Item 7 - Visual Slideshow provided by Staff at MeetingPROVIDE INFORMATION REGARDING PENSION
OBLIGATION BONDS AND ADOPT A RESOLUTION
AUTHORIZING JUDICIAL VALIDATION PROCEEDINGS
FOR THE PROPOSED PENSION DEBT REFINANCING AND
RELATED BOND FINANCING AGREEMENTS
AUGUST 3, 2021
Section
I.History of City of Poway Pensions
II.Review of Pension Obligation Bonds
III.Pension Obligation Bond Financial Analysis
IV.Pension Obligation Bond Risk Analysis
V.Judicial Validation
VI.Recommendation
Table of Contents
SECTION I
HISTORY OF CITY OF POWAY PENSIONS
•Most cities in California, including Poway, contract with
CalPERS for their employees' retirement benefits.
•CalPERS provides for and manages the City's employee
pension plans.
•Poway has 2 CalPERS pension plans:
•Miscellaneous Plan
•Safety Plan
4
City of Poway Pension Plans
5
Info About City of Poway Plan
Group Plan
Tier 1 "Classic"
(Hired prior to 1/9/12)
Tier 21 "Classic"
(Hired prior to 1/9/12)
Tier 3 "PEPRA"
(Hired on/after 1/1/13)
Miscellaneous 2% @ 55 (FAE 1)2,3 2% @ 60 (FAE 3)4 2% @ 62 (FAE 3)
Safety 3% @ 50 (FAE 3)3% @ 55 (FAE 3)2.7% @ 57 (FAE 3)
1.Tier 2 employees are employees that have actively worked for a participating CalPERS agency or agency with a
reciprocity agreement with CalPERS and have not had a break in CalPERS service greater than 6 months.
2.The PARS supplemental benefit increased the Miscellaneous benefit to 2.7% @ 55 for eligible employees.
3.FAE 1 means the single highest year of earnings (typically final) is used to calculate the employee's salary pursuant to
the applicable benefit formula.
4.FAE 3 means the highest three years (typically the final three) of average earnings is used to calculate the salary used in
the applicable benefit formula.
6
Info About City of Poway Plan (cont.'d)
Group Plan
Tier 1 "Classic"
(Hired prior to 1/9/12)
Tier 2 "Classic"
(Hired prior to 1/9/12)
Tier 3 "PEPRA"
(Hired on/after 1/1/13)
Miscellaneous 2% @ 55 2% @ 60 2% @ 62
Employer1,2 9.25%12.10%7.03%
Employee2,3 7.00%7.005 7.005
UAL4 21.73%21.73%21.73%
Total 37.98%40.83%35.76%
Safety 3% @ 50 3% @ 55 2.7% @ 57
Employer2 22.48%20.64%13.13%
Employee2 9.00%9.00%13.00%
UAL4 23.91%23.91%23.91%
Total 55.39%53.55%50.04%
Source: CalPERS actuarial valuations, the most recent being as of June 30, 2019.
1.Miscellaneous employer rates are blended at 8.74% per the actuarial report and estimated at the rates shown based on the Normal Cost by Benefit Group
detail in the actuarial report.
2.The employee rates are the contracted CalPERS rates and do not reflect the additional 1.00% employee pickup agreed to through the labor bargaining process
for Tier 1 and Tier 2 employees. Each Tier 1 and Tier 2 employee currently contributes an additional 1.00% towards the cost of the CalPERS retirement benefits.
3.Miscellaneous Tier 1 and Tier 2 employees will begin contributing an additional 1.00% towards the cost of the CalPERS retirement benefits beginning the first full
pay period in July 2024.
4.The UAL represents a blended rate for the three retirement tiers and is an employer only cost.
7
Info About City of Poway Plan (cont.'d)
Group Plan
Tier 1 "Classic"
(Hired prior to 1/9/12)
Tier 2 "Classic"
(Hired prior to 1/9/12)
Tier 3 "PEPRA"
(Hired on/after 1/1/13)
Miscellaneous1 47 N/A N/A
Miscellaneous 12 13 96
Safety 24 2 18
Total 83 15 114
1.Represent miscellaneous employee also eligible for the PARS supplemental benefit formula.
