
$62M
$84M
$44M
$72M
$28M
A+
(AA
Ins.)
AA
A+
AA
AA-
AA
AA
AA
(AA
Ins.)
AA
(AA
Ins.)
AA+
AAA
AAA
AAA
AA+
AA+
AA
AA
AA (A+
Ins.)
A+
AA-
AA
AA-
AA-
AAA
AA+
AA-
POB
POB
Lease
Lease
POB
POB
POB
POB
POB
POB
POB
POB
POB
POB
POB
LRB
POB
POB
POB
POB
POB
POB
POB
POB
POB
POB
Spread to 30
-
Yr. Treasuries
All
-
in TIC
Significant Credit Spread
Tightening due to Demand >
Supply
Recent upticks in
TSY rates & spreads