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HomeMy WebLinkAbout10. Intro Ord Authorizing Issuance & Sale of Taxable Pension Obligation Bonds, Series 2021II., CityofDowney AGENDA MEMO I ·if ', TO: Item No. APPROVED BY CITY MANAGER FROM: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL OFFICE OF THE CITY MANAGER BY: ANIL H. GANDHY, 91RECTOR OF FINANCE AND INFORMATION TECHNOLOGY ~ \ V' ~llvt,' DATE: OCTOBER 27, 2020 SUBJECT: INTRODUCTION OF ORDINANCE AUTHORIZING ISSUANCE AND SALE OF TAXABLE PENSION OBLIGATION BONDS, SERIES 2021 RECOMMENDATION 1) Recommendation of the Finance Director that City Council waive the full reading of and introduce the following Ordinance: ORDINANCE NO. : AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF DOWNEY AUTHORIZING THE ISSUANCE AND SALE OF ITS TAXABLE PENSION OBLIGATION BONDS, SERIES 2021, IN AN AGGREGATE AMOUNT NOT TO EXCEED $150,000,000, TO REFUND A PORTION OF THE CITY'S OBLIGATION TO THE CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM, AND AUTHORIZING THE EXECUTION AND DELIVERY OF A FIRST SUPPLEMENTAL TRUST AGREEMENT, A BOND PURCHASE AGREEMENT AND A CONTINUING DISCLOSURE CERTIFICATE AND THE PREPARATION OF AN OFFICIAL STATEMENT AND OTHER MATTERS RELATED THERETO. 2) Authorize the City Manager, the Assistant City Manager, and/or the Finance Director to execute the following documents, and any other related documents, necessary to issue the Taxable Pension Obligation Bonds, Series 2021, provided the principal amount does not exceed $150 million: a. First Supplemental Trust Agreement b. Preliminary Official Statement (contains the Continuing Disclosure Certificate at Appendix F) c. Bond Purchase Agreement DISCUSSION Unfunded long-term liabilities for City employee pension plans continue to be a key issue with respect to the City's long-range financial planning and financial health. The INTRODUCTION OF ORDINANCE AUTHORIZING ISSUANCE AND SALE OF TAXABLE PENSION OBLIGATION BONDS, SERIES 2021 OCTOBER 27, 2020 PAGE2 City of Downey has a long history of actively managing its pension costs, including issuing its Taxable Pension Obligation Bonds, 2005 Series A; negotiating with the Miscellaneous labor group in 2012 and the Safety labor group in 2015 to require all employees to increase their contribution of CalPERS reportable compensation; creating a second formula tier in December 2011 (Fire), in January 2012 (Miscellaneous) and in October 2012 (Police) that requires employees to retire at a later date and receive a lower pension; and implementing a new tier in 2013 where each new City staff member will enter under either the City's second-tier retirement formula as a "classic" member or the state's Public Employee 's Pension Reform (PEPRA) retirement formula as a "new" member. As PEPRA employees started in the system after 2013, their plans are 95- 100% funded. PEPRA employees comprise 45% of the Miscellaneous workforce and 37% of the Safety Workforce. Overall, these proactive actions taken by the City will reduce the City's overall pension burden over the next in the next twenty to thirty years. At its July 28, 2020 meeting, the City Council authorized staff to engage the services of Bartel Associates, LLC to prepare an analysis of the City's pension plans in order to better understand and project the most realistic estimates of future California Public Employee Retirement System (CalPERS) contribution increases that would occur from a likely lower investment return from 7.0% which is set by CalPERS . This agenda memo includes a summary of the City's current pension plan and Unfunded Accrued Liability , and staff's recommendation to address the City's rising pension costs by issuing pension obligation bonds to refinance a portion of the City's obligations to CalPERS. As a contracting member of CalPERS , the City provides Safety (police and fire) and Miscellaneous (all other) Employee Pensions Plans (Plans) to its permanent and probationary employees. Additionally, the City has cost-sharing multiple employer defined benefit pension plans that are administered by CalPERS. The amount the City pays annually to CalPERS consists of two components: the normal cost and a scheduled payment toward the Unfunded Accrued Liability. The normal cost is the total amount that a CalPERS actuary has determined should be charged in a given year to the City and its employees to complement the year's investment earnings such that all benefits paid and all administrative costs are covered . The collected amount is used by CalPERS to make investments . From these payments, the City is allocated a share of the value of CalPERS investments -this share is the Market Value of Assets. Each year, a CalPERS actuary determines the Actuarial Accrued Liability for all member agencies. The Actuarial Accrued Liability is the actuary's projection of the total amount that CalPERS should currently have to cover promised benefits over time (accounting for investment earnings and future annual billings to the member agency). If the Actuarial Accrued Liability exceeds the Market Value of Assets, the member agency's "account" is in a deficit position and a Unfunded Accrued Liability exists. According to the most recent CalPERS actuarial valuation report as of June 30, 2019, the City's current total