8
Info About City of Poway Plan (cont.'d)
# of Members As of 6/30/2019 Safety Misc.Total
Active Members1 51 184 235
Transferred Members2 29 113 142
Separated/Terminated Members3 15 105 120
Retired Members4 50 270 320
TOTAL 145 672 817
1.Current employees enrolled in CalPERS.
2.Former employees that are still employed at another CalPERS employer.
3.Former employees that are not working at another CalPERS employer and
are not retired.
4.Former employees that are now retired from the CalPERS system. Does not
necessarily mean they retired from the City of Poway.
9
Info About City of Poway Plan (cont.'d)
CalPERS Funded Status
Miscellaneous: 69.53%
Safety: 73.52%
Source: CalPERS actuarial valuations, the most recent being June 30, 2019.
Poway Pension Funding Situation
•City contributes to 2 CalPERS benefit pension systems:
•Miscellaneous Plan
•Safety Plans
•City currently has an aggregate UAL of approximately $57.2 million1
•Combined normal cost and UAL annual Payments have increase by 62% over the past five years
•Additional UAL balance from 2020 Investment loss estimated at $3.7 million2
10
Info About City of Poway Plan (cont.'d)
1 Source: Most recent CalPERS actuarial valuation reports as of June 30, 2019, for fiscal year 2021-22.
2 Source: Bartel Associates, LLC.
UAL Balance 6/30/2017 6/30/2018 6/30/2019 6/30/2020 6/30/2021 5-Yr Increase
Miscellaneous Plan $32,284,316 $37,858,596 $37,862,343 $38,161,265 $38,098,445 $5,814,129 18%
Safety Plans $15,188,201 $17,619,912 $18,659,611 $18,982,012 $19,090,825 $3,902,624 26%
Total $47,472,517 $55,478,508 $56,521,954 $57,143,277 $57,189,270 $9,716,753 20%
UAL & Normal CostAnnual Payments 6/30/2017 6/30/2018 6/30/2019 6/30/2020 6/30/2021 5-Yr Increase
UAL Miscellaneous Plan $1,603,752 $1,950,836 $2,339,449 $2.643,161 $2,890,493 $1,286,741 80%
Safety Plans $643,147 $823,801 $1,024,473 $1,179,349 $1,394,617 $751,470 117%
UAL Total:$2,246,899 $2,774,637 $3,363,922 $3,822,510 $4,285,110 $2,038,211 91%
Normal Cost Miscellaneous Plan $904,392 $984,422 $1,058,935 $1,179,779 $1,162,383 $257,991 29%
Safety Plans $905,523 $907,517 $1,014,462 $1,135,518 $1,141,660 $236,137 26%
Normal Cost Total:$1,809,915 $1,891,939 $2,073,397 $2,315,297 $2,304,043 $494,128 27%
Total $4,056,814 $4,666,576 $5,437,319 $6,137,807 $6,589,153 $2,532,339 62%
Info About City of Poway Plan (cont.'d)
Source: Most recent CalPERS actuarial valuation reports as of June 30, 2019, for fiscal year 2021-22.(1)Miscellaneous normal cost projections are based on the 8.74% of the total Miscellaneous salary assuming an annual growth rate of
2.75%.
Safety normal cost projections are based on the 22.48% of the total Safety salary assuming an annual growth rate of 2.75%.
Normal Cost contributions will be made as part of the payroll reporting process. If there is a contractual cost sharing or other change,
this amount will change.
