Source: Police and Fire 2021 Annual Comprehensive Financial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
B-25
Funding Status
General. The funding objective for the Pension Plan s is to meet long -term benefit obligations through contributions and investment income. Following is a summary of the funded status of the Pension Plans on an actuarial and financial statement basis.
Actuarial Funded Status. The Federated 2021 Pension Plan Actuarial Report and the Police and Fire 2021 Pension Plan Actuarial Report are the most recent actuarial valuation s available for the Federated Pension Plan and the Police and Fire Pension Plan as of the date of this Official Statement. The following information is derived primarily from such report. To determine on-going funding requirements for pension benefits, most pension plans utilize an actuarial value of pension assets that differs from the market value of those assets. The actuarial value of pension assets is based on smoothing year-to-year market value returns for purposes of reducing the resulting volatility on contributions. The market value represents the value of the pension assets if t hey were liquidated o n the valuation date. For a further description of the methodology used by the Pension Plans for valuing their respective pension plan assets, please see “PENSION PLANS – Actuarial Assumptions.” Table B-5a, Table B-5b, Table B-5c and Table B-5d show the respective Market Value of Assets and Actuarial Value of Assets of the Pension Plans. Table B-5a and Table B-5c also show the actuarially determined value of all current and future benefits to be paid by the Pension Plans (the “Total Actuarial Liability”) as of June 30, 2020 and June 30, 2021 . The Market Value of Assets, Actuarial Value of Assets and Total Actuarial Liability are intended to be used to assess contribution s for an ongoing pension plan.
They are not appropriate for the assessment of the sufficiency of plan assets to settle the obligations of a pension plan, like the Pension Plans, on a risk-free basis, because actual events and plan experience may deviate from the assumptions used in the actuarial valuations and such deviations may be material.
Table B-5a
Federated Pension Plan
Assets & Liabilities
(in millions)
June 30, 2020 June 30, 2021 % Change
Total Actuarial Liability $ 4,401 $ 4,563 3.7%
Market Value Assets 2,208 2,884 30.6
Actuarial Value Assets 2,301 2,513 9.2
Unfunded Actuarial Liability- MV(1) 2,193 1,679 (23.5) Unfunded Actuarial Liability - AV(2) (3) 2,100 2,050 (2.4) Funded Ratio – Market Value 50.2% 63.2% 26.0
Funded Ratio – Actuarial Value 52.3% 55.1% 5.4
(1) UAL amount based on Market Value of Assets , which is determined using actual contributions, benefit payments and administrative expenses during the year. Any difference between this amount and the actual net investment earnings is considered a gain or loss.
(2) UAL amount based on Actuarial Value of Assets , which is calculated by recognizing the deviation of actual investment returns compared to the expected return for the period ending on th e valuation date over a five-year period. See “– Actuarial Assumptions – Actuarially Assumed Investment Rates of Return” for the actuarially expected or assumed investment returns for the previous 10 fiscal years.
(3) Decrease from June 30, 2020 to June 30, 2021 is primarily due to gains recognized as a result of actual investment returns above the discount rate (reducing the UAL by approximately $76 million) and contributions in excess of the Normal Cost plus interest on the UAL (further reducing the UAL by approximately $14 million) , offset by liability losses (of approximately $31 million, including a $21 million loss due to salaries being higher th an expected) and changes in assumptions (of approximately $10 million). See “PENSION PLANS – Funding Status” below for a discussion of the funding status of the Federated Pension Plan.
Source: Federated 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-5c
Federated Pension Plan
Market and Actuarial Value of Assets
(in thousands)
June 30, 2020 June 30, 2021
Market Value, Beginning of Year $ 2,132,152 $ 2,208,017
Contributions
Member 25,082 25,724
City 181,327 183,964
Total 206,409 209,688
Net Investment Earnings(1) 90,909 698,608
Benefit Payments (216,728) (227,206)
Administrative Expenses (4,725) (4,762)
Market Value, End of Year $ 2,208,017 $2,884,345
Actuarial Value of Assets $ 2,301,469 $ 2,513,095
(1) Gross investment earnings less investment expenses.
Source: Federated 2021 Annual Comprehensive Financial Report for Market Value of Assets; Federated 2021 Pension Plan Actuarial Report for Actuarial Value of Assets.
Table B-5b
Police and Fire Pension Plan
Assets & Liabilities
(in millions)
June 30, 2020 June 30, 2021 % Change
Total Actuarial Liability $ 5,235 $ 5,442 3.9%
Market Value Assets 3,702 4,727 27.7
Actuarial Value Assets 3,852 4,210 9.3
Unfunded Actuarial Liability - MV(1) 1,533 715 (53.4) Unfunded Actuarial Liability - AV(2) (3) 1,383 1,231 (11.0) Funded Ratio – Market Value 70.7% 86.9% 16.1
Funded Ratio – Actuarial Value 73.6% 77.4% 5.16
(1) UAL amount based on Market Value of Assets, which is determined using actual contributions, benefit payments and administrative expenses during the year. Any difference between this amount and the actual net investment earnings is considered a gain or loss.
(2) UAL amount based on Actuarial Value of Assets, which is calculated by recognizing the deviation of actual investment returns compared to the expected return for the period ending on the valuation date over a five -year period. See “– Actuarial Assumptions – Actuarially Assumed Investment Rates of Return” for the actuarially expected or assumed investment returns for the previous 10 fiscal years.
(3) Decrease from June 30, 2020 to June 30, 2021 is primarily due to gains recognized as a result of actual investment returns above the discount rate (reducing the UAL by approximately $117 million) and contributions in excess of the Normal Cost plus interest on the UAL (further reducing the UAL by approximately $5 4 million), offset by liability losses (of approximately $6.7 million) and changes in assumptions (of approximately $12.4 million). See “PENSION PLANS – Funding Status” below for a discussion of the funding status of the Pension Plan s.
Source: Police and Fire 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-5d
Police and Fire Pension Plan
Market and Actuarial Value of Assets
(in thousands)
June 30, 2020 June 30, 2021
Market Value, Beginning of Year $ 3,588,422 $ 3,702,020 Contributions
Member $ 27,645 $ 29,033
City 188,481 201,370
Total $ 216,126 $ 230,403
Net Investment Earnings(1) 134,085 1,044,290
Benefit Payments (231,008) (244,310)
Administrative Expenses (5,605) (5,764)
Market Value, End of Year $ 3,702,020 $ 4,726,639
Actuarial Value of Assets $ 3,851,948 $ 4,210,447
(1) Gr oss investment earnings less investment expenses.
Source: Police and Fire 2021 Annual Comprehensive Financial Report for Market Value of Assets; Police and Fire 2021 Pension Plan Actuarial Report for Actuarial Value of Assets.
Ta
ble B-6a and Table B-6b show the historical dollar amount of the UAL and the Funded Ratio for the Pension Plan s as of June 30, 201 1 through June 30, 202 1 calculated using the actuarial (smoothed) value of assets. See “ PENSION PLANS – Actuarial Assumptions – Smoothing Methodology” f or a description of the smoothing methodologies employed for the Pension Plans.
As shown in Table B-6a, the UAL of the Federated Pension Plan as of the June 30, 2021 valuation date increased approximately $1.1 billion (or 110%) when compared to the UAL as of the June 30, 2011 valuation date. According to the Plan Actuary, the net increase is due primarily to the following:
• Unfavorable investment returns on the actuarial (smoothed) value of assets in eight of the pr
evious 10 years (resulting in an increase in the UAL of approximately $416 million over the last 10 years notwithstanding positive investment returns in seven of those years); • Changes in actuarial assumptions primarily relat ed to reduction s in the discount rate (resulting in an increase in the UAL for the Federated Pension Plan of approximately $501 mi
llion over the last 10 years);
• Contributions less than the Normal Cost plus interest on the UAL through fiscal year 2017- 2018 offset by contributions greater than the Normal Cost plus interest on the UAL si nce fi
scal year 2017-2018 (resulting in an increase in the UAL of approximately $ 43.4 million over the last 10 years); and
• Actuarial gains and losses on the Actuarial Liability (resulting in an increase in the UAL of approximately $135 million over the last 10 years).
As shown in Table B-6a, the Federated Pension Plan’s UAL was 571% of total covered annual
payroll as of the June 30, 2021 valuation date of the Federated 2021 Pension Plan DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Actuarial Report. In other words, to fully fund the UAL of the Federated Pension Plan as of June 30, 2021, contributions would need to be nearly 6 times the covered payroll for fiscal year 2020- 2021.
The Plan Actuary projects that, if all assumptions are met in the future including an expected return of 6.625%, the Federated Pension Plan will achieve a funded status on an actuarial basis of approximately 93% by 2036.
As shown in Table B-6b, the UAL of the Police and Fire Pension Plan as of June 30, 2021 increased approximately $721 million (or 141%) when compared to the UAL as of the June 30, 2011 valuation date. According to the Plan Actuary, the increase over the past 10 fiscal years in the UAL of the Police and Fire Pension Plan is due primarily to the following:
• Unfavorable investment returns on the actuarial (smoothed) value of assets in 7 of the previous 10 years (resulting in an increase in the UAL of approximately $483 million over the last 10 years notwithstanding positive investment returns in seven of those years); • Changes in actuarial assumptions primarily relating to the reduction in the discount rate (resulting in an increase in the UAL for the Police and Fire Pension Plan of approximately $466 million over the last 10 years);
• Contributions above the Normal Cost plus interest on the UAL in 9 of the previous 10 years (resulting in a decrease in the UAL of approximately $292 million over the last 10 years); and
• Actuarial losses on the Actuarial Liability (resulting in an increase in the UAL of approximately $92.5 million over the last 10 years).
Table B-6a
Federated Pension Plan
Schedule of Pension Funding Progress
(in thousands)
Valuation
Date
(June 30)
Actuarial
Value of
Assets
Actuarial
Liability UAL
Funded
Ratio(1)
Covered
Payroll
UAL as % of
Covered
Payroll(1)
2011 $ 1,788,660 $ 2,770,227 $ 981,567 65% $ 228,936 429% 2012 1,762,973 2,841,000 1,078,027 62 225,859 477
2013 1,783,270 3,013,763 1,230,493 59 225,779 545
2014 1,911,773 3,235,065 1,323,292 59 234,677 564
2015 2,004,481 3,569,898 1,565,417 56 251,430 623
2016 2,034,741 3,786,730 1,751,989 54 266,823 657
2017 2,101,435 3,923,966 1,822,531 54 287,339 634
2018 2,179,488 4,100,821 1,921,333 53 298,985 643
2019 2,228,802 4,200,708 1,971,906 53 313,310 629
2020 2,301,469 4,401,083 2,099,614 52 341,552 615
2021 2,513,095 4,562,981 2,049,886 55 359,061 571
(1) Rounded to the nearest whole percent.
Source: Federated 2020 Pension Plan Actuarial Report; Federated 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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As shown in Table B -6b, the Police and Fire Pension Plan’s UAL was 488% of total covered annual payroll as of the June 30, 2021 valuation date of the Police and Fire 2021 Pension Plan Actuarial Report. In other words, to fully fund the UAL of the Police and Fire Pension Plan as of June 30, 2021, contributions would need to be nearly 5 times the covered payroll for fiscal year 2020-2021.
The Plan Actuary projects that, if all assumptions are met in the future, the Police and Fire Pension Plan will achieve a funded status on an actuarial basis of 100% by 2029 and 103% by 2036.
Net Pension Liability . For purposes of financial reporting, the City is required under GASB Statement No. 68 to calculate and disclose the Net Pension Liability of the Pension Plans.
The Net Pension Liability of Pension Plan is the difference between the actuarial present value of projected benefit payments that is attributed to past periods of employee service calculated using methods and assumptions known as the “Total Pension Liability” and the fair market value of the Pension Plan's assets known as the “Fiduciary Net Position .” For purposes of its financial statements, the City calculates the Net Pension Liability of the Pension Plans using a measurement date that is one fiscal year prior to the Net Pension Liability measurement date used for the Retirement Plans’ financial statements.
Table B -7a presents the funded status of the Federated Pension Plan calculated in accordance with the assumptions and methodology set forth in GASB Statement No. 68 as of the June 30, 2020 and the June 30, 2021 measurement dates. The Total Pension L iability of Federated Pension Plan as of June 30, 2020 and June 30, 2021 shown in Table B-7a is based on results of actuarial valuations dated as of June 30, 2019 and June 30, 2020, respectively, and rolled-forward to June 30, 2020 and June 30, 2021 using standard roll forward procedures.
Table B-6b
Police and Fire Pension Plan
Schedule of Pension Funding Progress
(in thousands)
Valuation
Date
(June 30)
Actuarial
Value of
Assets
Actuarial
Liability UAL
Funded
Ratio(1)
Covered
Payroll
UAL as % of
Covered
Payroll(1)
2011 $ 2,685,721 $ 3,196,007 $ 510,286 84% $ 190,726 268% 2012 2,703,539 3,397,792 694,253 80 187,959 369
2013 2,771,924 3,578,031 806,107 78 184,645 437
2014 3,025,101 3,813,825 788,724 79 188,189 419
2015 3,212,776 4,058,410 845,634 79 184,733 458
2016 3,303,550 4,355,990 1,052,440 76 194,072 542
2017 3,439,922 4,464,402 1,024,480 77 203,816 503
2018 3,596,590 4,696,428 1,099,838 77 218,429 504
2019 3,706,302 4,988,427 1,282,125 74 235,818 544
2020 3,851,948 5,235,335 1,383,387 74 240,798 575
2021 4,210,447 5,441,660 1,231,213 77 252,558 488
(1) Rounded to the nearest whole percent.
Source: Police and Fire 2020 Pension Plan Actuarial Report; Police and Fire 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
B-30
Table B-7a
Federated Pension Plan
Components of Net Pension Liability
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total pension liability $ 4,323,370 $4,526,849 4.7%
Plan fiduciary net position 2,208,017 2,884,345 3.1
Net pension liability $ 2,115,353 $ 1,642,504 (22.4%)
Plan fiduciary net position as a
percentage of the total pension liability 51.1% 63.7% 24.7% Source: Federated 2021 Annual Comprehensive Financial Report .
Ta
ble B-7b presents the funded status of the Police and Fire Pension Plan calculated in accordance with the assumptions and methodology set forth in GASB Statement No. 68 as of the June 30, 20 20 and the June 30, 2021 measurement dates. The Total Pension Liability of the Police and Fire Pension Plan as of June 30, 2020 and June 30, 202 1 shown in Table B -7b is based on results of actuarial valuation s dated as of June 30, 2019 and June 30, 2020, respectively, and rolled -forward to June 30, 2020 and 2021 using standard roll forward procedures.
Table B-7b
Police and Fire Pension Plan
Components of Net Pension Liability
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total pension liability $ 5,177,016 $ 5,423,372 4.8%
Plan fiduciary net position 3,702,020 4,726,640 27.7
Net pension liability $ 1,474,996 $696,732 (52.8)
Plan fiduciary net position as a
percentage of the total pension liability 71.5% 87.2% 21.9% Source: Police and Fire 2021 Annual Comprehensive Financial Report .
