5/25/2022
1 FINANCIAL PERFORMANCE AND
BUDGET COMMITTEE MEMORANDUM
CALPERS PENSION AND 2020 POB UPDATE
June 10, 2022
2 Rewind to Spring 2020 – Pension Obligation Bond Recap In the Spring of 2020, the City issued $432M of POBs to pay off approximately 67% of its then current UAL
$230M of UAL remained outstanding with CalPERS
City locked in a 3.69% interest rate and achieved
multiple objectives → → → → → → → → →
While navigating the unknowns present during the
height of COVID, the City undertook a robust and
transparent stakeholder engagement process to craft a
thoughtful POB strategy, while maintaining its strong
“AA” credit rating during unprecedented economic
times
Included a significant amount of stress testing to quantify risks and deliberate timing strategies on when to invest monies with CalPERS
Cash flow savings; $175M+ projected
overall
Equitable funding of both
Miscellaneous and Safety Plans
(targeted 92% funding ratio)
Smoothed out payments to enhance
budget predictability/flexibility and
fiscal sustainability/resiliency
No extension of payments to ensure
savings in every single year
Maintained flexibility to pay off debt
early (10‐year call feature)
Note: Savings assumed CalPERS earned 7% returns
1 2
5/25/2022
2 3
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Fiscal Year
POB Debt Service Unrefunded UAL Payments
UAL Payments Before POB Total Payments After POB
Rewind to Spring 2020 – Pension Obligation Bond Recap
Cash Flow Smoothing Strategy and Savings Estimates
$140M of
present value
savings
estimated
32.5% of UAL
refunded
$179M of
cumulative
savings
$7+ million of
annual near‐
term General
Fund savings to
help balance
budget
Payments on $432M POB
Payments on $230M UAL
Note: Savings assumed CalPERS earned 7% returns
4 What Has Happened Since the 2020 POB Was Issued?
City Benefited From Fortuitous POB Timing
FYE 2020 Earnings: 4.7% Returns + minor
demographic assumption changes were
factored in, driving UAL up by $62M
$230M UAL rose to $292M
FYE 2021 Earnings: CalPERS earned robust
21.3% returns
$305M of reduced UAL from these strong
returns
Bonus: Good Timing of POB magnifies these gains;
Additional $65M of reduced UAL
Fall 2021 ALM Study: Discount rate
reduction to 6.8%; UAL increase of $77M
NET EFFECT: CITY IS ROUGHLY 100%
FUNDED
99.5% for Safety ($7M UAL) and 101% for
Miscellaneous ($15M surplus)
$(100)
$(50)
$‐
$50
$100
$150
$200
$250
$300
$350
AFTER 2020
POB
4.7% FY20
RETURNS
21.3% FY21
RETURNS
FY21
MAGNIFIED
GAINS FROM
GOOD POB
TIMING
6.8%
DISCOUNT
RATE
REDUCTION
MILLIONS
RIVERSIDE EST. UAL SINCE POB ISSUANCE
Funding
Ratio
89%
92%
95%
98%
101%
104%
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3 5
What Has Happened Since the 2020 POB Was Issued?
City Benefited From Fortuitous “POB Timing” –U A L PAYMENTS UAL payments are
expected to be close to
zero starting in 2024
Assumes that CalPERS
meets or exceed its
6.8% annual earnings
expectation
Note: Annual Normal
Cost payment (not
shown here) will grow
from $35M to $40M
due to discount rate
reduction
$5M annual increase to
budget starting in FY
2024
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Fiscal Year
POB Debt Service Unrefunded UAL Payments UAL Payments Before POB Total Payments After POB Payments on $432M POB
Note: Projected payments and new UAL estimates calculated by CalPERS Outlook Online Tool 6 Additional Scenarios for Prudent Financial Planning
While the City’s pension outlook has improved considerably, there are still several potential risks/considerations to keep in mind
CalPERS is currently underperforming in FY 2022 with recent stock market declines CalPERS can still lower the discount rate below 6.80% Additional Scenarios for prudent financial planning for on next slides CalPERS earns 0% for FY 2022
CalPERS earns ‐5% for FY 2022
CalPERS lowers discount rate to 6.50% next year
5 6
5/25/2022
4 7
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Fiscal Year
POB Debt Service Unrefunded UAL Payments
UAL Payments Before POB Total Payments After POB
Est. UAL Payments If POB Wasn't Issued
Scenario 1: CalPERS earns 0% for FY 2022
UAL would grow
back up to ≈$143M
UAL Payments
would ramp up
starting in 2024
again
Overall payments
would be
approximately
$45M annually
Along with $5M of
added Normal
Costs, this is about
same overall level
planned at time of
POB issuance
Payments on $432M POB
Payments on New $143M UAL
Note: Projected payments and new UAL estimates calculated by CalPERS Outlook Online Tool 8 $0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
$80.0
$85.0
$90.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
2047
2048
2049
2050
2051
Millions
Fiscal Year
POB Debt Service Unrefunded UAL Payments
UAL Payments Before POB Total Payments After POB
Est. UAL Payments If POB Wasn't Issued
Scenario 2: CalPERS earns ‐5% for FY 2022
UAL would grow back
up to ≈$289M
UAL Payments would
ramp up starting in
2025 again
Overall payments
would be around ≈
$47M annually, but
grow to over $60M
over next decade
Inclusive of $5M of
added Normal Costs,
this is significantly
higher than planned
at time of POB
issuance
Payments on $432M POB
Payments on New $289M UAL
Note: Projected payments and new UAL estimates calculated by CalPERS Outlook Online Tool 7 8
5/25/2022
5 9
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0
$75.0
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
2036
2037
2038
2039
2040
2041
2042
2043
2044
2045
2046
Millions
Fiscal Year
POB Debt Service Unrefunded UAL Payments
UAL Payments Before POB Total Payments After POB
Est. UAL Payments If POB Wasn't Issued
Scenario 3: CalPERS Lowers Discount Rate to 6.50% Next Year UAL would
grow back up
to ≈$83M
UAL Payments
would ramp
up starting in
2025 again;
then rapidly
decrease
Payments on $432M POB
Payments on New $83M UAL
Note: Projected payments and new UAL estimates calculated by CalPERS Outlook Online Tool 10 Takeaways
Riverside, along with many other agencies who issued POBs in 2020, have benefitted significantly from great market timing –l o c k i n g in low interest rates and magnifying the benefit of the 21.3% gains from CalPERS in FY 2021
The 3.69% interest rate the City locked in is over 1.25% lower than current (April 2022) POB rates While POB payments are fixed and predictable, the UAL (and related amortization payments), are extremely sensitive to CalPERS investment earnings City should plan/forecast using conservative assumptions and perform sensitivity analysis to understand potential impacts under a variety of CalPERS results Significant savings (reduction in UAL payments) is expected for FY 2024 City should consider using majority of that savings to bolster reserves (like the Section 115 Trust) to ensure this “shock absorber” is funded to healthy levels Provides strong resiliency to absorb future economic shocks/new UAL; such as the expected increases coming from the FY 2022 underperformance
9 10