Unfunded Accrued Liability is $212.7 million which is equivalent INTRODUCTION OF ORDINANCE AUTHORIZING ISSUANCE AND SALE OF TAXABLE PENSION OBLIGATION BONDS, SERIES 2021 OCTOBER 27, 2020 PAGE3 to approximately 66.8% funded status. The chart below depicts the projected repayment schedule (by plan) of the $212.7 million at a 7.0% interest rate, which is the interest rate CalPERS assesses on the Unfunded Accrued Liability. Downey CalPERS Annual UAL Payment Schedule U) $25 C: ~ $20 i $15 I II I $10 $5 I L $- • Miscellaneous Plan • Safety Plan Over the next decade, annual Unfunded Accrued Liability payments are projected to grow from $16.2 million to $22.5 million, an increase of over 39%. It should be noted that the overall Unfunded Accrued Liability will change every year moving forward, with below average CalPERS investment performance adding to the City's payments, and with above average investment performance off-setting the current payments. Given the recent stock market drop and overall market volatility, it is likely that the City's Unfunded Accrued Liability will increase if FY 2020-21 returns are well under the current 7.0% target. While the City's budget has remained balanced despite steady expenditure increases, the City has made various substantial proactive changes beyond those related to pension management as a means to ensure long-term fiscal viability. More specifically, from Fiscal Year 2008-09 to Fiscal Year 2020-21, full-time budgeted staffing has been reduced from 481 to 428 (a 11% decrease); in Fiscal Year 2017-18 the City negotiated with labor groups to require staff, for the first time ever, to begin contributing toward their employer-provided healthcare costs; and in recent years the City began contracting for its IT and Transit System operations . The City has also instituted a number of efficiencies that have generated revenue savings, including installation of LED lighting, a new vehicle replacement and maintenance program, and ideas from the City's Innovation Team. Further the City has strategically sought federal, state, local and private funding for projects to support its parks, Library, police, fire, water and community development needs. In the last 6 years, the City has received approximately $64 million in grants. Additionally, as the City continues to navigate the COVID-19 Pandemic, City Departments have reduced expenditures and limited full-time hiring. City staff has been evaluating restructuring the City's Unfunded Accrued Liability through a pension obligation bond since April 2020. In 2005, the City issued the 2005 pension obligation bonds as a tool to help manage the City's Unfunded Accrued INTRODUCTION OF ORDINANCE AUTHORIZING ISSUANCE AND SALE OF TAXABLE PENSION OBLIGATION BONDS, SERIES 2021 OCTOBER 27, 2020 PAGE4 Liability. The restructuring concept entails borrowing money at interest rates (currently <4.0%) lower than CalPERS is charging on the City's Unfunded Accrued Liability (7.0%) and using that money to pay off a portion of its Unfunded Accrued Liability. One way to think of the Unfunded Accrued Liability is as a debt that has a principal and an interest rate; CalPERS effectively thinks of the Unfunded Accrued Liability in this manner to produce an amortization schedule for the Unfunded Accrued Liability that requires annual payments. In this respect, the discount rate is the interest rate being applied to the debt, and the Unfunded Accrued Liability is a debt that can be refinanced . After a pension obligation bond issuance, the Unfunded Accrued Liability debt payments effectively transfers from CalPERS to the bondholders. The below flow chart provides the flow of funds before and after the issuance of pension obligation bonds. Flow of Funds Before and After Pension Obligation Bonds (POBs) Before POBs Normal Cost UAL Payments Validation: I Bond Payments After POBs Normal Cost UAL Payments Un refunded Bases Under the California Constitution, cities may not incur any debt for any purpose exceeding in any year the income and revenue provided for such year, without voter approval (the "Constitutional Debt Limit"). An exception to the Constitutional Debt Limit exists for obligations imposed by law, such as the City's obligations to CalPERS. Before cities may access the public capital markets to sell the pension obligation bond s, cities are required to obtain a court judgment to the effect, among others, that the pension obligation bond s and the refunding of the CalPERs obligations are valid , legal and binding obligations of the city in accordance with their terms, and the pension obligation bond s and the CalPERS Obligations are exempt from the Constitutional Debt Limit. The City's proposed Taxable Pension Obligation Bonds, Series 2021 will rely on the validation action obtained for the 2005 Pension Obligation Bonds . On April 26, 2005, the Superior Court of the State of California for the County of Los Angeles entered a default judgment to the effect that, among other things, the City's 2005 Pension Obligation Bonds and any Additional Bonds (as defined in the hereinafter defined Original Trust Agreement}, including the 2021 Pension Obligation Bonds, issued by the City to refund the City's unfunded accrued actuarial liability to CalPERS, upon execution and delivery