Ac
tuarial Assumptions
General. Annually, actuarial valuations are prepared to measure the financial position of the Federated Pension Plan to determine the amounts to be contributed to the plan by active members and the City. The Plan Actuary employs a variety of actuarial methods and assumptions in these calculatio ns. To prepare the actuarial valuations, the Plan Actuary uses demographic data (including employee age, salary and service credits), economic assumptions (including estimated future salary increases and investment returns), and decrement assumptions (including employee turnover, mortality and retirement rates) to produce the necessary information.
Experience studies are performed by the Plan Actuary periodically to determine appropriate revisions to the actuarial assumptions. Actual result s are compared with past expectations and new estimates are made about the future. In 2019, the Boards adopted certain economic and demographic changes based on experience studies of the Pension Plans performed by the Plan Actuary. The Plan Actuary determi ned that the changes in the assumptions based on the experience studies decreased the UAL of the Federated Pension Plan by $2.9 million or 0.1% of DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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the Actuarial Liability and increased the UAL of the Police and Fire Pension Plan by $80.9 million or 1.6% of Accrued Liability. Table B-8a below summarizes actuarial assumptions employed by the Plan Actuary in the Federated 2021 Pension Plan Actuarial Report.
Table B-8a
Federated Pension Plan
Actuarial Assumptions
Valuation Date June 30, 2021
Actuarial funding method Entry Age Normal
Amortization method Level percent of pay, closed, layered Amortization payment growth rate 2.75% compounded annually Asset valuation method 5-year smoothing of return
Actuarial Assumptions:
Discount Rate 6.625%
Wage inflation(1) 3.00% compounded annually
Cost-of-Living Adjustments(2)
Tier 1-3.0% per year; Tier 2-1.25% - 2.0% per
year depending on years of service
(1) Additional merit salary increases of 0.10% to 3.75% based on a participant's years of service are also assumed. (2) Cost-of-living adjustments are fixed at 3% by the plan provisions for Tier 1 and do not fluctuate with actual inflation.
For Tier 2, adjustments fluctuate with actual inflation and are capped at 1.25% to 2.0% depending on service.
Source: Federated 2021 Pension Plan Actuarial Report .
Table B-8b below summarizes actuarial assumptions employed by the Plan Actuary in the Police and Fire 2021 Pension Plan Actuarial Report.
Table B-8b
Police and Fire Pension Plan
Actuarial Assumptions
Valuation Date June 30, 2021
Actuarial funding method Entry Age Normal
Amortization method Level percent of pay, closed, layered Amortization payment growth rate 2.25% compounded annually Asset valuation method
5 year smoothing of return; Minimum of 80% and
maximum of 120% of market value
Actuarial Assumptions:
Discount Rate 6.625%
Wage inflation(1)
Bargained for increases and 3.0% compounded
annually thereafter
Cost-of-Living Adjustments(2) Tier 1-3.0% per year; Tier 2-2.0% per year
(1) Additional merit salary increases of 0.6% to 6.5% based on a participant's years of service are also assumed. (2) Cost-of-living adjustments are fixed at 3% by the plan provisions for Tier 1 and do not fluctuate with actual inflation.
For Tier 2, adjustments fluctuate with actual inflation and are capped at 2.0%.
Source: Police and Fire 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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The Federated 2021 Pension Plan Actuarial Report and the Police and Fire 2021 Pension Plan Actuarial Report are the most recently available actuarial valuations of the Federated Pension Plan and the Police and Fire Pension Plan, respectively. Please see Tables B-5a, B-5b, B-6a and B-6b above for a summary of certain of the conclusions set forth in the Federated 2021 Pension Plan Actuarial Report and the Police and Fire 2021 Pension Plan Actuarial Report.
Actuarial Funding Method . The Pension Plan s use the individual Entry Age Normal Actuarial Cost Method. Under this method, the Normal Cost is computed as the level annual percentage of pay required to fund the retirement benefits between each member’s date of hire and assumed termination of employment.
Amortization Method and Period. The Tier 1 UAL for the Federated Pension Plan as of June 30, 2009 is amortized over a 30-year closed period, and changes in the Tier 1 UAL are amortized over 20-year closed periods beginning with the valuation period in which they arise .
Tier 1 assumption changes are amortized over 25-year periods beginning with the valuation date in which they first arise. For members who were reclassified under Measure F from Tier 2 to Tier 1, a portion of the increase in liability for the reclassificat ion is to be paid by members. Rehired members who were reclassified pay an additional contribution rate of 3.0 percent of payroll until the amount they owe has been paid off. All Classic members pay an additional contribution rate based on a 20- year amort ization of the increase in liability for Classic members who were reclassified from Tier 2 to Tier 1 under Measure F.
The Tier 2 UAL for the Federated Pension Plan as of June 30, 2017, is amortized over a closed 10-year period. Tier 2 actuarial gains and losses, assumption changes, and plan changes thereafter are amortized over 10-year periods beginning with the valuation date in which they first arise. Amortization payments for the Federated Pension Plan are scheduled to increase 2.75% each year while aggregate payroll is expected to grow 3.00% each year. As a result, contributions to the Federated Pension Plan are expected to become a slightly smaller percentage of combined Tier 1 and Tier 2 payroll each year.
With respect to the Police and Fire Pension Plan, actuarial gains and losses and plan changes are amortized over a 15-year period (16 years for gains and losses prior to June 30, 2016) beginning with the valuation date in which they first arise. Changes in methods and assumptions are amortized over a 20-year period (16 years for changes prior to June 30, 2011) beginning with the valuation date on which they are effective.
Effective June 30, 2019, the remaining amortization periods for several components of the Tier 1 UAL for the Police and Fire Pension Plan were adjusted to smooth the pattern of amortization payments. Effective June 30, 2019, all prior assumption amortization base periods were increased by four years. As a result of this change, all prior assumption amortization base periods have the same remaining period as if they had originally been amortized over 20 years. At the same time, amortization payments for the Police and Fire Pension Plan were scheduled to increase 2.50% each year, a decrease from the prior rate of 3.25%, while aggregate payroll was assumed to grow
3.00% each year and any already bargained for increases are taken into account. Effective June 30, 2020, the annual increase in amortization payments for the Police and Fire Pension Plan was reduced from 2.50% to 2.25%.
Smoothing Methodology. When measuring assets, the Pension Plans “smooth” gains and losses to reduce the volatility of contribution rates over a five-year period to reduce the
impact of short -term investment volatility on employer contribution rates. If in the one-year period prior to the annual actuarial valuation, the actual net investment return on the Market Value
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
B-33
of As
sets of the respective Pension Plans is lower or higher than the actuarial assumed net rate of return, then 20% of the shortfall or excess is recognized each year when determining the recommended contribution rates for that actuarial valuation. As a result, the respective smoothed assets of the Pension Plans will be lower or higher than the plan’s Market Value of Assets depending upon whether the remaining amount to be smoothed is a net gain or a net loss.
Actuarially Assumed Investment Rates of Return. The net rate of return assumed by the Pension Plans represents the long-term expected rate of return on the plan’s investments net of investment expenses. In November 2020 and December 2020, the Federated Board and the Police and Fire Board, respectively, adopted changes to the economic assumptions for the Federated 2021 Pension Plan Actuarial Report and the Police and Fire 2021 Pension Plan Actuarial Report, which included a reduction in the assumed net rate of return, or discount rate, from 6.75% to 6.625%. Table B-9a and Table B -9b show the historical discount rates for the Federated Pension Plan and Police and Fire Pension Plan, respectively, from the June 30, 2012 valuation through the June 30, 2021 valuation.
Table B-9a
Federated Pension Plan
Historical Discount Rates
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
7.50% 7.25% 7.00% 7.00% 6.875% 6.875% 6.750% 6.750% 6.625% 6.625% Source: Federated 2021 Pension Plan Actuarial Report .
Table B-9b
Police and Fire Pension Plan
Historical Discount Rates
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
7.25% 7.125% 7.00% 7.00% 6.875% 6.875% 6.750% 6.750% 6.625% 6.625% Source: Police and Fire 2021 Pension Plan Actuarial Report .
Cont
ributions
General. Annual c ontributions to the Pension Plan s by the City and employees are amounts actuarially determined to be sufficient to provide adequate assets to pay benefits when due. When the Boards approve contribution rates and amounts, such rates and amounts become the legally required contribution rates and amounts of the City and employees for the fiscal year beginning one year after the valuation date. There are two components to the annual City and employee contributions: (i) the Normal Cost (including administrative expenses); and (ii) the UAL contribution. A nnual contributions are based upon actuarial calculations that take into consideration a number of economic and demographic assumptions, including assumed investment earnings on the assets of the Pension Plans that are used to pay b enefits. For a description of the assumptions utilized in the actuarial valuations for the Pension Plan s, please see “PENSION PLANS – Actuarial Assumptions.”
Funding Policy. The Pension Plans employ a “floor funding method” for setting the City’s funding policy contribution amount for Tier 1 for the Normal Cost portion (which includes administrative expenses). Under such method, beginning in fiscal year 2016 -2017, the City’s DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
B-34
Normal Cost contribution is the greater of: (1) the dollar amount recommen ded by the Plan Actuary in the annual valuation report and approved by the Boards (adjusted for time of contribution) or, (2) the dollar amount determined by applying the Normal Cost as a percent of payroll reported in the actuarial valuation to the actual payroll for the fiscal year if actual payroll exceeds the actuarial payroll. T he portion of the City’s contribution relating to the UAL is set at the dollar amount recommended by the Plan Actuary and adopted by the Boards in the annual actuarial valuation.
The Pension Plan s do not employ a “floor funding method” for determining the City’s contribution for Tier 2 members. The City’s contribution for Tier 2 members of the Pension Plans are based on the contribution rate determined by the Plan Actuary and approved by the Boards multiplied by the actual Tier 2 member payroll for each Pension Plan.
The required contributions as determined by the Plan Actuary anticipate that the City will make contributions on a bi-weekly basis throughout the fiscal year. The City may elect to prefund all or part of its total required contributions to the Pension Plan s at the beginning of each fiscal year. The prefunded annual contributions are made on the basis of estimated bi -weekly payroll in the actuarial valuation for the fiscal year and may be increased at the end of the fiscal year based on actual bi -weekly payroll. The amount of the prefunded annual contribution is the actuarial equivalent of contributions made regularly over the course of a year as established by the Boards. To the extent contributions are made after the beginning of the fiscal year, the amounts are adjusted for interest. To determine the City’s “prefunded” annual contribution amount, the Boards, based on the advice of the Plan Actuary and outside investment consultants, set an interest discount rate to be applied by the Plan Actuary to the required contributions to account for the fact that contributions are made and invested at the beginning of the year instead of made throughout the year and inve sted thereafter by the Pension Plans. The Boards have implemented an “incremental reduction approach” to set the interest discount rate in a given year.
The approach applies the discount rate for the year of the contribution reduced incrementally based on certain broad economic and market benchmarks. This approach is intended to incentivize the City to prefund contributions to the Pension Plans when market valuations may be lower and an economic cycle may be in early stages of expansion and disincentivize f or prefunding contributions when market valuations and/or economic expansions may exceed historic patterns.
The City prefunded its contributions for Tier 1 employees under the Pension Plans for fiscal year 2020-2021 with funds on hand and proceeds of tax and revenue anticipation notes in the aggregate principal amount of $130,000,000 issued in July 2020. The City prefund ed its contributions for Tier 1 employees under the Retirement Plans for fiscal year 2021 -2022 with funds on hand and proceeds of tax and revenue anticipation notes in the aggregate principal amount of $285 million issued on July 1, 2021. The City may elect to prefund its contributions to the Pension Plans in future fiscal years, including fiscal year 2022-2023. The projected contributions set forth in this Appendix B do not take into account any such prefunding.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
B-35
Historical City and Employee Contributions. Table B-10a shows the City’s actuarially determined annual contribution and actual contribution to the Federated Pension Plan for fiscal years 2016-2017 through 2020-2021.
Table B-10a
Federated Pension Plan
Schedule of City Contributions
(in thousands)
2016-
2017
2017-
2018
2018-
2019
2019-
2020
2020
-2021
Actuarially Determined
Contribution $ 138,483 $ 156,770 $ 173,006 $ 181,327 $183,964 Actual Contribution 138,483 156,770 173,006 181,327 183,964 Contribution Deficiency
(excess) $ 0 $ 0 $ 0 $ 0 $0
Source: City of San José Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2021.
The member contribution rate for Tier 1 of the Federated Pension Plan is a proportion (3/11ths) of the Normal Cost (including administrative expenses, but excluding reciprocity) with the remaining 8/11ths of the Normal Cost allocated to the City. On June 29, 2021, the City Council introduced an ordinance amending the Municipal Code to cease the Normal Cost contribution of Tier 1 members of the Federated Pension Plan with 30 or more years of service credit as of the effective date of the ordinance. The change is intended by the City to incentivize such members to continue working for the City by increasing their take-home pay. Such members will not be eligible for any return of the amount of Normal Cost contributions made between obtaining 30 years of service credit and the effective date of the ordinance. The ordinance bec ame effective on September 2, 2021. See Table B-4a for a general description of service retirement pension benefit formulas (excluding early retirement) for Tier 1 members of the Federated Pension Plans as of June 30, 2021.
In addition to the 8/11ths of the Normal Cost (including administrative expenses), the City is allocated all of the Reciprocity Normal Cost (i.e., the cost of funding reciprocity with other California pension plans), plus an amortization payment on the UAL. Tier 1 members who were rehired into Tier 2 and then returned to Tier 1 under Measure F also pay half of the increased cost attributable to their Tier 2 service. The Federated Board set a contribution rate of 3.0% of pay that applies to each such individual member until such member has paid off their individual UAL amount for reclassification. For Tier 2, the members and the City each pay half of the total contribution rate. However, the member’s UAL contribution rate cannot increase by more than
0.33% of pay each year. The City contributes any amounts in excess of this cap that would otherwise be contributed by the member. The member and City contribution rates each cannot be less than 50% of the Normal Cost rate. According to t he Plan Actuary , the most sig nificant portion of the City's contribution to the Federated Pension Plan is the portion of the contribution attributable to the UAL for Tier 1, which is substantially attributable to members who no longer work for the City.
Table B -10b shows the City’s actuarially determined annual contribution and actual contribution to the Police and Fire Pension Plan for fiscal years 2016-17 through 2020-2021.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-10b
Police and Fire Pension Plan
Schedule of City Contributions
(in thousands)
2016-
2017
2017-
2018
2018-
2019
2019-
2020
2020
-2021
Actuarially Determined
Contribution $ 136,957 $ 157,712 $ 176,618 $ 188,481 $ 201,370 Actual Contribution 136,957 157,712 176, 618 188,481 201,370 Contribution Deficiency
(excess) $ 0 $ 0 $ 0 $ 0 $0
Source: City of San José Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2021.
