2022 POB RESTRUCTURING - PTO ACTUARIAL ANALYSIS UPDATE AND
PRELIMINARY RESTRUCTURING OPTIONS REVIEW
JULY 19, 2022
Table of Contents
2 Revisiting City’s Current Pension Situation
Update on PTO Actuarial Analysis
Preliminary Restructuring Options and Recommendation
NOTE: Restructuring analysis is preliminary; continues to be reviewed and updated by municipal advisor, underwriters and actuary
Why Your Finance Team Recommends Consideration of Extending the Term of the 2005 POB Refinancing
3 Since 2005, after the 2005 POBs fully funded the City’s Unfunded Actuarial Liability (“UAL”) with CalPERS, the City’s CalPERS’ UAL has grown to an estimated $380 million This UAL increase has placed an est. $20 million+ annual burden on the City (primarily General Fund) over and above the revenue generated by the City’s Pension Tax Override (PTO) levy
The City also faces an estimated $20 million automatic termination of the 2016 RBC swap on 8/1/23
Extending the term of the 2005 POBs through a refinancing presents the opportunity to better align the City’s future pension costs with its PTO revenues Provides significant annual pension cost reduction to the General Fund over the next 12 years Imminent Risks Facing the City
4 The 2005 B-2 POBs are currently accreting but will convert to variable rate Index Bonds on 8/1/23
LIBOR, the underlying variable rate index for the 2005 POBs, will expire 6/30/23
The Accreted Value of the 2005 B-2 POBs at Conversion will be approximately $128 million, which is $86 million greater than the initial principal amount of $41 million
The City faces a currently estimated $20 million Automatic Termination Payment to RBC on 8/1/23
Background on the City’s Debt with CalPERS
5 The City’s CalPERS Unfunded Actuarial
Liability (UAL) is the City’s largest debt
obligation
Represents the shortfall in the City’s account with
CalPERS needed to fully fund its employees’
future retirement benefits
CalPERS annual UAL amortization payments
are now about $26 million, and are currently
estimated to escalate to $42 million by FY
2031
For comparison, debt service on the 2005 POBs is
currently about $12 million per year
Est. Balances as of July 1, 2022
1999 POBs $3 Million
2005B-1 POBs $18 Million
2005B-2 POBs* $128 Million
2016 Swap $20 Million
CalPERS UAL** $380 Million
OPEB UAL $90 Million
Lease Bonds/COPs $94 Million
Total $733 Million
*8/1/23 full accreted value
** Assumes -5% investment returns for FY 2022
Actuarial Analysis for Pension Tax Override (PTO)
Budgetary Challenge for General Fund
Bartel and Associates conducted a comprehensive actuarial study of the share of the City’s pension costs that can legally be paid by the City’s PTO (study attached to Staff Report)
The Challenge: $42 million of current annual pension costs (growing to $50M by FY 2025 and $60M by FY 2029) that could legally be paid for by PTO revenues
However, only $24 million of PTO revenue is being collected; this means that the City (primarily the General Fund) is paying for $20 million+ of pension costs that otherwise could be paid for by the PTO
The Finance Team has been analyzing tailored POB restructuring options (in concert with the City’s other pension expenses) with the goal of reducing the burden on City’s General Fund
6 What This Means for the 2005 POBs
The City’s CalPERS Debt is “Fixed,” But its POBs Can Be “Reshaped” 7 The combined cost of annual
payments on the UAL,
Normal Cost and 2005 POB
debt service is currently
about $50M
Grows to between $60-$70
million over the next 5 years
Expenses paid from non-PTO
General Fund revenues
(amount above teal line)
projected to grow from $25M
million to $48 million
7 $-
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2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 Millions
Current Projected Pension Costs. Vs. Projected PTO Revenue Est. UAL Payments
Est. Normal Cost Payments
Restructuring the 2005 POBs
Macro Policy Goals
8 Consistent with the Council’s 6/21/22 action, the Finance Team’s developing Plan of Finance is intended to achieve:
Refinancing the 2005 B-1 and B-2 POBs
Terminating the 2016 Swap (funded through 2022 POB issuance) Defeasing the 1999 POBs
A simple/conventional fixed rate semi-annual debt service structure that will be easy to administer
To better align the City’s aggregate pension expenses with projected PTO revenues, the Finance Team has evaluated three preliminary restructuring options (1) No extension from the existing 2034 maturity; (2) 10-year extension; (3) Extension to 2052 $-
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2005 POB Restructuring Options
Visual Depiction of “Re-Shaping”
9 Reshaping POB debt service (shown in royal
blue bars) through term extension allows the
City to more efficiently utilize PTO revenues
and reduce burden on General Fund through
FY 2034
Helps to “smooth” pension costs payable by
City; enhancing budget predictability & fiscal
sustainability
Est. Normal Cost Payments
Est. UAL Payments