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044204520462047MillionsCombined (1)
Safety Normal Cost Safety UAL Payments Miscellaneous Normal Cost Miscellaneous UAL Payments
11
Current Payment Amortization -Miscellaneous and Safety Plans
12
Info About City of Poway Plan (cont.'d)
Options for Managing Pensions
Identify new sources of revenue
Regional service delivery
Section 115 Trust
Additional discretionary payments
CalPERS Fresh Start
Reprogram capital reserves
Pension obligation bonds
SECTION II
REVIEW OF PENSION OBLIGATION BONDS
•Taxable form of debt issued by governmental employers to retire all or a portion of
their Unfunded Accrued Liability (“UAL”) with the goal of reducing future liability
•Designed to take advantage of an “arbitrage” opportunity whereby the issuer
borrows at a lower rate in the fixed income market than what can be earned by
investing bond proceeds at a higher rate in the pension fund (a balanced portfolio),
including a variety of investment vehicles, predominantly equity investments
•Interest is not exempt from federal income tax due to arbitrage structure
•POB debt service payments would replace the refunded UAL payments
•Does not factor in City’s need to continue making 100% of its normal cost payments and
remaining UAL payments not funded with POBs
•California’s State Constitution does not specifically authorize POBs
•Legal foundation to issue is based on statute to refinance existing debt
•Validation action is needed to officially confirm the existence of a pension liability with the local
County Superior Court to obtain authorization to issue POBs
•Process takes approximately 3 months
14
What are Pension Obligation Bonds (“POB”)?
•POBs fall under an exception to the constitutional debt limit because of a public
agency’s obligation to fund its pension system payments.
•Bond counsel requires that POB documents are “validated” in Superior Court.
•Validation does not obligate the City to issue bonds, nor even to have agreed on a
specific plan of finance.
•First step in the validation process is the preparation of bond documents. The
documents can be prepared with maximum flexibility regarding bond structure and
terms to position the City to move quickly if it decides to issue POBs at a future
date.
•Validation action generally requires approximately 90 days from the date of filing,
and an additional 30-day appeal period.
15
Court Validation Process
16
Potential Benefits of POBs
Potential Benefits of POBs
Tool for fiscal sustainability
Budgetary savings
Interest rate savings from arbitrage
Market timing
Time value of money
Maturity modification
Reserve/service levels preservation
17
Potential Risks of POBs
Potential Risks of POBs
Converts obligation from "variable" to "fixed"
Future UAL can still change
Investment risk (arbitrage risk)
Low pension fund returns
"Too much of a good thing"
Market timing risks
Increased bonded debt and credit risk
Judicial validation process
Political process
18
Objectives of a POB Issuance
Increase financial sustainability
Achieve savings
Increase funded ratio with CalPERS
Objectives of a POB Issuance
•If the City issues POBs, it has many options it can choose from,
depending on its unique situation
•Key considerations include, using savings to further reduce CalPERS UAL
•Set aside some or all of the savings in a separate trust
•Make an additional CalPERS contribution each year in the amount of some or all of
the POB savings
•Use savings to stablize CalPERS normal costs
•Use savings for other City budget priorities
•Some combination of these strategies
19
What to do with POB Savings
•Arcadia
•Auburn
•Azusa
•Baldwin Park
•Carson
•Chowchilla
•Chula Vista
•Coachella
•Corte Madera
•Covina
•Downey
•El Cajon
•El Monte
•El Segundo
•Gardena
•Glendora
•Grass Valley
•Hawthorne
•Huntington Beach
•Inglewood
•Larkspur
•Manhattan Beach
•Marysville
•Montebello
•Monterey Park
•Ontario
•Orange
•Pasadena
•Placentia*
•Pomona
•Redondo Beach*
•Ridgecrest
•Riverside
•Torrance*
•West Covina*
•Willows
20* Structured as a Lease Revenue Bond.