The member contribution rate for Tier 1 of the Police and Fire Pension Plan is a proportion (3/11ths) of the Normal Cost (excluding reciprocity), plus the employee member’s historical share of assumed administrative expenses. In addition, employee members pay a portion of the UAL attributable to certain benefit improvements. The remaining 8/11ths of the Normal Cost is allocated to the City. In addition to the 8/11ths of the Normal Cost (including administrative expenses), the City is allocated all of the Reciprocity Rate (the cost of funding reciprocity with
other California pension plans) and the remaining portion of the UAL rate. For Tier 2 members of the Police and Fire Pension Plan, members and the City share the total contribution rate equally, except that increases in the contributions of members relating to the UAL are limited to one-third of one percent of compensation each year.
Table B-11a below summarizes the pension contribution rates for employee members of the Federated Plan for fiscal years 2021-2022 (as adopted by the Federated Board) and 2022- 2023. The Federated Board has not yet adopted a resolution imposing the contribution rates for fiscal year 2022-2023 on the City and plan members. For fiscal year 2022-2023, the Plan Actuary projects payroll to total $132.6 million for Tier 1 and $237.2 million for Tier 2.
Table B-11a
Federated Pension Plan
Member Contribution Rates
2021-2022 2022-2023
Basic COLA Total Basic COLA Total
Tier 1
Total Member Normal Cost/Admin Rate(1) 5.25% 2.14% 7.39% 5.24% 2.17% 7.41% Tier 2
Member Normal Cost/Admin Rate(2) 6.66% 1.12% 7.78% 6.72% 1.13% 7.85% Member UAL Rate(3) 0.26 0.13 0.39 0.16 0.12 0.28
Total Member Rate 6.92% 1.25% 8.17% 6.88% 1.25% 8.13%
(1) Determined by dividing the total Normal Cost plus assumed administrative expenses determined by the Plan Actuary by the payro ll ex
pected for members active on the valuation date.
(2) Excludes additional reclassified rate (UAL) for Classic and Reclassified Tier 1 Members. According to the Plan Actuary, the increase in the Tier 1 member contribution rate for fiscal year 2020-2021 is primarily due to the discount rate change. (3) Determined by dividing the UAL payment by total expected payroll f or the year (including members active on the valuation date and new
entrants expected to replace active members who are expected to leave employment).
Source: Resolution No. 9097 approved by the Federated Board on May 20, 2021; Resolution No. 9098 approved by the Federated Board on May 20, 2021; Federated 2021 Pension Plan Actuarial Report.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Ta
ble B-11b shows the City’s contributions in dollars to the Federated Pension Plan for fiscal years 2021-2022 (as adopted by the Federated Board) and 2022-2023. Because Tier 1 is closed, the City’s total Normal Cost contribution for Tier 1 is expected to decrease over time as active Tier 1 members decrease. The portion of the City’s contribution rate attributable to the UAL for Tier 1 members is not expected to decrease as Tier 1 members retire or otherwise leave the system, because the City is responsible for all such contributions . The contributions set forth in Table B-11b assume the City makes such contributions in installments throughout the year.
Table B-11b
Federated Pension Plan
City Contribution Amounts
(in thousands)
(throughout the year)
2021-2022 2022-2023
Basic COLA Total Basic COLA Total
Tier 1
City Normal Cost/Admin(1) $ 19,736 $ 8,056 $ 27,792 $ 19,027 $ 7,875 $ 26,903 City UAL Cost(2) 84,804 75,890 160,694 85,400 77,202 162,602 Total City Contribution $ 104,540 $ 83,946 $ 188,486 $104,427 $85,077 $ 189,505 Tier 2
Total City Contribution(3) $ 14,847 $ 2,682 $ 17,529 $ 16,322 $ 2,966 $ 19,288 (1) Includes the reciprocity rate for the prefunding of the liability for reciprocal benefits with certain other California publi c pension plans. The Plan Actuary reports that the decrease in the City’s Normal Cost Tier 1 contribution in fiscal year 2021-2022 is due to the decline in Tier 1 active members.
(2) Includes the deficiency rate for the amortization of the funding deficiency and the golden handshake rate for the cost for fundi ng addi
tional benefits granted in the past to certain retiring employees. (3) The Plan Actuary reports that the increase in the City’s total contribution for Tier 2 is due primarily to the grow th in Tier 2 membership.
Source: Resolution No. 9097 approved by the Federated Board on May 20, 2021; Resolution No. 9098 approved by the Federated Board on May 20, 2021; Federated 2021 Pension Plan Actuarial Report.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-11c summarizes the pension contribution rates for employee members of the Police and Fire Plan for fiscal years 2021-2022 (as adopted by the Police and Fire Board) and 2022-2023. The Police and Fire Board has not yet adopted a resolution imposing the contribution rates for fiscal year 2022-2023 on the City and plan members.
Table B-11c
Police and Fire Pension Plan
Member Contribution Rates
2021-2022 2022-2023
Basic COLA Total Basic COLA Total
Police Tier 1
Member Normal Cost/Admin Rate 7.41% 3.40% 10.81% 7.51% 3.46% 10.97% Member UAL Rate(1) 0.03 0.01 0.04 0.04 0.02 0.06
Total Member Rate 7.44% 3.41% 10.85% 7.55% 3.48% 11.03%
Police Tier 2
Member Normal Cost/Admin Rate 11.45% 3.10% 14.55% 11.60% 3.12% 14.72% Member UAL Rate (0.16) 0.04 (0.12) (0.35) -- (0.35)
Total Member Rate 11.29% 3.14% 14.43% 11.25% 3.12% 14.37%
Fire Tier 1
Member Normal Cost/Admin Rate 8.11% 3.80% 11.91% 8.26% 3.85% 12.11% Member UAL Rate(1) -- -- -- -- 0.01 0.01
Total Tier 1 Member Rate 8.11% 3.80% 11.91% 8.26% 3.86% 12.12%
Fire Tier 2
Member Normal Cost/Admin Rate 12.10% 3.25% 15.35% 12.16% 3.26% 15.42% Member UAL Rate (0.10) 0.03 (0.07) (0.22) (0.02) (0.24) Total Tier 2 Member Rate 12.00% 3.28% 15.28% 11.94% 3.24% 15.18%
(1) Excludes additional reclassified rate (UAL) for Classic and Reclassified Tier 1 Members .
Source: Resolution No.4821 approved by the Police and Fire Board on May 6, 2021; Resolution No.4822 approved by the Police and Fire Board on May 6, 2021; Resolution No.4823 approved by the Police and Fire Board on May 6, 2021; Resolution No.4824 approved by the Police and Fire Board on May 6, 2021 ; Police and Fire 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Ta
ble B-11d shows the City’s contribution in dollars for the Police and Fire Pension Plan for fiscal year s 2021-2022 (as adopted by the Police and Fire Board) and 2022- 2023. The contributions set forth in Table B-11d assume the City makes such contributions in installments throughout the year.
Table B-11d
Police and Fire Pension Plan
City Contribution Amounts
(in thousands)
(throughout the year)
2021-2022 2022-2023
Police Basic COLA Total Basic COLA Total
Tier 1
City Normal Cost/Admin $ 19,180 $ 8,216 $ 27,396 $ 17,932 $ 7,837 $ 25,769 City UAL Cost 40,137 40,784 80,921 37,280 39,070 76,350 Total City Contribution $ 59,317 $ 49,000 $ 108,317 $ 55,212 $ 46,907 $ 102,119 Tier 2
Total City Contribution $ 7,598 $ 2,113 $ 9,711 $ 9,470 $ 2,626 $ 12,096 Fire
Tier 1
City Normal Cost/Admin $ 16,483 $7,709 $ 24,192 $16,106 $ 7,515 $ 23,620 City UAL Cost 35,681 35,206 70,887 34,551 35,138 69,689 Total City Contribution $ 52,164 $ 42,915 $ 95,079 $ 50,657 $ 42,653 $ 93,309 Tier 2
Total City Contribution $ 2,944 $ 805 $ 3,749 $ 3,540 $ 961 $ 4,501 Source: Resolution No.4821 approved by the Police and Fire Board on May 6, 2021; Resolution No.4822 approved by the Police and Fire Board on May 6, 2021; Resolution No.4823 approved by the Police and Fire Board on May 6, 2021; Resolution No.4824 approved by the Police and Fire Board on May 6, 2021 ; Police and Fire 2021 Pension Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Projected City Contributions. Table B -12a provides 20 -year projections of City contributions calculated by the Plan Actuary for the Federated Pension Plan as of March 8, 2022, assuming such contributions are made by the middle of the year and that all assumption are exactly met each and every year in the future.
Table B-12a
Federated Pension Plan
20-Year Projections of Contributions
(middle of the year)
Fiscal Year
Ended
June 30
Projected
City Contribution
Amount
Projected
Total Contribution Rate
(% of Payroll)
2023 $208,793,000 56.46%
2024 205,028,000 53.82
2025 201,389,000 51.33
2026 197,191,000 48.79
2027 192,579,000 46.27
2028 196,800,000 45.90
2029 200,746,000 45.46
2030 205,194,000 45.11
2031 209,850,000 44.79
2032 207,752,000 43.05
2033 213,038,000 42.86
2034 208,591,000 40.75
2035 204,543,000 38.79
2036 213,662,000 39.34
2037 220,472,000 39.41
2038 188,152,000 32.65
2039 184,276,000 31.05
2040 174,641,000 28.57
2041 56,114,000 8.91
2042 51,684,000 7.97
Source: Cheiron 5-Year and 20-Year Budget Projections for Federated Plan , dated March 8, 2022.
The relatively rapid decrease in the City contribution rates (as a percentage of payroll) in the first few years shown above is driven by the recognition of the deferred investment gains from fiscal year 2020-2021 in the actuarial value of assets. The more gradual decrease thereafter is due to the gradual decrease in the Normal Cost rate as Tier 2 becomes a greater proportion of the active membership and the gradual decrease in the UAL rate as payroll is expected to grow slightly faster than amortization payments. There is a more rapid decline in the contribution rates from 2038 to 2042 primarily due to paying off certain amortization bases.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-12b
Police and Fire Pension Plan
20-Year Projections of Contributions
(middle of the year)
Fiscal Year
Ended
June 30
Projected
City Contribution
Amount
Projected
Total Contribution Rate
(% of Payroll)
2023 $212,026,000 81.5%
2024 193,744,000 72.3
2025 177,975,000 64.5
2026 165,441,000 58.2
2027 151,326,000 51.7
2028 151,071,000 50.1
2029 150,115,000 48.3
2030 138,249,000 43.2
2031 114,123,000 34.6
2032 104,498,000 30.8
2033 85,789,000 24.5
2034 59,560,000 16.5
2035 59,676,000 16.1
2036 60,197,000 15.8
2037 61,122,000 15.5
2038 62,367,000 15.4
2039 63,820,000 15.3
2040 65,319,000 15.2
2041 67,084,000 15.2
2042 69,039,000 15.1
Source: Cheiron 5-Year and 20-Year Budget Projections for Police and Fire Plan, dated January 26, 2022.
For the Police and Fire Pension Plan, the 20 -year projections set forth above show total contribution rates (as a percentage of payroll) declining rapidly over the next four years as the deferred investment gains from fiscal year 2020-2021 are recognized in the actuarial value of assets. Contribution rates continue to decline in the years afterwards as portions of the UAL are fully amortized.
It is certain that not all assumptions in the 20-year projections for the Pension Plans will be exactly met each and every year. In the Federated 2021 Pension Plan Actuarial Report and the Police and Fire 2021 Pension Plan Actuarial Report , the Plan Actuary notes that there is a significant level of uncertainty in projections of the future, the largest source of which is the projection of investment returns. Actual investment returns that vary from the assumed rate of investment return can result in significan tly different contribution rates. See “ SUMMARY OF FEDERATED PLAN – Summary of Historical and Projected Contributions – Plan Risks.” Investments
The State Constitution and the Municipal Code provide that the Board s have exclusive control over the investment of the assets of the ir respective Pension Plan. The Municipal Code also specifies that the Boards are to manage the investments for the purpose of providing benefits to its members and beneficiaries, maintaining the actuarial soundness of the Pension Plans, and
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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def
raying reasonable expenses of administering the plan. The Boards have retained investment consultants to advise them.
Table B-13 shows the historical annual returns for the Pension Plans at the identified interval as reported by the ir investment consultant in its quarterly reports for the period ending December 31, 2021.
Table B-13
Pension Plans
Historical Investment Performance
(As of December 31, 2021)
Measurement Period
Federated Pension Plan
Rate of Return(1,2,3)
Police and Fire Pension Plan
Rate of Return(1,2,4)
Since Inception 7.3% 8.6%
10 Years 7.6 7.9
5 Years 10.4 10.1
3 Years 15.5 14.1
1 Year 16.5 14.6
(1) The returns for certain investments (Equity Aggregate) are gross of fees through June 2015 and net of fees thereafter. (2) Net of fees.
(3) Me asurement Period Beginning January 1994.
(4) Me asurement Period Beginning March 1971.
Source: Meketa Investment Group Federated Pension Plan Quarterly Review December 31, 2021; Meketa Investment Group Police and Fire Pension Plan Quarterly Review December 31, 2021.
Annually, the Boards receive projections from its investment consultants for the expected net rates of return based on approved target asset allocations. Investment returns and the subsequent risk associated with those returns are partially a function of the underlying assets of the Pension Plans. The Boards, as part of its fiduciary responsibilities, adopts asset allocation targets commensurate with its diversification goals and risk tolerance.
Table B-14 shows the asset allocation targets for the Pension Plans. Asset allocation targets represent the ultimate allocation goals of the Pension Plans. However, during periods of allocation transition, asset allocation target objectives may not be achieved. The Pension Plans are in the process of transitioning the asset allocations to new asset allocation targets shown in Table B-14. Changes to the allocations of illiquid asset classes may take several quarters to implement.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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For a description of the types of investments in each asset class identified in Table B-14, please see each Investment Policy Statement. A copy of the Investment Policy Statement for the Federated Pension Plan may be found at https://www.sjretirement.com/investments-and- reports/investments-and-reports-federated/investments-and-reports-federated-investment/.