POB Debt Service
Est. Normal Cost Payments
Est. UAL Payments
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Est. Normal Cost Payments
Est. UAL Payments
Note: All options assumes interest-only 2023-2025; 1st principal maturing January 1, 2026 with debt service modestly ascending at 2% annually thereafter The Whole Picture: Status Quo vs. Potential Restructured Payments Projected Pension Expenses Paid by the City/General Fund (not covered by PTO) 10 Status Quo: City
payments growing
from $31M (2024)
to $48M
2034 Term: City
payments reduced
to $23M (2024) and
grow to $49M
2044 Term: City
payments reduced
to $24M (2024) and
grow to $39M
2052 Term: City
payments reduced
to $24M (2024) and
grow to $37M
Current (Status Quo)
1-Aug
City Payments Not Covered
by PTO
City Payments Not
Covered by PTO Cash Flow Benefit
City Payments Not
Covered by PTO Cash Flow Benefit
City Payments Not
Covered by PTO Cash Flow Benefit
2023 $25,211,587 $22,582,260 $2,629,326 $22,893,532 $2,318,054 $23,204,356 $2,007,230 2024 31,489,986 23,256,457 8,233,529 23,638,907 7,851,079 24,020,807 7,469,179 2025 33,606,558 25,520,751 8,085,807 25,903,201 7,703,357 26,285,101 7,321,457 2026 36,391,420 38,957,567 (2,566,147) 30,324,417 6,067,003 28,318,354 8,073,066 2027 38,090,318 41,092,244 (3,001,926) 32,289,863 5,800,455 30,247,419 7,842,899 2028 40,552,960 42,926,849 (2,373,889) 33,945,324 6,607,636 31,860,987 8,691,973 2029 44,020,988 46,736,509 (2,715,521) 37,573,091 6,447,897 35,446,997 8,573,991 2030 43,004,266 47,673,472 (4,669,207) 38,327,434 4,676,831 36,160,222 6,844,043 2031 48,140,734 48,573,835 (433,101) 39,041,610 9,099,124 36,829,560 11,311,174 2032 46,624,234 46,653,202 (28,968) 36,928,634 9,695,600 34,673,665 11,950,569 2033 46,143,324 45,617,654 525,670 35,697,123 10,446,201 33,396,786 12,746,538 2034 40,191,152 42,375,504 (2,184,352) 32,262,792 7,928,360 29,915,404 10,275,748 2035 17,014,672 17,014,672 0 30,353,610 (13,338,938) 27,963,116 (10,948,444) 2036 14,347,606 14,347,606 0 27,952,956 (13,605,350) 25,514,062 (11,166,456) 2037 10,263,914 10,263,914 0 24,141,214 (13,877,300) 21,654,520 (11,390,606) 2038 8,006,921 8,006,921 0 22,164,096 (14,157,175) 19,626,090 (11,619,169) 2039 5,432,819 5,432,819 0 19,875,044 (14,442,225) 17,283,238 (11,850,419) 2040 3,553,433 3,553,433 (0) 17,971,532 (14,418,099) 15,329,320 (11,775,887) 2041 3,118,373 3,118,373 (0) 16,065,866 (12,947,493) 13,372,516 (10,254,143) 2042 2,284,100 2,284,100 0 11,023,330 (8,739,230) 8,274,255 (5,990,155) 2043 1,716,180 1,716,180 0 6,025,284 (4,309,104) 4,907,033 (3,190,853) 2044 1,883,970 1,883,970 0 7,661,484 (5,777,514) 5,135,825 (3,251,855) 2045 0 0 0 0 0 3,313,156 (3,313,156)
2046 0 0 0 0 0 3,374,177 (3,374,177)
2047 0 0 0 0 0 3,438,017 (3,438,017)
2048 0 0 0 0 0 3,501,422 (3,501,422)
2049 0 0 0 0 0 3,567,420 (3,567,420)
2050 0 0 0 0 0 3,632,686 (3,632,686)
2051 0 0 0 0 0 3,700,174 (3,700,174)
2052 0 0 0 0 0 3,767,712 (3,767,712)
Total Est. City Payments Not Covered by PTO $541,089,515 $539,588,293 $572,060,344 $557,714,397 Est. Total Cash Flow Benefit / (Cost) to City (2) $1,501,222 ($30,970,829) ($16,624,882) Present Value of Cash Flow Benefit (3) $4,549,840 $11,308,888 $26,571,017 Est. Cash Flow Benefit from 2023 to 2034 $1,501,222 $84,641,598 $103,107,868 Added Debt Service from Term Extension $62,129,388 $129,843,062 (1) Benefit calculation accounts for added debt service from term extension; Cash flow benefit is positive given that a significantly larger portion of debt service is paid for by PTO under term extension scenarios instead of the City's General Fund (2) PV uses bond interest rate as discount factor
(3) Assumes interest-only 2023-2025; 1st principal maturing January 1, 2026 with debt service modestly ascending at 2% annually thereafter (4) Assumes fiscal year PTO revenue receipts fund bond year debt service payments 2034 Term (No Extension) 2044 Term 2052 Term
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Current (Status Quo) 2034 Term (No Extension) 2044 Term 2052 Term Status Quo. Vs Restructuring Options (2034, 2044 & 2052) Projected Pension Payments by City/General Fund (not covered by PTO) 11 2044 & 2052 options create >$80M est. cash flow benefit through 2034, through reduced annual expenses
Takeaways and Preliminary Recommendation
12 Without a term extension on the POB refunding, the City is expected to pay between $25M to $48M from non-PTO revenues annually through 2034 for pension expenses
2044 and 2052 term options may provide over $80M of estimated cash flow benefit (reduced pension expenses) to the City over next 12 years 2044 is currently the preliminary recommended term for POB refinancing; Why?
$84 million of
projected pension
expense reduction
for next 12 years
Enhanced budget
predictability/
smoothing and
fiscal sustainability
Increased resources
for other City
priorities
More optimal re-
alignment of
expenses to
revenue
$70M of lower
interest costs vs.
the 2052 term