Approximately 36 Cities have issued POBs since 2019
Recent POBs by other CA Cities
SECTION III
PENSION OBLIGATION BONDS FINANCIAL ANALYSIS
•Sell POBs to finance a portion of UAL
•Hypothetical scenarios to target 85% and 100% funded ratios
•CalPERS allows ability to payoff individual bases
•Bases selection determined by individual UAL balance amount and amortization
period combined with the goal of shortening the overall average life, POB
interest expense, and risk profile
•Shorter amortization periods will have a lower POB interest expense, but the shorter
time period decreases the chance of realized savings
•Longer amortization periods will have a higher POB interest expense, but the longer
time period increases the chance of realized savings
22
POB Financial Analysis: UAL Potential Funding Scenarios
POB Assumptions
•Current Taxable Interest Rates
•S&P “AA” category underlying rating
•Optionally callable in 10 years
•No Reserve Fund
•No Extension of Final Maturity
Annual Payment Scenarios
•Proportional
•Level
•Combination
•85% Funded Ratio and
100% Funded Ratio
23
POB Financial Analysis: Summary of Assumptions
Group Plan
Total
Accrued
Liability
UAL
Balance
Estimated
Additional
2020 UAL
Balance
Estimated
Total UAL
Balance
Before POBs
Funded
Ratios
After POBs
Funded
Ratios
Miscellaneous $122,086,611 $38,098,445 $2,362,495 $40,460,940 66.9%85%/100%
Safety $66,035,742 $19,090,825 $1,328,903 $20,419,728 69.1%85%/100%
Total $188,122,353 $57,189,270 $3,691,398 $60,880,668 67.6%85%/100%
A B C D =(A-D)/A
•The UAL of the Miscellaneous and Safety Plans are compromised of individual
amortization bases
•Amortization bases can vary by term length, annual payments, and as a credit or a liability
•CalPERS annually adjusts UAL and any changes in actual vs expected results in new bases
•Bases that are negative are treated as a credit to the City’s required contributions
•Miscellaneous and Safety have 74 Amortization Bases
•Miscellaneous Plans: 23
•Safety Plans: 51
24
POB Financial Analysis: UAL Amortization Bases
-$2
-$1
$0
$1
$2
$3
$4
$5
MillionsCity of Poway Miscellaneous Plan
UAL Payments by Amortization Bases
-$1
-$1
$0
$1
$1
$2
$2
$3
$3
MillionsCity of Poway Safety Plans
UAL Payments by Amortization Bases
•CalPERs Rates:
•Current Actuarial Earnings Rate Assumed at: 7%
•Historical Rate of Return over the past 30 years at: 8%
•30 Year Treasury rate as of July 20, 2021 is 1.88%
•POB All-In True Interest Cost (“TIC”) assumed at 3.37% to 3.90%
•POBs are sold at a spread to treasuries
25
POB Financial Analysis: Investment Earnings Key
Historical CalPERS Rate of Return
•POB Proportional Annual Debt Service
•Years 1 -24
26
POB Financial Analysis: 85% Funded Scenario,Proportional Savings Profile 1
1 Estimated. Actual savings numbers will depend on the final POB interest rates achieved and the
CalPERS actual investment performance over the life of the POBs to final maturity. The CalPERS
performance rate will fluctuate, and the City has no control over CalPERS’ investment performance.
27
POB Financial Analysis: 85% Funded Scenario,POB Savings Summary 1
85% Funded Scenario Metrics Proportional Structure
Bonds
Bond Issuance Amount $33,150,000
UAL Payoff $32,681,167
CalPERS Funded Ratio 85%
Term
Final Maturity 2045 (24 Years)
Average Life 13 Years
Debt Service
Maximum Annual Debt Service $2,418,460
Average Annual Debt Service $2,065,750
Potential Savings
All-in True Interest Cost 3.85%
Gross Savings $19,480,087
Present Value Savings2 $13,221,481
Average Annual Savings $799,594
1 Estimated. Actual savings numbers will depend on the final POB interest rates achieved and the CalPERS actual investment performance over the life of the POBs to final maturity. The CalPERS performance rate will fluctuate, and the City has no control over CalPERS’ investment performance.
2Savings represented in today's dollars.
•POB Proportional Annual Debt Service
•Years 1 -24
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POB Financial Analysis: 100% Funded Scenario,Proportional Savings Profile 1
1 Estimated. Actual savings numbers will depend on the final POB interest rates achieved and the
CalPERS actual investment performance over the life of the POBs to final maturity. The CalPERS
performance rate will fluctuate, and the City has no control over CalPERS’ investment performance.