Reference to the foregoing website is provided solely for informational purposes and is not incorporated herein by this reference. A copy of the Investment Policy Statement for the Police and Fire Pension Plan as of December 2021, prior to adoption of the targets set forth in Table B- 14 above and the most recently available Investment Policy Statement for the Police and Fire Pension Plan , may be found at https://www.sjretirement.com/investments-and- reports/investments-and-reports-police-and-fire/investments/. The City makes no representation as to the accuracy or completeness of any of the information on such website. See also the Table B-14
Pension Plans
Target Asset Allocations
Asset Class
Federated Pension
Plan
Target %
Police and Fire Pension
Plan
Target %
Growth 75 71
Public Equity 49 42
Private Markets 21 25
Private Equity 8 9
Venture/Growth Capital 4 4
Private Debt 3 4
Growth Real Estate 3 4
Private Real Assets 3 4
Emerging Markets Bonds 3 2
High Yield Bonds 2 2
Low Beta 8 16
Market Neutral Strategies 3 3
Bonds (Immunized Cash
Flows) 5 13
Other 17 13
Core Real Estate 5 5
Commodities 0 0
Long-Term Government
Bonds 2 1.5
Investment Grade Bonds 8 4.5
TIPS 2 2
10-Year Expected Return (1) 6.2 6.0
20-Year Expected Return(1) 7.2 7.0
Standard Deviation (1) 11.6 11.1
(1) The City provides no assurance that actual returns will not be less than those expected by the Boards.
Source: Federated City Employees’ Retirement System Investment Policy Statement, Approved by the Federated Board on January 20, 2022, Return and Risk numbers updated March 17, 2022 ; Police and Fire Department Retirement Plan Asset Allocation Analysis , Approved by the Police and Fire Board on March 3, 2022; City of San Jose, Office of Retirement Services.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Federated 2022 Annual Comprehensive Financial Report and Police and Fire 2022 Annual Comprehensive Financial Report. [ORS to confirm accuracy of links]
HEALTHCARE PLANS
General
The Healthcare Plans provide eligible retirees, their dependents, and survivors with health and dental benefits. For health benefits, the Healthcare Plans pay that portion of the premium that is equivalent to the premium for the lowest -priced medical plan with which the City contracts for medical benefits for active City employees. If the retiree elects a medical plan that is not the lowest priced plan, the eligible retiree or survivor pays the difference between the portion paid by their Healthcare Plan and that charged by t he medical care provider. In the case of dental benefits, the Healthcare Plans pay the entire premium. Retired members of the Healthcare Plans eligible for medical and/or dental benefits may elect annually not to receive benefits for the plan year and participate in the in- lieu credit program, providing a credit equal to 25% of the lowest cost plan for that year which may be applied to member premiums in future years.
As described in “CHANGES TO THE RETIREMENT PLANS AND RETIREE BENEFITS,” the Healthcare Plans are closed to new members. Generally, members of the Retirement Plans that were hired before July 2013 and did not elect to opt into the VEBA for the applicable Retirement Plan are eligible for defined benefit retiree healthcare benefits from the ir Healthcare Plans. Subject to certain eligibility requirements, a VEBA member who receives a service - connected disability retirement will be eligible to receive 100% of the single premium cost for the lowest cost plan provided through their Healthcare Plan until the member is eligible for Medicare after exhausting all funds in their individual VEBA account.
The contributions for the members who opted into the applicable VEBA for the Healthcare Plans and opted out of the Healthcare Plans were transferred to the applicable VEBA in March 2018. Eligible employees who are rehired by the City during calendars years 2018 through 2022 may opt into the applicable VEBA for the Healthcare Plans if they were not employed during the initial opt-in period and transfer the retiree healthcare contributions from the applicable Healthcare Plan to their VEBA account. The financial reporting, disclosure, and accounting for costs and obligations related to the Healthcare Plan s are consistent with the requirement s of GASB Statement No. 74 and GASB Statement No. 75. The Healthcare Plans provide financial reporting according to the requirements of GASB Statement No. 74. The City provides financial reporting, disclosure, and accounting for costs and obligations related to the Healthcare Plans according to the requirements of GASB Statement No. 75. GASB Statement No. 74 and GASB Statement No. 75 require the liability for OPEB obligations, known as the Net OPEB Liability , and an OPE B expense to be recognized in the financial statements of the Healthcare Plans and the City. OPEB expense under GASB Statement No. 74 and GASB Statement No. 75 recognizes deferred outflows of resources and deferred inflows of resources related to OPEB over a defined, closed period, rather than a choice between an open or closed period. See “RETIREMENT PLANS IN GENERAL – Implementation of Certain Accounting Changes Relating to Retirement Plans.” Establishment of Section 115 Trusts; Internal Revenue Code Limitations The Section 401(h) of the Code permits a pension plan to provide retiree healthcare benefits under certain conditions, including when: (1) a separate account (i.e., a 401(h) account) is maintained for the healthcare benefits; and (2) the healthcare benefits are subordinate to the
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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pensi
on benefits. Under IRS regulations, subordination means that the contributions for healthcare benefits do not exceed 25% of the aggregate contributions excluding contributions to fund past service credits. Exceeding the subordination limit puts a pension plan at risk of losing its tax-exempt status, which in turn, would subject the pension plan’s income to the payment of income tax and reduce the assets available for the payment of benefits.
To avoid exceeding the subordination limit for the 401(h) accounts held in the Pension Plans, the City Council enacted an ordinance to establish a separate trust under Section 115 of the Code for the Federated Plan effective June 2011 (the “Federated 115 Trust”), an ordinance to establish a separate trust under Section 115 of the Code for the Police members effective June 2012 (the “Police 115 Trust”), and an ordinance to establish a separate trust under Section 115 of the Code for the Fire members effective June 2012 (the “Fire 115 Trust” and together with the Police 115 Trust, the “ Police and Fire 115 Trust ”). The Police 115 Trust and Fire 115 Trust operate as sub trusts of a sing le trust under Section 115 of the Code. The Federated Board serves as the board of trustees for the Federated 115 Trust, and the Police and Fire Board serves as the board of trustees for the Police 115 Trust and Fire 115 Trust. The 401(h) account for the Federated Healthcare Plan was depleted in fiscal year 2018 -2019, leaving only the Federated 115 Trust in the Federated Healthcare Plan. As a result, all Federated Healthcare Plan benefits are now paid from the Federated 115 Trust. Assets in a trust established by the City under Section 115 of the Code are not available to satisfy liabilities of any other trust established under Section 115 of the Code.
The Boards received private letter ruling s from the IRS on the tax -exempt status of the Federated 115 Trusts, the Police 115 Trust, and the Fire 115 Trust. Additionally, on August 6, 2013, in response to the City’s request, the IRS issued a private letter ruling indicating that employee contributions into the Federated 115 Trust, the Police 115 Trust, and the Fire 115 Trust may be made as employer contributions and therefore are excludable from the employee’s gross income and are not subject to income or other employment taxes. Employee contributions to the Federated 115 Trust commenced on December 22, 2013. To date, employee contributions to the Police 115 Trust and the Fire 115 Trust have not commenced.
The Boards have been advised that the contributions to the Federated 115 Trust the Police 115 Trust, and the Fire 115 Trust must be treated as non-refundable in order to maintain the tax- exempt status of such trusts . The Retirement Plans permit employee pension and retiree healthcare contributions held in the 401(h) accounts to be refunded. To date, retiree healthcare contributions have been refunded from the respective pension funds of the Pension Plan s, not the respective 401(h) accounts therein. Federated employees are only eligible to receive the portion of their retiree healthcare contributions that were made to the 401(h) account before January 1, 2014. After such date, all employee contributions were placed into the Federated 115 trust. Employees have to take a return of contributions from the pension and retiree healthcare plans in order to receive the amount that they previously contributed into the 401(h) account.
Funding Status
General. Following is a summary of the funded status of the Healthcare Plans on an actuarial and financial statement basis.
Actuarial Funded Status. The Federated 2021 Healthcare Plan Actuarial Report and the Police and Fire 2021 Healthcare Plan Actuarial Report are the most recent actuarial valuation s available for the Federated Healthcare Plan and the Police and Fire Healthcare Plan, respectively, DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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as of the date of this Official Statement. The following information is derived primarily from such report.
Tables B-15a, B-15b, B-16a and B-16b show the respective Market Value of Assets, the Actuarial Value of Assets and Total Actuarial Liability of the Federated Healthcare Plan as of June 30, 2020 and June 30, 2021 . Actuarial valuations of a plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about claim costs, health care trend rates and dependent coverage elections. These measures , including the UAL and funded ratio as described in this Appendix B, are intended to be used to assess contribution amounts for an ongoing other post - employment benefits plan. They are not appropriate for the assessment of the sufficiency of plan assets to settle the respective obligations of the Healthcare Plans on a risk-free basis, because actual events and plan experience may deviate from the assumptions used in the actuarial calculations and such deviations may be material.
Table B-15a
Federated Healthcare Plan
Assets and Liabilities
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total Actuarial Liability $ 650,419 $ 662,860 1.9%
Market Value Assets 303,313 384,613 26.8
Explicit Subsidy Unfunded Actuarial
Liability 255,764
205,774
(19.5)
Explicit Subsidy Funded Percentage 54.3% 65.1% 10.8
Total Unfunded Actuarial Liability(1) $ 347,106 $ 278,247 (19.8) Total Funded Percentage 46.6% 58.0% 11.4
(1) According to the Plan Actuary, the net decrease in the UAL is primarily due to investment experience (resulting in a decrease of approximately $57.6 million), liability experience mainly due to lower-than-expected premiums for dental and Medicare eligible health plans offset by demographic experience (resulting in a decrease of appro ximately $28.6 million), and contributions in excess of the amount needed to pay the normal cost and interest on the UAL (resulting in a decrease of approximately $10 million), offset by assumption changes (resulting in an increase of approximately $ 46.3 million) mainly due to the reduction in the discount rate from 6.25% to 6.00% .
Source: Federated 2021 Healthcare Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-16a
Federated Healthcare Plan
Market Value of Assets
(in thousands)
2020-2021 2021-2022
Market Value, Beginning of Year $ 294,488 $ 303,310
Contributions
Member 10,692 10,275
City 21,790 20,949
Implicit Subsidy 4,743 5,287
Total $ 37,225 $ 36,512
Net Investment Earnings(1) 3,075 77,360
Benefit Payments(2) (30,779) (31,871)
Admin Expense (686) (697)
VEBA Transfer (13) (5)
Market Value, End of Year $ 303,310 $ 384,608
(1) Gross investment earnings less investment expenses. (2) Includes both explicit and implicit subsidies. The implicit subsidy is shown as both a contribution and a payment from the plan, but it is not actually contributed to the trust or paid from the trust. It is paid by the City as a part of active health plan premiums.
Source: Federated 2021 Annual Comprehensive Financial Report.
Table B-15b
Police and Fire Healthcare Plan
Assets and Liabilities
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total Actuarial Liability $ 739,014 $ 758,208 2.6%
Market Value Assets 208,531 276,313 32.5
Explicit Subsidy Unfunded Actuarial
Liability 471,777
417,179
(11.6)
Explicit Subsidy Funded Percentage 30.7% 39.8% 9.2
Total Unfunded Actuarial Liability(1) $ 530,483 $ 481,895 (9.2) Total Funded Percentage 28.2% 36.4% 29.0
(1) According to the Plan Actuary, the net decrease in the UAL is primarily due to investment experience (resulting in a decrease of approximately $38.6 million) and liability experience primarily driven by decreases in the Medicare eligible premium rates offset by demographic experience ( resulting in a decrease of approximately $51.4 million), offset by contributions less than the amount needed to pay the normal cost and interest on the UAL (resulting in an increase of approximately $1.8 million) and assumption changes (resulting in an increase of approximately $33.6 million) mainly due to the reduction in the discount rate from 6.25% to 6.00%.
Source: Police and Fire 2021 Healthcare Plan Actuarial Report .
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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In
the Federated 2021 Healthcare Plan Actuarial Report , the Plan Actuary further notes that if all assumptions are met in the future, including an expected return of 6.00% each year, the funded percentage for the explicit subsidy is expected to reach 100% by 2037.
Table B-16b
Police and Fire Healthcare Plan
Market Value of Assets
(in thousands)
2019-2020 2020-2021
Market Value, Beginning of Year $ 185,957 $ 208,532
Contributions
Member 13,135 12,475
City 24,003 25,382
Implicit Subsidy 3,347 3,015
Total 40,485 40,872
Net Investment Earnings(1) 7,243 52,994
Benefit Payments (25,031) (25,974)
Admin Expense (122) (110)
Market Value, End of Year $ 208,532 $276,314
(1) Gr oss investment earnings less investment expenses.
Source: Police and Fire 2021 Annual Comprehensive Financial Report .
In the Police and Fire 2021 Healthcare Plan Actuarial Report , the Plan Actuary further notes that if all assumptions are met in the future, including an expected return of 6.00% each year, and the City does not impose its optional cap on contributions, the funded percentage for the explicit subsidy is expected to reach about 100% by 2043. If the City imposes its optional cap on contributions every year, the funded percentage for the explicit subsidy is not expected to reach 100%. See “ HEALTHCARE PLANS – Contributions – General” below for a discussion regarding the City’s optional cap on contributions to the Healthcare Plans.
The 401(h) account for the Federated Healthcare Plan was depleted in fiscal year 2018- 2019 as a result of Federated Healthcare Plan contributions having been made solely to the Federated 115 Trust while at the same time benefits having been paid only from the Federated Healthcare Plan 401(h) account. All Federated Healthcare Plan benefits are now paid from the Federated 115 Trust. The expected investment returns for the Federated Healthcare Plan will be based solely on the investment policy of the Section 115 Trust.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B -17a and Table B -17b show the respective UAL and Funded Ratio of the Healthcare Plans from as of June 30 of the years 2012 through 2021.
Table B-17a
Federated Healthcare Plan
Schedule of OPEB Funding Progress
(in thousands)
Valuation
Date
(June 30)
Market
Value of
Assets
Actuarial
Liability UAL
Funded
Ratio
Covered
Payroll
UAL as %
of Covered
Payroll
2012 $137,798 $1,096,620 $958,822 13% $225,859 425%
2013 157,695 870,872 713,177 18 226,098 315
2014 199,776 729,406 529,630 27 234,677 226
2015 209,761 817,673 607,912 26 251,430 242
2016 225,845 764,261 538,416 30 266,823 202
2017 248,583 630,452 381,869 39 287,339 133
2018 277,256 650,114 372,858 43 298,985 125
2019 294,489 631,752 337,263 47 299,002 113
2020 303,313 650,419 347,106 47 322,850 108
2021 384,613 662,860 278,247 58 339,546 82
Source: Federated 2021 Healthcare Plan Actuarial Report .
As shown in Table B -17a, the UAL of the Federated Healthcare Plan decreased approximately $680 million from approximately $ 960 million as of the June 30, 20 12 valuation date to approximately $ 280 million as of the June 30, 202 1 valuation date, a decrease of 73%.
The Plan Actuary further reports that, over the last 10 years, the UAL of the Federated Healthcare Plan for the explicit subsidy decreased approximately $307 million. According to the Plan Actuary, such decrease is due to a combination of a reduction in the Actuarial Liability of $60.2 million and an increase in assets of $246.8 million. The reduction in Actuarial Liability was primarily due to plan changes and favorable medical cost trend experience. The increase in the assets has been primarily attributable to contributions and recent investment returns. In the future, growth in assets will become more dependent on investment returns as benefit payments grow to equal or exceed contributions. See “HEALTHCARE PLANS – Contributions – General” for a discussion regarding the implicit subsidy.
In December 2021, the Federated Board adopted changes to the economic assumptions for the Federated 2021 Healthcare Plan Actuarial Report , which included a reduction in the discount rate from 6.25% to 6.00%. See “– Actuarial Assumptions" As further shown in Table B-17a, the Federated Healthcare Plan’s UAL was 82% of total covered annual payroll as of the June 30, 2021 valuation date of the Federated 2021 Healthcare Plan Actuarial Report . In other words, to fully fund the UAL of the Federated Healthcare P lan contributions would need to be nearly equal to the covered payroll for fiscal year 2020-2021.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B-17b
Police and Fire Healthcare Plan
Schedule of OPEB Funding Progress
(in thousands)
Valuation
Date
(June 30)
Market
Value of
Assets
Actuarial
Liability UAL
Funded
Ratio
Covered
Payroll
UAL as %
of Covered
Payroll
2012 $66,385 $997,321 $930,936 6.7% $172,626 539%
2013 75,035 700,525 625,490 10.7 184,645 339
2014 93,605 706,710 613,105 13.2 188,189 326
2015 114,565 739,753 625,188 15.5 184,733 338
2016 135,207 778,871 643,664 17.4 194,072 332
2017 142,517 680,246 537,729 21.0 203,816 264
2018 162,519 747,274 584,755 21.7 218,429 268
2019 185,957 693,329 507,373 26.8 235,818 215
2020 208,532 739,014 530,483 28.2 240,798 220
2021 276,313 758,208 481,896 36.4 253,435 190
Source: Police and Fire 2021 Healthcare Plan Actuarial Report .
As shown in Table B -17b, the UAL of the Police and Fire Healthcare Plan decreased approximately $449 million from approximately $ 931 million as of the June 30, 201 2 valuation date to approximately $482 million as of the June 30, 2021 valuation date, a decrease of 48%.
The Plan Actuary further reports that, over the last 10 years, the UAL of the Police an d Fire Healthcare Plan for the explicit subsidy decreased approximately $116 million. According to the Plan Actuary, such decrease is due to an increase in assets of $213.3 million somewhat offset by an increase in the Actuarial Liability of $97.3 million. The increase in Actuarial Liability includes the impact of reducing the discount rate from 7.25% in 2012 to 6.00% in 2021. In December 2021, the Police and Fire Board adopted changes to the economic assumptions for the Police and Fire 2021 Healthcare Plan Actuarial Report, which included a reduction in the discount rate from
6.25% to 6.00%. See “ – Actuarial Assumptions” below. The increase in the assets has been primarily attributable to contributions and recent investment returns. In the future, growth in assets will become more dependent on investment returns as benefit payments grow to equal or exceed contributions. See “HEALTHCARE PLANS – Contributions – General” for a discussion regarding the implicit subsidy.
As further shown in Table B-17b, the Police and Fire Healthcare Plan’s UAL was 190% of total covered annual payroll as of the June 30, 2020 valuation date of the Police and Fire 2021 Healthcare Plan Actuarial Report . In other words , to fully fund the UAL of the Police and Fire Healthcare Plan contributions would need to be nearly twice the covered payroll for fiscal year 2020-2021.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Net OPEB Liability. For purposes of financial reporting, GASB Statements No. 74 and 75 require the Healthcare Plans and the City, respectively, to report Net OPEB Liability in their respective financial statements. Net OPEB Liability is measured as the Total OPEB Liability less the OPEB plan fiduciary net position. The City’s financial statements calculate Net OPEB Liability using a measurement date that is one year prior to the measurement date used for the Plans financial statements. As a result, the respective financial statements of the Retirement Plans show Net OPEB Liability one year later in date.
Table B -18a and Table B- 18b set forth t he respective Total OPEB Liability of the Healthcare Plans as of June 30, 2020 and June 30, 2021 based on results of actuarial valuations dated as of June 30, 2019 and June 30, 2020, respectively, rolled-forward to June 30, 2020 and June 30, 2021, respectively, using generally accepted actuarial procedures.
Table B-18a
Federated Healthcare Plan
Components of Net OPEB Liability
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total OPEB Liability $ 649,868 $665,452 2.3%
Plan fiduciary net position (303,310) (384,608) 26.8 Net OPEB Liability $ 346,558 $280,844 (18.9)
Plan fiduciary net position as a
percentage of the Total OPEB
Liability
46.7% 57.8%
23.7 Source: Federated 2021 Annual Comprehensive Financial Report .
Table B-18b
Police and Fire Healthcare Plan
Components of Net OPEB Liability
(in thousands)
June 30, 2020 June 30, 2021 % Change
Total OPEB Liability $ 725,788 $ 771,819 6.3%
Plan fiduciary net position 208,532 276,313 32.5
Net OPEB Liability $ 517,256 $ 495,506 (4.2)
Plan fiduciary net position as a
percentage of the Total OPEB
Liability
28.7% 35.8%
24.7 Source: Police and Fire 2021 Annual Comprehensive Financial Report .
Actuarial Assumptions
Actuarial assumptions used for the valuations for the health and dental benefits provided by the Healthcare Plans are generally the same as are used for the valuations of the respective Pension Plans. In addition to such assumptions, the Plan Actuary employs assumptions with respect to future healthcare utilization and inflation. See “PENSION PLAN S – Actuarial Assumptions.” Table B-19a and Table B- 19b summarize the actuarial valuation methods and
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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assum
ptions employed by the Plan Actuary in the Federated 2021 Healthcare Plan Actuarial Report and the Police and Fire 2021 Healthcare Plan Actuarial Report, respectively.
Table B-19a
Federated Healthcare Plan
Healthcare Actuarial Assumptions
Valuation Date June 30, 2021
Actuarial cost method Entry Age Normal
Amortization method Level dollar, closed, layers
Amortization period 20 Years -3 year phase in and out
Asset valuation method(1) Market Value
Actuarial Assumptions:
Payroll Growth Rate 3.00%
Discount Rate 6.00%
(1) The market value of assets means the actual value of assets , and not the smoothed value, is used.
Source: Federated 2021 Healthcare Plan Actuarial Report .
Table B-19b
Police and Fire Healthcare Plan
Healthcare Actuarial Assumptions
Valuation Date June 30, 2021
Actuarial cost method Entry Age Normal
Amortization method Level percent of pay, closed, layers Amortization period 25 Years -3 year phase in and out
Asset valuation method(1) Market Value
Actuarial Assumptions:
Payroll Growth Rate(2) 3.00%
Discount Rate 6.00%
(1) The market value of assets means the actual value of assets, and not the smoothed value, is used. (2) For Fire Members, 4.25% is assumed for fiscal year 2021-2022 and 3.00% for all other years.
Source: Police and Fire 2021 Healthcare Plan Actuarial Report.
The net rate of return assumed by the Healthcare Plans represent the long-term expected rate of return on the plan’s investments net of investment expenses. In December 2021, the Federated Board and the Police and Fire Board, adopted changes to the economic assumptions for the Federated 2021 Healthcare Plan Actuarial Report and the Police and Fire 2021 Healthcare Plan Actuarial Report , which included a reduction in the assumed net rate of return, or discount rate from 6.25% to 6.00%.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Table B -20a and Table B -20b show the historical discount rates for the Federated Healthcare Plan and the Police and Fire Healthcare Plan, respectively, from the June 30, 201 2 valuation through the June 30, 2021 valuation.
Table B-20a
Federated Healthcare Plan
Historical Discount Rates
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
7.50% 7.25% 7.00% 7.00% 6.875% 6.875% 6.75% 6.75% 6.25% 6.00% Source: Federated 2021 Healthcare Plan Actuarial Report .
Table B-20b
Police and Fire Healthcare Plan
Historical Discount Rates
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
7.25% 7.125% 7.00% 7.00% 6.875% 6.875% 6.50% 6.50% 6.25% 6.00% Source: Police and Fire 2021 Healthcare Plan Actuarial Report .
Contributions
General. The annual contribution costs for the benefits of the Healthcare Plan s are allocated to both the City and the active employee members. Historically, member and City contributions to the Healthcare Plans were negotiated through collective bargaining and were not actuarially determined. Until the City entered into agreements with various bargaining groups in 2009 and prior to implementation of Measure F, contributions by the City and the participating employees to the Healthcare Plan s were based upon an actuarially determined percentage of employees’ base salary sufficient to provide adequate assets to pay benefits when due over the next 15 years for the Federated Healthcare Plan and over 10 years for the Police and Fire Healthcare Plan. From 2009 until the implementation of Measure F, the City had been in the process of phasing in payment of the annual required contribution for the retiree health and dental benefits provided by the Healthcare Plan s as calculated pursuant to GASB Statements No. 43 and 45 as then in effect. However, the contribution rates for the City and member s of the Healthcare Plans were capped before the full annual required contribution was reached.
With the implementation of Measure F, member contributions are fixed as a percentage of pay, and the City's contribution toward the explicit subsidy (premium subsidy) is an Actuarially Determined Contribution. The City has an option to limit its Actuarially Determined Contribution to a fixed percentage of the payroll of all active members eligible for full benefits or catastrophic disability benefits under the Healthcare Plans. The Plan Actuary commenced calculating the Actuarially Determined Contribution for the Healthcare Plan s in fiscal year 2018 -2019. See “CHANGES TO THE RETIREMENT PLANS AND RETIREE BENEFITS” for a discussion of Measure F.
According to the Plan Actuary , because new entrants to the Healthcare Plan s are only entitled to catastrophic disability benefits and do not contribute to the Healthcare Plans, member contributions are expected to decline as current active members eligible for full benefits retire or otherwise leave active employment with the City. In addition, because member contributions pay DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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all of the Normal Cost plus a portion of the UAL, the City's Actuarially Determined Contribution is expected to increase slightly as the member contributions decrease.
The City pay s the implicit subsidy on a pay -as-you go basis as part of active health premiums. An implicit subsidy for retiree health benefits exists because the medical experience for retirees under age 65 are pooled with the experience for active employees thereby resulting in a lowering of the premium paid for retirees. The liabilities for the implicit subsidy have been included in the GASB Statements No. 74 and 75 disclosure calculations reported in the financial statements of the Healthcare Plans and the City. The implicit subsidy is included in the actuarial valuations of the Federated Healthcare Pla n. The implicit subsidy is shown in such statements as both a contribution and payment from the respective Healthcare Plan. However, the implicit subsidy is not actually contributed to or paid from the Healthcare Plans. Rather, it is paid directly by the City on a pay-as-you-go basis as a part of active member health plan premiums. The Plan Actuary separately calculates the total UAL, being the aggregate UAL for both implicit and explicit subsidies, and the UAL for only the explicit subsidy. The UAL for th e explicit subsidy is used to calculate the City’s Actuarially Determined Contribution to the Federated 115 Trust . The total implicit subsidy relating to the Federated Healthcare Plan for fiscal year 2021-2022 is approximately $5 million.
Effective March 25, 2018, the Tier 1 and Tier 2 members in the Federated Healthcare Plan who opted to remain in the Federated Healthcare Plan contribute 7.5% of pay. The City continued to pay the phased -in contribution rate until the beginning of fiscal ye ar 2018-2019.
Currently, the City makes the Actuarially Determined Contribution determined by the Federated Board subject to a cap of 14% of payroll of all active members eligible for full benefits or catastrophic disability benefits under the Federated Healthcare Plan, not just active members of the Federated Healthcare Plan. For purposes of calculating the City’s contribution to the explicit subsidy UAL, the UAL as of June 30, 2017, is amortized as a level dollar amount over a closed 20-year period. All future UAL amortization bases will be amortized over 20 -year periods with a 3-year phase-in and phase-out.
Members remaining in the Police and Fire Healthcare Plan make contributions fixed at
8.0% of pay effective March 25, 2018. The City's contribution t oward the explicit subsidy is actuarially determined separately for Police and Fire. The City pays the implicit subsidy on a pay- as-you-go basis as a part of the active health premiums. For purposes of calculating the City’s contribution for the explicit subsidy UAL, the UAL as of June 30, 2017 was amortized as a level percent of payroll over a closed 25 -year period. All future UAL amortization bases will be amortized over 25-year periods with a 3 -year phase-in and phase-out. The UAL for the explicit subsidy is used to calculate the City’s Actuarially Determined Contribution to the Police 115 Trust and the Fire 115 Trust. In addition, the City has an option to limit its contribution for the explicit subsidy to 11% of Police and Fire Retirement Plan total payroll. The total implicit subsidy relating to the Police and Fire Healthcare Plan for fiscal year 2021-2022 is approximately $3.5 million.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Historical City and Member Contributions. Table B-21a shows the components of the Actuarially Determined Contribution for the Federated Healthcare Plan for fiscal years 2021-2022 (as adopted by the Federated Board) and 2022-2023. The Federated Board has not yet adopted a resolution imposing the contribution rates for fiscal year 2022-2023 on the City and plan members.
Table B-21b shows the components of the Actuarially Determined Contribution for the Police and Fire Healthcare Plan for fiscal years 2021-2022 (as adopted by the Police and Fire Board) and 2022-2023. The Police and Fire Board has not yet adopted a resolution imposing the contribution rates for fiscal year 2022-2023 on the City and plan members.
Table B-21a
Federated Healthcare Plan
Actuarially Determined Contribution
Explicit Subsidy Only
(in thousands)
2021-2022 2022-2023 % Change
Normal Cost $ 5,815 $ 6,536 12.4%
UAL Payment 23,197 21,051 (9.2)
Total Contribution $ 29,012 $ 27,587 (4.9)
Projected Member Contributions 9,076 8,807 (3.0)
City ADC Amount $ 19,936 $ 18,780 (5.8)
Projected Total Payroll $ 332,536 349,732 5.2
City ADC Percentage 6.0% 5.4% (0.6)
Source: Resolution No. 9094 approved by the Federated Board on May 21, 2020; Resolution No. 9095 approved by the Federated Board on May 21, 2020 Resolution No. 9097 approved by the Federated Board on May 20, 2021; Federated 2021 Healthcare Plan Actuarial Report.