29
POB Financial Analysis: 100% Funded Scenario,POB Savings Summary 1
100% Funded Scenario Metrics Proportional Structure
Bonds
Bond Issuance Amount $61,490,000
UAL Payoff $60,880,668
CalPERS Funded Ratio 100%
Term
Final Maturity 2045 (24 Years)
Average Life 11 Years
Debt Service
Maximum Annual Debt Service $4,909,029
Average Annual Debt Service $3,701,100
Potential Savings
All-in True Interest Cost 3.73%
Gross Savings $25,567,228
Present Value Savings2 $17,929,886
Average Annual Savings $1,041,169
1 Estimated. Actual savings numbers will depend on the final POB interest rates achieved and the CalPERS actual investment performance over the life of the POBs to final maturity. The CalPERS performance rate will fluctuate, and the City has no control over CalPERS’ investment performance.
2Savings represented in today's dollars.
SECTION IV
PENSION OBLIGATION BONDS RISK ANALYSIS
•To evaluate a potential POB, Bartel Associates measured the projected
change in the City’s future cash flows with and without a POB
•“Debt Service” –The City will pay off POBs over time on a fixed schedule
•POB funds will be paid directly to CalPERS
•City’s CalPERS unfunded liability will be reduced
•City’s future required contributions to CalPERS will (usually) be reduced.
•Future required CalPERS contributions depend on actual future investment return
•All calculations based on present value now, to account for time value of money
31
POB Costs and Savings
•Actual calculation of savings will depend on future years’ CalPERS
investment return
•It will not be 7% every year, and usually not close to 7%.
•Bartel Associates ran 1,000 simulations modeling possible scenarios
•In most scenarios, the City’s cash flow with POB will be lower
•CalPERS charges 7% interest on UAL; Debt service will be less than 7%
•In some scenarios the City’s cash flow with POB will be higher, if:
•CalPERS investment return is very bad
•CalPERS investment return is very good
32
POB Costs and Savings (cont.’d )
•Bartel Associates calculated how likely the City’s cash flow is to be
reduced
•How much are the savings likely to be?
•If cash flows increase, how much is the additional cost likely to be?
•Bartel Associates repeated this modeling for different POB amounts
designed to pay off different percentages of the unfunded liability
•Typically, the success rate is different for each scenario
33
POB Costs and Savings (cont.’d )
•Bartel Associates’ calculations showed, for different POB amounts:
•How likely is it that future cash flows will be reduced compared to no POBs being
issued
•What the savings are likely to be
•What the expected future CalPERS contributions/cash flows are likely to be
•The modeling gave the City information needed to select a POB
amount, considering:
•What level of risk the City is comfortable with
•What level of reduction in future CalPERS required contributions (if any) is
desired
34
Selecting Size of POB
Risk Analysis
35
Risk Analysis (cont.'d)
•Capital Market Assumptions for investments in CalPERS PERF:
•Based on study of investment consultant and investment bank 2017
short and long-term capital market assumptions adjusted for long-term
trends in investment returns
•Inflation –2.5%
Asset Class
PERF
Policy
Target
Geometric
Real
Average
Return
Standard
Deviation
Geometric
Nominal
Average
Return
Public Equity 50%4.82%17.84%7.44%
Fixed Income 28%1.47%4.24%4.01%
Real Assets 13%4.81%12.55%7.43%
Private Equity 8%6.19%25.50%8.84%
Liquidity 1%0.06%0.97%2.56%
100%
36
Risk Analysis: 7% Scenario
37
POB Costs and Savings
38
-100
+150
+300
+500
+15-200
POB Costs and Savings (cont.’d )
39
-100 +150 +300 +500+15-200
POB Costs and Savings (cont.’d )
40
+300
-200
+500
-100
+15
+150
Risk Analysis: 7% Scenario (cont.'d)
41
Present Value of Contributions without POB less with POB
Combined Miscellaneous & Safety Plans –85% Funding | 7% Discount Rate