Table B-21b
Police and Fire Healthcare Plan
Actuarially Determined Contribution
Explicit Subsidy Only
(in thousands)
2021-2022 2022-2023 % Change
Police
Total Contribution $ 23,275 $ 23,576 1.3%
Projected Member Contributions 6,030 5,567 (7.7)
City ADC Amount $ 17,245 $ 18,009 4.4
City ADC Percentage 11.4% 11.1% (2.4)
Fire
Total Contribution $ 16,214 $ 16,161 (0.3)
Projected Member Contributions 5,187 4,974 (4.1)
City ADC Amount $ 11,027 $ 11,187 1.5
City ADC Percentage 11.4% 11.3% (1.0)
Source: Resolution No. 4821 approved by the Police and Fire Board on May 6, 2021; Resolution No. 4822 approved by the Police and Fire Board on May 6, 2021; Resolution No. 4823 approved by the Police and Fire Board on May 6, 2021 ; Resolution No. 4824 approved by the Police and Fire Board on May 6, 2021 ; Police and Fire 2021 Healthcare Plan Actuarial Report.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Pr
ojected City Contributions. In January 202 2, as directed by the Retirement Plans, the Plan Actuary provided five-year budget projections for the City’s contributions for the Healthcare Plans based on the Federated 2021 Healthcare Plan Actuarial Report and the Police and Fire 2021 Healthcare Plan Actuarial Report . The projections for the Federated Healthcare Plan were revised by the Plan Actuary at the direction of the Federated Board to include certain additional changes in demographic assumptions in March 2022. The projections assume that all valuation assumptions were exactly met since June 30, 2021, and are exactly met each and every year for the projection period. Such projections together with a projection of OPEB payroll are summarized in the following table s. Unlike the pension contributions, the City contributions for the Healthcare Plans are strictly payments toward the UAL. Consequently, there is no separate breakout of normal cost. According to the Plan Actuary, City contributions to the Healthcare Plans are expected to increase in the future as members retire or otherwise leave the plans.
Table B-22a
Federated Healthcare Plan
5-Year Projections of Contributions
(in thousands)
(Throughout the Year)
Fiscal Year
Ended
June 30
Ful
l Benefit
Payroll
Total
Payroll
Estimated City
Contribution Cap
Actuarially
Determined
Contribution
2023 $ 117.4 $ 369.8 $ 49.0 $ 18.8
2024 108.7 380.9 50.4 18.4
2025 100.1 392.4 51.9 17.3
2026 91.9 404.1 53.5 17.5
2027 84.0 416.3 55.1 17.7
Source: Cheiron 5-Year and 20-Year Budget Projections for Federated Plan, March 8, 2022.
Table B-22b
Police and Fire Healthcare Plan
5-Year Projections of Contributions
(in thousands)
(Throughout the Year)
Fiscal Year
Ended
June 30
Total
Payroll
Estimated City
Contribution Cap
Actuarially Determined
Contribution
2023 $ 261.0 $ 28.7 $ 29.2
2024 268.9 29.6 30.3
2025 276.9 30.5 30.3
2026 285.3 31.4 31.5
2027 293.8 32.3 32.8
Source: Cheiron 5-Year and 20-Year Budget Projections for Police and Fire Plan, January 26, 2022.
Th
e estimated full benefit payroll is for the closed group of members entitled to full OPEB benefits. The total payroll also includes members only eligible for catastrophic disability benefits.
According to the Plan Actuary, City contributions for the Fede rated Healthcare Plan represent payments solely toward the UAL, as member contributions are sufficient to cover Normal Costs DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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during this period. The Plan Actuary further notes that, if all assumptions are met in the future, including an expected return of 6.00% each year, with respect to the Federated Healthcare Plan, the funded percentage of the for the explicit subsidy is expected to reach 100% by 2037.
According to the Plan Actuary, City contributions for the Police and Fire Healthcare Plan represent payments predominately toward the UAL, as member contributions cover nearly all Normal Costs during this period. According to the Plan Actuary, if all assumptions are met in the future including an expected return of 6.00% each year and the City does not impose its optional cap on contributions, the funded percentage for the explicit subsidy with respect to the Police and Fire Healthcare Plan is expected to reach 100% by 2043. If the City imposes its optional cap on contributions every year, the funded percentage for the explicit subsidy is not expected to reach 100%.
It is certain that not all assumptions will be exactly met each and every year. Actual investment returns that vary from the assumed rate of investment return can result in significantly different contribution rates.
Investments
The Federated Healthcare Plan is funded through the Federated 115 Trust as the 401(h) account within the Federated Pension Plan was depleted in 2018-2019. As a result, all Federated Healthcare Plan benefits are now paid from the Federated 115 Trust. Table B -23 shows the historical annual returns net of fees for the Federated Section 115 Trust and the Police and Fire 115 Trust at the identified interval as reported by the Healthcare Plans’ investment consultant in the quarterly reports for the period ending December 31, 2021.
Table B-23
Section 115 Trusts
Historical Investment Performance
(As of December 31, 2021)
Measurement Period
Federated 115 Trust
Net Rate of Return
Police and Fire 115 Trust
Net Rate of Return
Since Inception(1) N/A 6.3
10 Years N/A N/A
5 Years 8.2 8.2
3 Years 11.8 12.9
1 Year 10.5 10.8
N/A 6.3
(1) Measurement Period Beginning July 2011 Federated, July 2012 Police and Fire.
Source: Meketa Investment Group Federated Retiree Healthcare 115 Trust Quarterly Review December 31, 2021; Meketa Investment Group Police and F ire Retiree Healthcare 115 Trust Quarterly Review December 31, 2021.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Th
e most recent target allocations for the Federated 115 Trust and the Police and Fire 115 Trust are shown in the following table.
Table B-24
Section 115 Trusts
Target Asset Allocation
Asset Class
Federated 115 Trust
Target %
Police and Fire 115 Trust
Target %
Growth 59 59
US Equity 30 30
Developed Market Equity (non-US) 14 14
Emerging Market Equity 15 15
Low Beta 5 5
Short-Term Investment-Grade Bonds 5 5
Other 36 36
Investment Grade Bonds 14 14
Long Term Government Bonds 5 5
Core Real Estate 12 12
Commodities 5 5
20-Year Expected Return (1) 6.3 6.3
Standard Deviation (1) 12.1 12.1
(1) The City can provide no assurance that actual returns will not be less than those expected by the Board s.
Source: City of San Jose, Office of Retirement Services.
Fo
r a description of the types of investments in each asset class for the target asset allocations identified in Table B-24, please see the Federated City Employees’ Retirement System Investment Policy Statement, Approved by the Federated Board on April 18, 2019 , at https://sjrs.legistar.com/MeetingDetail.aspx?ID=687980&GUID=C9713B0A-A68F-4035-A4EF- 2DF78A9B363C&Search=, and the Police and Fire Department Plan Investment Policy Statement, Approved by the Police and Fire Board o n April 4, 2019 https://sjrs.legistar.com/MeetingDetail.aspx?ID=685165& GUID=B895D44B -1CEB-41B2-841F- 7926B4EAEC97&Options=info&Search=. Reference to the foregoing website is provided solely for informational purposes and is not incorporated herein by this reference. The City makes no representation as to the accuracy or completeness of any of the information on such website.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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APPENDIX C
BASIC FINANCIAL STATEMENTS OF THE CITY OF SAN JOSE
FOR THE FISCAL YEAR ENDED JUNE 30, 2021
[to be attached]
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
D-1
APPENDIX D
SUMMARY OF CERTAIN PROVISIONS OF
THE PRINCIPAL LEGAL DOCUMENTS
The following is a brief summary of certain provisions of the Site Lease, Lease Agreement and the Indenture of Trust relating to the 2022A Bonds. Such summary is not intended to be definitive, and reference is made to the complete documents for the complete terms thereof. [to come]
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
E-1
APPENDIX E
PROPOSED FORM OF OPINION OF BOND COUNSEL
[Closing Date]
City of San José Financing Authority
200 East Santa Clara Street
San Jose, California 95113
OPINION: $ [PAR] City of San José Financing Authority Taxable Lease Revenue 2022A Bonds, Series 2022A (Convention Center Refunding Project) Members of the Governing Board of the Authority:
We have acted as bond counsel to the City of San José Financing Authority (the “Authority”) in connection with the issuance by the Authority of the captioned bonds dated the date hereof (the “2022A Bonds”). The 2022A Bonds are issued pursuant to Article 4 of Chapter 5, Division 7, Title 1 of the Government Code of the State of California (the “Bond Law”), the Indenture of Trust, dated as of April 1, 2022 (the “Indenture”), by and between the Authority and Wilmington Trust, National Association , as trustee (the “Trustee”), and a resolution of the Governing Board of the Authority adopted on [March 29, 2022] (the “Authority Resolution”). Under the Indenture, the Authority has pledged certain revenues (the “Revenues”) for the payment of principal, premium (if any), and interest on the 2022A Bonds when due, including lease payments made by the City of San José (the “City”) under a Lease Agreement dated as of April 1, 2022 (the “Lease Agreement”), between the Authority and the City. Capitalized terms used but not defined herein have the meanings given to such terms in the Indenture.
In order to further secure the 2022A Bonds, the City, for and on behalf of the Convention Center Facilities District No. 2008-1, City of San José, County of Santa Clara, State of California (the “Convention Center Facilities District”) , and the Authority have entered into a Pledge Agreement dated as of April 1, 2022 (the “Pledge Agreement”), pursuant to which the City, for and on behalf of the Convention Center Facilities District, has pledged a lien and security interest in the Special Taxes that are collected by the City for the benefit of the Authority as security for the City’s obligations to make Lease Payments under the Lease Agreement. The City Council, as the legislative body of the Convention Center Facilities District , approved the execution and delivery of the Pledge Agreement pursuant to a resolution of the City Council adopted on [March 29, 2022] (the “City Resolution”).
We have examined the law and such certified proceedings and other papers, opinions, and other documents as we deem necessary to render this opinion. As to questions of fact material to our opinion, we have relied upon representations of the Authority cont ained in the DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San José Financing Authority
[Closing Date]
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Indenture and the City contained in the Lease Agreement and the Pledge Agreement, and in the certified proceedings, and other certifications of public officials furnished to us, without undertaking to verify the same by independent investigation. The opinions expressed herein are based upon our analysis and interpretation of existing statutes, regulations, rulings and judicial decisions, including the validation default judgment entered on March 30, 2010, by the Superior Court of the County of Santa Clara in the action entitled City of San José v. All Persons Interested et al., Case No. 1-09-CV-148458, and cover certain matters not directly addressed by such authorities.
Based on the foregoing, we are of the opinion that, under existing law:
1. The Authority is a duly created and validly existing joint exercise of powers authority under the laws of the State of California with the power to adopt the Authority Resolution, enter into the Indenture , the Lease Agreement and the Pledge Agreement and perform the agreements on its part contained therein, and issue the 2022A Bonds.
2. The City is a municipal corporation and charter city duly organized and existing under the laws of the State of California with the power to adopt the City Resolution, enter into the Lease Agreement and the Pledge Agreement and perform the agreements on its part contained therein.
3. The Indenture has been duly authorized, executed and delivered by the Authority, and constitutes a valid and binding obligation of the Authority, enforceable against the Authority.
4. The Indenture creates a valid lien on the Revenues and other funds pledged by the Indenture for the security of the 2022A Bonds.
5. The Lease Agreement has been duly authorized, executed and delivered by th e Authority and the City, and constitutes a valid and binding obligation of the Authority and the City, enforceable against the Authority and the City.
6. The Pledge Agreement has been duly authorized, executed and delivered by the Authority and the City, for and on behalf of the Convention Center Facilities District, and constitutes a valid and binding obligation of the Authority and the City, for and on behalf of the Convention Center Facilities District, enforceable against the Authority and the City , for and on behalf of the Convention Center Facilities District.
7. The Pledge Agreement creates a valid lien on the Special Taxes for the benefit of the Authority as security for the City’s obligations to make Lease Payments.
8. The 2022A Bonds have been duly authorized and executed by the Authority, and are valid and binding limited obligations of the Authority, payable solely from the Revenues and other funds provided therefor in the Indenture.
9. Interest on the 2022A Bonds is not intended to be excluded from gross income for federal income tax purposes.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San José Financing Authority
[Closing Date]
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10. Interest on the 2022A Bonds is exempt from personal income taxation imposed by the State of California.
We express no opinion regarding any other tax consequences arising with respect to the ownership, sale or disposition of, or the amount, accrual or receipt of interest on, the 2022A Bonds.
The rights of the owners of the 2022A Bonds and the enforceability of the 2022A Bonds, the Indenture , the Lease Agreement and the Pledge Agreement are limited by bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights generally, and by equitable principles, whether considered at law or in equity.
This opinion is given as of the date here of, and we assume no obligation to revise or supplement this opinion to reflect any facts or circumstances that may hereafter come to our attention, or any changes in law that may hereafter occur. Moreover, our opinions are not a guarantee of a particular result, and are not binding on the courts; rather, our opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the certifications and opinions referenced above. Our engagement with respect to this matter has terminated as of the date hereof.
Respectfully submitted,
A Professional Law Corporation
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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APPENDIX F
FORM OF CONTINUING DISCLOSURE CERTIFICATE
$________
CITY OF SAN JOSE FINANCING AUTHORITY
TAXABLE LEASE REVENUE BONDS, SERIES 2022A
(CONVENTION CENTER REFUNDING PROJECT)
This Continuing Disclosure Certificate (the “Disclosure Certificate”) is executed and delivered by the City of San José (the “City”) in connection with the issuance by the City of San José Financing Authority (the “Authority”) of the bonds captioned-above (the “Bonds”). The Bonds are being issued pursuant to a resolution adopted by the Authority on March 29, 2022, and an Indenture of Trust (the “Indenture”), dated as of April 1, 2022, by and between the Authority and Wilmington Trust, National Association, as trustee (the “Trustee”).
The City hereby covenants and agrees as follows:
Section 1. Purpose of the Disclosure Certificate. This Disclosure Certificate is being executed and delivered by the City for the benefit of the holders and ben eficial owners of the Bonds and in order to assist the Participating Underwriter in complying with Rule 15c2 -12(b)(5) of the Securities and Exchange Commission.
Section 2. Definitions. In addition to the definitions set forth above and in the Indenture, which apply to any capitalized term used in this Disclosure Certificate unless otherwise defined in this Section 2, the following capitalized terms have the following meanings:
“Annual Report ” means any Annual Report provided by the City pursuant to, and as described in, Sections 3 and 4.
“Annual Report Date ” means the date not later than April 1 after the end of each fiscal year of the City (currently June 30th).
“Current Fiscal Year” means the then current fiscal year as of an Annual Report Date. For example, with respect to the Annual Report Date of April 1, 2023, the Current Fiscal Year means the 2022-2023 fiscal year.
“Dissemination Agent” means the City or any other Dissemination Agent designated in writing by the City and which has filed with the City a written acceptance of such designation. As of the date of this Disclosure Certificate, the City is acting as Dissemination Agent.
“Listed Events” means any of the events listed in Section 5(a).
“MSRB” means the Municipal Securities Rulemaking Board, which has been designated by the Securities and Exchange Commission as the sole repository of disclosure information for purposes of the Rule.
“Official Statement” means the final official statement executed by the City in connection with the issuance of the Bonds.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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“Participating Underwriter” means any of the original purchasers of the Bonds required to comply with the Rule in connection with offering of the Bonds.
“Preceding Fiscal Year” means the most recently ended fiscal year preceding an Annual Report Date. For example, with respect to the Annual Report Date of April 1, 2023, the Preceding Fiscal Year means the 2021-2022 fiscal year.
“Rule” means Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.
Section 3. Provision of Annual Reports.
(a) The City shall, or shall cause the Dissemination Agent to, not later than the Annual Report Date, commencing April 1, 2023, with the report for the 2021-2022 fiscal year, provide to the MSRB in an electronic format as prescribed by the MSRB, an Annual Report that is consistent with the requirements of Section 4 of this Disclosure Certificate. Not later than 15 Business Days prior to the Annual Report Date, the City shall provide the Annual Report to the Dissemination Agent (if other than the City). I f by 15 Business Days prior to the Annual Report Date the Dissemination Agent (if other than the City) has not received a copy of the Annual Report, the Dissemination Agent shall contact the City to determine if the City is in compliance with the previous sentence. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Certificate; provided that the audited financial statements of the City may be submitted separately from the balance of the Annual Report, and later than the Annual Report Date, if not available by that date. If the City’s fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(b). The City shall provide a written certification with each Annual Report furnished to the Dissemination Agent to the effect that such Annual Report constitutes the Annual Report required to be furnished by the City hereunder.
(b) If the City does not provide (or cause the Dissemination Agent to provide) an Annual Report by the Annual Report Date, the City shall provide (or cause the Dissemination Agent to provide) to the MSRB, in an electronic format as prescribed by the MSRB, a notice in substantially the form attached as Exhibit A.
(c) With respect to each Annual Report, the Dissemination Agent shall:
(i) determine each year prior to the Annual Report Date the then -applicable rules and electronic format prescribed by the MSRB for the filing of annual continuing disclosure reports; and
(ii) if the Dissemination Agent is other than the City, file a report with t he City certifying that the Annual Report has been provided pursuant to this Disclosure Certificate, and stating the date it was provided.
Section 4. Content of Annual Reports . The City’s Annual Report shall contain or incorporate by reference the following:
(a) The City’s audited financial statements prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board for the Preceding Fisc al Year. If the City’s
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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audited financial statements are not available by the Annual Report Date, the Annual Report shall contain unaudited financial statements in a format similar to the financial statements contained in the final Official Statement, and the audited financial statements shall be filed in the same manner as the Annual Report when they become available.
(b) Unless otherwise provided in the audited financial statements filed on or before the Annual Report Date, financial information and oper ating data with respect to the City for the Preceding Fiscal Year or Current Fiscal Year , as specified below, substantially similar to that provided in the Official Statement:
(i) Summary information relating to the City's adopted operating budget for the then-current Fiscal Year, substantially in the form set forth in Table 11 of Appendix A to the Official Statement (provided that the categories set forth in said Table 11 may be revised to reflect the then current budgeting and budget reporting practices of the City)
(ii) Particular section or sections of the budget demonstrating that t he
Ci
ty has budgeted for Lease Payments (as defined in the Official Statement) for the current Fiscal Year.
(iii) General Fund summary of revenues and expenditures substantially in
the form set forth on page 32 of the City’s fiscal year 2020- 21 annual comprehensive financial report.
(iv) General fund balance sheet substantially in the form set forth on page 28 of the City’s fiscal year 2020-21 annual comprehensive financial report. (v) General fund tax revenues by source substantially in the form set forth on page 191 of the City’s fiscal year 2020-21 annual comprehensive financial report.
(vi) Assessed valuation of property in the City substantially in the form set forth on p age 282 of the City’s fiscal year 2020- 21 annual comprehensive financial report, and the current property tax levy and collections substantially in the form set forth on page 285 of the City’s fiscal year 2020- 21 annual comprehensive financial report.
(vii) A description of any event of default under the Indenture .
(vi
ii) A
description of any event resulting in the abatement of Lease Paym
ents under the Lease.
(c) In addition to any of the information expressly required to be provided under thi s Di
sclosure Certificate, the City shall provide such further material information, if any, as may be necessary to make the specifically required statements, in the light of the circumstances under which they are made, not misleading.
(d) Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the City or related public entities, which are available to the public on the MSRB’s internet web site or filed with the Securities and DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Exchange Commission. The City shall clearly identify each such other document so included by reference.
Section 5. Reporting of Significant Events.
(a
) The City shall give, or cause to be given, notice of the occurrence of any of t he fo
llowing events with respect to the Bonds:
(1) Principal and interest payment delinquencies.
(2) Non-payment related defaults, if material.
(3) Unscheduled draws on debt service reserves reflecting financial difficulties.
(4) Unscheduled draws on credit enhancements reflecting financial difficulties.
(5) Substitution of credit or liquidity providers, or their failure to perform. (6) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Pr oposed
Is
sue (IRS Form 5701 -TEB) or other material notices or
determinations with respect to the tax status of the security, or other material events affecting the tax status of the security. (7) Modifications to rights of security holders, if material. (8) Bond calls, if material, and tender offers.
(9) Defeasances.
(10) Release, substitution, or sale of property securing repayment of the securities, if material.
(11) Rating changes.
(12) Bankruptcy, insolvency, receivership or similar event of the City or other obligated person.
(13) The consummation of a merger, consolidation, or acquisiti on
in
volving the City or an obligated person, or the sale of all or substantially all of the assets of the City or an obligated person (other than in the ordinary course of business), the entry into a definitive agreement to undertake such an action, or the termination of a def
initive agreement relating to any such actions, other than pursuant to its terms, if material.
(14) Appointment of a successor or additional trustee or the change of name of a trustee, if material.
(15) Incurrence of a financial obligation of the City, if material, o r agr
eement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the City or an obl
igated person, any of which affect security holders, if material. (16) Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of a financial obligati on
of
the City, any of which reflect financial difficulties.
(b) Whenever the City obtains knowledge of the occurrence of a Listed Event, the City shall, or shall cause the Dissemination Agent (if not the City) to, file a notice of such occurrence DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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with the MSRB, in an electronic format as prescribed by the MSRB, in a timely manner not in excess of 10 business days after the occurrence of the Listed Event. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(8) and (9) above need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to holders of affected Bonds under the Indenture.
(c) The City acknowledges that the events described in subparagraphs (a)(2), (a)(7), (a)(8) (if the event is a bond call), (a)(10), (a)(13), (a)(14) and (a)(15) of this Section 5 contain the qualifier “if material.” The City shall cause a notice to be filed as set forth in paragraph (b) above with respect to any such event only to the extent that the City determines the event’s occurrence is material for purposes of U.S. federal securities law.
(d) For purposes of this Disclosure Certificate, any event described in paragraph (a)(12) above is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent, or similar officer for the City in a proceeding under the United States Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court o r governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City.
(e) For purposes of Section 5(a)(15) and (16), “financial obligation” means a (i) debt obligation; (ii) derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) g uarantee of (i) or (ii). The term financial obligation shall not include municipal securities as to which a final official statement has been provided to the Municipal Securities Rulemaking Board consistent with the Rule.
Section 6. Identifying Information for Filings with the MSRB. All documents provided to the MSRB under the Disclosure Certificate shall be accompanied by identifying information as prescribed by the MSRB.
Section 7. Termination of Reporting Obligation . The City’s obligations under this Disclosure Certificate shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the City shall give notice of such termination in the same manner as for a Listed Event under Section 5(b).
Section 8. Dissemination Agent. The City may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Certificate, and may discharge any Dissemination Agent, with or without appointing a successor Dissemination Agent. Any Dissemination Agent may resign by providing 30 days’ written notice to the City.
Section 9. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Certificate, the City may amend this Disclosure Certificate, and any provision of this Disclosure Certificate may be waived, provided that the following conditions are satisfied:
(a) if the amendment or waiver relates to the provisions of Secti ons 3(a), 4 or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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identity, nature, or status of an obligated person with respect to the Bonds, or type of business conducted;
(b) the undertakings herein, as proposed to be amended or waived, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the primary offering of the Bonds ,
af
ter taking into account any amendments or interpretations of the Rule, as we
ll as any change in circumstances; and
(c) th
e proposed amendment or waiver either (i) is approved by holders of the Bonds in the manner provided in the Indenture for amendments to the Indenture with the consent of holders, or (ii) does not, in the opinion of nationally recognized bond counsel, materially impair the interests of t he hol
ders or beneficial owners of the Bonds.
If the annual financial information or operating data to be provided in the Annual Report is amended pursuant to the provisions hereof, the first annual financial information filed pursuant hereto containing the amended operating data or financial information shall explain, in narrative form, the reasons for the amendment and the impact of the change in the type of operating data or financial information being provided.
If an amendment is made to the undertaking specifying the accounting principles to be followed in preparing financial statements, the annual financi al information for the year in which the change is made shall present a comparison between the financial statements or information prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles. The comparison shall include a qualitative discussion of the differences in the accounting principles and the impact of the change in the accounting principles on the presentation of the financial information, in order to provide information to investors to enable them to evaluate the ability of the City to meet its obligations. To the extent reasonably feasible, the comparison shall be quantitative. A notice of the change in the accounting principles shall be filed in the same manner as for a Listed Event under Section 5(b).
Section 10. Additional Information . Nothing in this Disclosure Certificate shall be deemed to prevent the City from disseminating any other information, using the means of dissemination set forth in this Disclosure Certificate or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Certificate. If the City chooses to include any information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Certificate, the City shall have no obligation under this Disclosure Certificate to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.
Section 11. Default . If the City fails to comply with any provision of this Disclosure Certificate, the Participating Underwriter or any holder or beneficial owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the City to comply with its obligations under this Disclosure Certificate. A default under this Disclosure Certificate shall not be d eemed an Event of Default under the Indenture, and the sole remedy under this Disclosure Certificate in the event of any failure of the City to comply with this Disclosure Certificate shall be an action to compel performance.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Section 12. Duties, Immunities and Liabilities of Dissemination Agent.
(a) The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Certificate, and the City agrees to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of its powers and duties hereunder, including the costs and expenses (including attorney fees) of defending again st any claim of liability, but excluding liabilities due to the Dissemination Agent’s negligence or willful misconduct. The Dissemination Agent shall have no duty or obligation to review any information provided to it by the City hereunder, and shall not be deemed to be acting in any fiduciary capacity for the City, the Bond holders or any other party. The obligations of the City under this Section shall survive resignation or removal of the Dissemination Agent and payment of the Bonds.
(b) The Dissemina tion Agent shall be paid compensation by the City for its services provided hereunder in accordance with its schedule of fees as amended from time to time, and shall be reimbursed for all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties hereunder.
Section 13. Notices. Any notice or communications to be among any of the parties to this Disclosure Certificate may be given as follows:
City of San José - Finance
Debt Management
200 East Santa Clara Street, 13th Floor Tower
San José, California 95113-1905
[email protected]
Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.
Section 14. Beneficiaries. This Disclosure Certificate shall inure solely to the benefit of the City, the Dissemination Agent, the Participating Underwriter and holders and beneficial owners from time to time of the Bonds, and shall create no rights in any other person or entity.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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Section 15. Counterparts. This Disclosure Certificate may be executed in several counterparts, each of which shall be regarded as an original, and all of which shall constitute one and the same instrument.
Date: _________, 2022 CITY OF SAN JOSE
By:
Director of Finance
APPROVED AS TO FORM:
By:
Senior Deputy City Attorney
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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EXHIBIT A
NOTICE OF FAILURE TO FILE ANNUAL REPORT
Name of Issuer: City of San José Financing Authority
Name of Bond Issue: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A (Convention Center Refunding Project )
Date of Issuance: _______, 2022
NOTICE IS HEREBY GIVEN that the City of San José (the “City”) has not provided an Annual Report with respect to the above-named Bonds as required by the Continuing Disclosure Certificate, dated _______, 2022. The City anticipates that the Annual Report wi ll be filed by _____________.
Dated: [DISSEMINATION AGENT]
By:
Name:
Title:
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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APPENDIX G
RATE AND METHOD OF APPORTIONMENT OF
THE CONVENTION CENTER FACILITIES DISTRICT
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San Jose January
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CFD No. 2008 -1 Page 1
RATE AND METHOD OF
APPORTIONMENT OF SPECIAL TAX
CITY OF SAN JOSE
CONVENTION CENTER FACILITIES DISTRICT NO. 2008-1
The Special Tax authorized by Convention Center Facilities District No. 2008-1 ("CCFD No. 2008-1") of the City of San Jose (the " City") shall be levied on all Assessor's Parcels within CCFD No. 2008-1 and collected as provided herein commencing in Fiscal Year 2009-2010 in an amount determined by the City Council through the application of the rate and method of apportionment of the Special Ta x set forth below. All of the real property within CCFD No. 2008-1, unless exempted by law or by the provisions hereof, shall be taxed for the purposes, to the extent and in the manner herein provided.
A. DEFINITIONS
The terms hereinafter set forth have the following meanings:
“Additional Special Tax” means the Special Tax determined in accordance with Section D herein, which may be levied by the City Council in any Fiscal Year on an Assessor’s Parcel of Taxable Property to satisfy the Revenue Stabilizatio n Reserve Requirement, provided that there are Bonds outstanding.
“Assessor's Parcel ” means a lot or parcel shown in an Assessor's Parcel Map with an assigned assessor's parcel number.
“Assessor's Parcel Map ” means an official map of the Assessor of the Co unty designating parcels by assessor's parcel number.
“Base Special Tax” means the Special Tax determined in accordance with Section C herein, which may be levied by the City Council in any Fiscal Year on an Assessor’s Parcel of Taxable Property.
“Bond Do cuments” means any bond indenture, trust agreement or similar document setting forth the terms of any Bonds.
“Bonds” means any binding obligation to pay or repay a sum of money, including obligations in the form of bonds, notes, certificates of participati on, long-term leases, loans from government agencies, or loans from banks, other financial institutions, private businesses, or individuals, or long-term contracts, or any refunding thereof, to which the Special Tax has been pledged.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San Jose January 16, 200 9
CFD No. 2008 -1 Page 2
“CCFD Administrator” means an official of the City, or designee thereof, responsible for determining the Special Tax Requirement and providing for the levy and collection of the Special Taxes for CCFD No. 2008-1.
“Chapter” means Chapter 14.32 of the San Jose Municipal Code, as amended. “City” means the City of San Jose.
“City Council” means the City Council of the City.
“County” means the County of Santa Clara.
“Director of Finance” means the finance director of the City. “Exempt Property” means all Assessor’s Parcels within CCFD No. 2008 -1 which are exempt from the Special Taxes pursuant to Section F herein. “Facilities” has the meaning given to that term in the resolution of which this Rate and Method of Apportionment of Special Tax is a part.
“Fiscal Year” means the period c ommencing on July 1 of any year and ending the following June 30.