Present Value of Contributions without POB less with POB
Combined Miscellaneous & Safety Plans –100% Funding | 7% Discount Rate
Risk Analysis: 6.5% Scenario
42
Risk Analysis: 6.5% Scenario (cont.'d)
43
Present Value of Contributions without POB less with POB
Combined Miscellaneous & Safety Plans –85% Funding | 6.5% Discount Rate
Present Value of Contributions without POB less with POB
Combined Miscellaneous & Safety Plans –100% Funding | 6.5% Discount Rate
Risk Analysis Summary: 7% Scenario
44
Plan
Likelihood
of Success
Average 30-Year Present Value Impact
Average of
Successful
Trials
Average of
Unsuccessful
Trials
Overall
Average
Miscellaneous 72%$8,000,000 $ (3,000,000)$5,000,000
Safety 69%4,000,000 (2,000,000)2,000,000
Combined 71%12,000,000 (5,000,000)7,000,000
Plan
30-Year Present Value Impact
25th Percentile 50th Percentile 75th Percentile
Miscellaneous $(589,790)$3,638,314 $8,326,866
Safety (484,927)1,347,002 3,799,537
Total (1,074,717)4,985,316 12,126,403
85% Funding | 7.0% Discount Rate
Plan
Likelihood
of Success
Average 30-Year Present Value Impact
Average of
Successful
Trials
Average of
Unsuccessful
Trials
Overall
Average
Miscellaneous 73%$15,000,000 $ (6,000,000)$10,000,000
Safety 69%8,000,000 (4,000,000)5,000,000
Combined 71%23,000,000 (10,000,000)14,000,000
Plan
30-Year Present Value Impact
25th Percentile 50th Percentile 75th Percentile
Miscellaneous $ (651,581)$6,330,462 $15,001,123
Safety (1,049,354)2,584,235 7,586,489
Total (1,700,934)8,914,697 22,587,612
100% Funding | 7.0% Discount Rate
Risk Analysis Summary: 6.5% Scenario
45
Plan
Likelihood
of Success
Average 30-Year Present Value Impact
Average of
Successful
Trials
Average of
Unsuccessful
Trials
Overall
Average
Miscellaneous 77%$6,000,000 $ (3,000,000)$4,000,000
Safety 73%3,000,000 (1,000,000)2,000,000
Combined 75%9,000,000 (4,000,000)6,000,000
Plan
30-Year Present Value Impact
25th Percentile 50th Percentile 75th Percentile
Miscellaneous $153,140 $3,266,563 $6,832,053
Safety (129,856)1,320,621 3,078,405
Total 23,284 4,587,184 9,910,458
85% Funding | 6.5% Discount Rate
Plan
Likelihood
of Success
Average 30-Year Present Value Impact
Average of
Successful
Trials
Average of
Unsuccessful
Trials
Overall
Average
Miscellaneous 77%$11,000,000 $ (5,000,000)$8,000,000
Safety 74%6,000,000 (3,000,000)4,000,000
Combined 75%17,000,000 (7,000,000)11,000,000
Plan
30-Year Present Value Impact
25th Percentile 50th Percentile 75th Percentile
Miscellaneous $392,581 $5,881,107 $12,408,928
Safety (238,615)2,631,185 6,211,509
Total 153,966 8,512,292 18,620,437
100% Funding | 6.5% Discount Rate
Risk Analysis Summary
46
SECTION V
JUDICIAL VALIDATION PROCESS
If City Council adopts the recommendation authorizing judicial validation proceedings, the expected next steps in the judicial validation process include:
1.Filing the Validation Complaint (within a week of City Council approval)
2. Seeking permission from the San Diego Superior Court (“Court”) to publish the summons so the Court can gain subject matter jurisdiction over the validation (usually 7-10 days following filing of the Validation Complaint)
3. Publish the summons (once a week for three consecutive weeks, totaling 21 days)
4. Response period to file an answer (10 days following completion of publication)
5. Clerk of the Court’s Entry of Default Judgment if no answer to Complaint is filed
6. File “points and authorities” seeking entry of default judgment
7. Hearing on judgment and Judge’s execution of judgment
8. Begin 30-day appeal period
9. After 30-day appeal period, return to Council for adoption of a resolution approving Preliminary Official Statement and confirm size and structure of POBs
10. Issue POBs
Superior Courts have been impacted significantly by COVID-19 and the Judicial Validation could take 4-7 months depending on Court impacts