“Hotel Property” means an Assessor’s Parcel of Taxable Property which consists of one or more buildings or structures situated in the City that has, on file with the Director of Finance, a t ransient occupancy registration certificate , including, but not limited to, any hotel, inn, tourist home or house, motel, studio hotel, bachelor hotel, guesthouse, bed and breakfast inn, apartment house, dormitory, public or private club, mobilehome or hou se trailer at a fixed location, or other similar structure or portion thereof situated in the city, which is occupied or intended or designed for Occupancy by Transients for dwelling, lodging or sleeping purposes.
“Hotel Transient Unit ” means a room withi n Hotel Property as to which the Special Tax may be levied in that it is used for Transient Occupancy. “Occupancy” means the use or possession, or right to the use or possession of any Hotel Transient Unit, or portion thereof .
“Operator” means the person who is proprietor of the Hotel Property, whether in the capacity of owner, lessee, sublessee, mortgagee in possession, licensee, or any other capacity. Where the operator performs his functions through a managing agent of any type or character other than a n employee, the managing agent shall also be deemed an operator, and shall have the same duties and liabilities as his principal. “Owner” means the l andowner, owner of land , or property owner of Hotel Property, except that if the fee owner of the Hotel Pr operty is a government entity, ‘Owner’ means the lessee of the government entity.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San Jose January
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CFD No. 2008 -1 Page 3
“Rent” means the consideration charged for the Occupancy of Hotel Transient Unit s valued in money, whether to be received in money, goods, property, labor, service, or otherwise. For purposes of this definition, Rent charged to: 1) a federal or state employee when on official business, or 2) any officer or employee of a foreign government, who is exempt by reason of express provision of federal law or international treaty , sh all be excluded from the Base Special Tax and Additional Special Tax calculations defined in Section C and D herein, respectively.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
City of San Jose January
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CFD No. 2008 -1 Page 4
“Revenue Stabilization Reserve” means a fund to be established and held by the City . Prior to the issuance of Bonds, all Sp ecial Tax revenues will, as collected and received by the City, be deposited in the Revenue Stabilization Reserve. Prior to the first issuance of Bonds, the City may pay its authorized expenses incurred in connection with the Convention Center Facilities District from the Revenue Stabilization Reserve, and thereafter as may be specified in the Bond Documents. Funds in the Revenue Stabilization Reserve shall be available for transfer to the appropriate redemption funds or accounts, established by the Bond Documents for the payment of debt service on Bonds, in the event that Special Tax collections, at any time, are not sufficient to make scheduled payments of principal or interest on the Bonds.
Subject to any limitations that may be imposed by the Bond D ocuments, the City may, at any time, transfer amounts in the Revenue Stabilization Reserve in excess of the Revenue Stabilization Reserve Requirement to the project fund for the Facilities or provide for changes, including a reduction, of the Revenue Stabilization Reserve.
The Bond Documents may establish terms and conditions under which the Revenue Stabilization Reserve may be closed and the Special Tax revenues therein, and any investment earnings thereon, applied to other authorized purposes of CCFD No. 2008 -1. In the absence of provisions in the Bond Documents, once all Bonds ha ve been retired, or provision has been made for their retirement or early redemption (which provision may include the application of moneys in the Revenue Stabilization Reserve ), the Revenue Stabilization Reserve will be closed and all remaining funds in the Revenue Stabilization Reserve transferred to the project fund for the Facilities. “Revenue Stabilization Reserve Requirement” means the minimum balance required in the Revenue Stabilization Reserve, as specified in the Bond Documents. “Special Tax” means the special tax authorized by CCFD No. 2008-1 to be levied by the City Council pursuant to the Chapter to fund the Facilities. “Taxable Property” means all Assessor’s Parcels that are not exempt from the Special Tax pursuant to law or the Rate and Method of Apportionment of Special Tax. “Transient ” means a person who exercises occupancy or is entitled to occupancy by reason of concession, permit, right of access, license, or o ther agreement for a period of thirty consecutive calendar days or less, counting portions of calendar days as full days. “Zone” means one of the two mutually exclusive geographic areas defined below.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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• “Zone 1” means all territory in the City located withi n a two and one quarter (2 ¼) mile radius of the San Jose Convention Center located at 408 Almaden Blvd.
San Jose CA. 95110.
• “Zone 2” means all territory within the City of San Jose that is not within Zone
1. DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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B. CLASSIFICATIONS OF ASSESSOR’S PARCELS
Each Fiscal Year using the definitions above, all Assessor’s Parcels within CCFD No. 2008 -1 shall be classified as either Hotel Property or Exempt Property and all Hotel Property shall be classified as within either Zone 1 or Zone 2 . Commencing with Fiscal Year 2009-2010 and for each subsequent Fiscal Year, all Hotel Property shall be sub ject to Special Taxes pursuant to Sections C, D and E below.
C. BASE SPECIAL TAX RATE
Zone 1
Commencing in Fiscal Year 200 9-2010, each Assessor’s Parcel classified as Hotel Property within Zone 1 of CCFD No. 2008-1 shall be subject to a Base Special Tax. The Base Special Tax for each Assessor’s Parcel classified as Hotel Property within Zone 1 shall equal four percent (4%) of all Rent charged.
Zone 2
Commencing in Fiscal Year 20 09-2010, each Assessor’s Parcel classified as Hotel Property within Zone 2 of CCFD No. 2008 -1 shall be subject to a Base Special Tax. The Base Special Tax for each Assessor’s Parcel classified as Hotel Property within Zone 2 shall equal the percentage of all Rent charged as identified in Table 1 below.
TABLE 1
ZONE 2 BASE SPECIAL TAX RATES
Term Base
Special Tax
July 1, 2009 – December 31, 2009 1%
January 1, 2010 – June 30, 2010 2%
Fiscal Year 2010-2011 3%
Fiscal Year 2011-2012 and thereafter 4%
D. ADDITIONAL SPECIAL TAX RATE
Commencing in Fiscal Year 2009-2010, each Assessor’s Parcel classified as Hotel Property in CCFD No. 2008 -1 shall be subject to a n Additional Special Tax. The Additional Special Tax for each Assessor’s Parcel classified as Hotel Property within either Zone shall equal one percent (1%) of all Rent charged.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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If Bonds are outstanding, and the City Council determines, by no later than June 1 of any calendar year (or such other date as specified in the Bond Documents) , that the amount in the Revenue Stabilization Reserve is less than the Revenue Stabilization Reserve Requirement, then the City Council may levy and collect the Additional Special Tax in the f ollowing Fiscal Year.
The City must mail written notice of the imposition of the Additional Special Tax to all Owners, or Operators on behalf of Owners, at least 30 days before the imposition of the Additional Special Tax may commence. If the Additional Special Tax will not be imposed in any year immediately following a year in which it was imposed, then the City must mail written notice by June 1 to all Owners or Operators on behalf of Owners that levy of the Additional Special Tax will cease as of the following July 1 for the Fiscal Year beginning on that day.
E. METHOD OF APPORTIONMENT OF THE SPECIAL TAX
Commencing with Fiscal Year 2009-2010, and for each subsequent Fiscal Year, the City Council shall levy Special Taxes as described below:
Step One: The Base Special Tax shall be levied on each Assessor’s Parcel classified as Hotel Property up to the rates specified in Section C.
Step Two: The Additional Special Tax shall also be levied on each Assessor’s Parcel classified as Hotel Property if authorized, and as provided in, Section D.
Special Taxes associated with Rent that is charg ed for Transient Occupancy shall be considered levied and due in the calendar month the Transient ceases Occupancy of the Hotel Transient Unit(s), except that Special Taxes associated with Rent that is paid by credit card shall be deemed levied and collected on the date that the credit card is presented for payment to the Operator. The Special Taxes are payable as described in Section G below.
F. EXEMPTIONS
No Special Tax shall be levied on any Assessor’s Parcel not classified as Hotel Property.
G. MANNER OF COLLECTION
The Special Tax shall be collected monthly by the City . Each Operator on behalf of the Owner shall, on or before the last day of each calendar month, submit the Special T axes levied against their Hotel Property to the Director of Finance of the City and shall include a special tax obligation form provided by the City.
H. FAILURE TO SUBMIT SPECIAL TAX
If any Owner, or Operator on behalf of Owner, fails or refuses to pay the Special T ax levied, the Director of Finance shall proceed in such ma nner as he may deem best to obtain facts and information on which to base his estimate of the Special Tax. As soon as the Director of Finance shall procure such facts and information as he is able to obtain upon which to base the Special Tax for such Assessor’s Parcel classified as Hotel Property, the Director of Finance shall proceed to determine the amount of such Special Tax due plus any penalties and interest, as described
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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below. In case such determination is made, the Director of Finance shall give a Determination of Special Tax Due by serving it personally or by depositing it in the United States mail, postage prepaid, addressed to the Owner or Operator on behalf of the Owner at its last known place of address. Such Owner, or Operator on behalf of the Owner, may file an appeal as prescribed in Section J herein.
Any Operator who fails to remit the Special Tax levied within the time required shall be subject to a penalty of ten percent (10%) of the amount delinquent in addition to the delinquent Special Tax. Delinquent Special Taxes will incur an additional 1 ½% penalty (applied to the amount originally levied without compounding) on the first day of each month which is more than six months after the date when the delinquent Special Tax was levied.
I. SPECIAL TAX AUDIT
It shall be the duty of the Owner, or Operator on behalf of the Owner, for each Assessor’s Parcel classified as Hotel Property that is subject to the Special Tax to keep and preserve , for a period of three years, all records as may be deemed necessary by the City (and that will, at a minimum, include a record of all Rents collected) to determine the Special Taxes levied upon such Hotel Property by the City Council . The City shall have the right to inspect such records at all reasonable times.
J. APPEALS
Any Owner or Operator on behalf of the Owner, claiming that the amount or application of the Special Tax is not correct, may appeal to the City Council by filing a notice of appeal with the City Clerk within fifteen calendar days of the serving or mailing of the Determination of Special Tax Due. The City Council shall fix a time and place for hearing such appeal, and the City Clerk shall give notice in writing to such Owner and Operator at their last known place of address. The findings of the City Council shall be final and conclusive, and shall be served upon the appellant in the manner prescribed above for service of notice of hearing. Any Special Tax found to be due shall be immediately due and payable upon the service of the City Council find ings. If the City Council decision requires that the Special Tax for an Assessor’s Parcel be modified or changed in favor of the Owner, or Operator on behalf of Owner, a cash refund shall not be made, but a credit shall be given against future Special Taxes on that Assessor’s Parcel.
K. TERM OF SPECIAL TAX
The authority of the City Council to levy the Base Special Tax on all Assessor’s Parcels classified as Hotel Property within CCFD No. 2008-1 in accordance with Section E is perpetual.
The Additional Speci al Tax may only be levied during a period when Bonds are outstanding in accordance with Section E herein.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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APPENDIX H
DTC AND THE BOOK-ENTRY ONLY SYSTEM
The following description of the Depository Trust Company ( “DTC”), the procedures and record keeping with respect to beneficial ownership interests in the 2022A Bonds, payment of principal, interest and other payments on the 2022A Bonds to DTC Participants or Beneficial Owners, confirmation and transfer of beneficial ownership interest in the 2022A Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC . Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.
Neither the Authority (the “Issuer”) nor the Trustee (the “Agent”) take any responsibility for the information contained in this Appendix.
No assurances can be given that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owners (a) payments of interest, principal or premium, if any, with respect to the 2022A Bonds , (b) certificates representing ownership interest in or other confirmation or ownership interest in the 2022A Bonds, or (c) redemption or other notices sent to DTC or Cede & Co., its nominee, as the registered owner of the 2022A Bonds, or that they will so do on a timely basis, or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Appendix . The current “Rules” applicable to DTC are on file with the Securities and Exchange Commission and the current “Procedures” of DTC to be followed in dealing with DTC Participants are on file with DTC.
1. The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the securities (the “Securities”). The Securities will be issued as fully -registered securities registered in the name of Cede & Co. (DTC ’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Security certificate will be issued for each issue of the Securities, each in the aggregate principal amount of such issue, and will be deposited with DTC. If, however, the aggregate principal amount of any issue exceeds $500 million, one certificate will be issued with respect to each $500 million of principal amount, and an additional certificate will be issued with respect to any remaining principal amount of such issue.
2. DTC, the world ’s largest securities depository, is a limited -purpose trust com pany
or
ganized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants ’ accounts. This eliminates the need for physical movement of securities certificates . Direct Participants include both U.S. and non -U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations . DTC is a wholly -owned subsidiary of The Depository Trust & Clearing Corporation ( “DTCC”). DTCC is the holding DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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company for DTC, National Securities Clearing Corporation and Fixed Income Cleari ng Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust compan ies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor ’s rating of AA+ . The DTC Rules applicable to its Participan ts are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The information contained on this Internet site is not incorporated herein by reference.
3. Purchases of Securities under the DTC system must be made by or through Direct Participants, which will receive a credit for the Securities on DTC ’s records . The ownership interest of each actual purchaser of each Security ( “Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants ’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase . Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Securities are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Securities, except in the event that use of the book-entry system for the Securities is discontinued.
4. To facilitate subsequent transfers, all Securities deposited by Direct Participants wit h
DTC
are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Securities with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Securities; DTC’s records reflect only the identity of the Direct P articipants to whose accounts such Securities are credited, which may or may not be the Beneficial Owners . The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
5. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Securities may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Securities, such as redemptions, tenders, defaults, and proposed amendments to the Security documents. For example, Beneficial Owners of Securities may wish to ascertain that the nominee holding the Securities for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.
6. Redemption notices shall be sent to DTC . If less than all of the Securiti es within an
is
sue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
7. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote wit h re
spect to Securities unless authorized by a Direct Participant in accordance with DTC ’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to Issuer as soon as possible after the record date . The Omnibus Proxy assigns Cede & Co. ’s consenting or voting DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.
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rights to those Direct Participants to whose accounts Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy).
8. Redemption proceeds, distributions, and dividend payments on the Securities will be ma
de to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from Issuer or Agent, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC, Agent, or Issuer, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of Issuer or Agent, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
9. A Beneficial Owner shall give notice to elect to have its Securities purchased or tendered, through its Participant, to the Agent, and shall effect delivery of such Securities by causing the Direct Participant to transfer the Participant’s interest in the Securities, on DTC’s records, to the Agent. The requirement for physical delivery of Securities in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Securities are transferred by Direct Participants on DTC’s records and followed by a book - entry credit of tendered Securities to the Agent’s DTC account. 10 .
DTC may discontinue providing its services as depository with respect to the Securities at
any time by giving reasonable notice to Issuer or Agent. Under such circumstances, in the event that a successor depository is not obtained, Security certificates are required to be printed and delivered.
11. Issuer may decide to discontinue use of the system of book -entry-only transfer s th
rough DTC (or a successor securities depository). In that event, Security certificates will be printed and delivered to DTC.
12. The information in this section concerning DTC and DTC’ s book-entry system has been
obtained from sources that Issuer believes to be reliable, but Issuer takes no responsibility for the accuracy thereof.
DRAFT--Contact the Office of the City Clerk at (408) 535-1260 or [email protected] for final document.