48
Judicial Validation Process
SECTION VI
RECOMMENDATIONS
•Receive and file the POB report and presentation
•Authorize staff to initiate a Court Validation process at a cost of
approximately $25,000
•Direct staff to proceed with the additional evaluation of potential
Pension Obligation Bonds for City Council consideration once the
Validation Process is complete
50
Recommendations
51
Assemble Key
Financing Team
Members
•Financial Advisor
•Actuarial Consultant
•Bond Counsel
•Bond Underwriter
Engage Policy Makers
and Stakeholders with
Plan of Finance
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
Affirm the City’s Pension Structuring Goals and Finalize
Pro Forma Model
90 -Day Validation Process 30 -Day
Protest
Period
Sell POBs
POB Next Recommended Steps
Aug. 3rd
Council Meeting
Oct. 18th
Signed Judgment
Nov. 16th
Council Meeting
to consider
POB Issuance
Nov. | Dec.
Potential Issuance
QUESTIONS?
52
•Issue less than 100% of the current estimate of the UAL
•Minimizes the lump sum amount invested at one time and avoids the budgetary pressures that
could be caused from a potentially over-funded system
•Consider issuing multiple POBs over multiple years, assuming favorable market
conditions
•Represents a form of “dollar cost averaging” to help mitigate market timing risks
•Timing issuances at key Market Cycles (during low equity market cycles and low interest rate
environment)
•Mitigation of market/credit risks
•Ensure adequate spread between borrowing rate and assumed earnings rate
•Avoid riskier bond structures, such as variable rate debt and interest rate swaps
•Be Prepared to Issue POBs, when time is right
•Prepare financing documents, establish minimum savings target and wait for favorable market
conditions
53
Strategies Available to Mitigate POB Risks
•City Council Study Session
•Stakeholder Outreach
•Expect opposition
54
Other Considerations for POBs
•Investment risk (Arbitrage risk)is the principal risk –if the pension plans earn less over the life of
the bonds than the interest paid on the POBs, then the POB program becomes a net cost to the City
•Overfunding Risk –Too high of a pension funding level may cause labor groups to ask for increased
benefits from the new annual cash flow savings
•Flexibility/Option Risk -Flexible UAL liability is replaced with comparatively inflexible municipal
bonds
•Recent POB issuances have sold with a 10-year optional call
•Credit Risk –S&P Global Ratings views POBs in environments of fiscal distress or as a mechanism
for short-term budget relief as a negative credit factor
•Political Risk
•An issuer may get a reputation for being too risky by gambling on future market returns;
negative reputation due to well publicized bankruptcies (Detroit, Stockton & San Bernardino)
•Government Finance Officers Association’s (GFOA) website states that it “recommends that
state and local governments do not issue POBs”
55
Potential Risks Associated with POBs
Recommends state and local government do not issue POBs for following reasons:
•Invested POB proceeds may fail to earn more than interest rate owed over bond term thereby
increasing overall liabilities, rather than decreasing overall costs
•Complex POB instruments carry considerable risk especially if derivative products are utilized
•Issuing taxable debt increases jurisdiction’s bonded debt burden potentially using debt capacity
that could be used for other municipal purposes
•If POBs are structured with deferred principal amortization or repayment longer than actuarial
amortization period overall borrowing costs will increase
•Rating agencies may not view as credit positive, especially if not part of more comprehensive plan
to address pension funding shortfalls
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Government Finance Officers Association (GFOA)Pension Obligation Bond Advisory