HomeMy WebLinkAboutCC AG PKT 2007-11-05 #H
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November 5, 2007
MEMORANDUM
TO: Honorable Mayor and Members of the City Council
FROM: 'fIw David N. Carmany, City Manager
SUBJECT: Potential issuance of pension obligation bonds
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INTRODUCTION:
The City of Seal Beach has the opportunity to reduce its long term pension contributions
by issuing pension obligation bonds.
The City of Seal Beach for many years has contracted with the California Public
Employees Retirement System for the provision of pension benefits for both safety and
miscellaneous employees.
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As of June 30, 2007, the City's unfunded pension liability had reached $12,600,000.
This unfunded liability is considered a debt to CalPERS which is being paid back over a
12 year period at an interest rate of 7.75%. As of June 30, 2008, the unfunded pension
liability will be $10,847,785, comprised of $8,698,849 (safety police) and $2,148,936
(safety fire). The safety police fund is currently being amortized over an 11 year period.
Simply put, by issuing bonds at a favorable interest rate, say 6%, and placing the
proceeds with CalPERS, thus paying off the unfunded liability, the city could gain the
difference between the CalPERS 7.75% rate and 6% saving approximately $40,000 per
year.
If the City Council decides that issuing pension bonds is in the interest of the City, it may
wish to direct staff to explore this further.
DISCUSSION:
Attached to this report is a presentation prepared by representatives of E.J. De La Rosa
& Company regarding the advantages and potential risk of issuing the pension obligation
bonds.
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Unfunded actuarial accrued liabilities arise when pension system assets are below the
actuarially determined future liabilities of the system. They are typically amortized by
pension systems at an interest cost equal to the assumed earnings rate on the pension
system's assets. The CalPERS rate is 7.75%. When the assumed earnings rate used
by a pension system Is higher than rates available to local governments through the
capital markets, pension bonds become an attractive financing alternative.
Agenda Item H
Pension obligation bonds may be issued on a stand alone basis, or a pooled basis,
whichever is more efficient. Based on conversations with representatives of E.J. De La
Rosa, it is believed that offering bonds on a pooled basis would be more efficient, given
costs of issuance, than on a stand-alone basis using their firm.
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One such pool is offered through the California Statewide Communities Development
Authority ("California Communities"), a joint powers authority co-sponsored by the
League of California Cities and the California State Association of Counties. California
Communities offers a pension obligation bond program to its over 470 member city,
county and special district members to provide an alternative way to finance unfunded
actuarial accrued liabilities with a local agency's pension system.
The Califotnia Communities pension obligation bond program is structured as follows.
Each participating local agency issues underlying pension bonds that are sold to
California Communities to finance all or a portion of its unfunded actuarial accrued
liabilities. The individual underlying local agency obligations are pooled together by
California Communities, and California Communities offers pooled pension obligation
bonds to investors. The interest cost of the pooled pension obligation bonds is equal to
the interest cost on the underlying local agency pension obligation bonds. Each local
agency is responsible for the debt service on its bonds only. No agency is responsible
for any other agency's obligations under the program.
California Communities offers pooled pension obligation bonds periodically depending
primarily on the borrowing interest rates available in the capital markets compared to
pension system amortization rates of interest. Given sufficient interest, a bond may be
issued in early 2008. Since the inception of the pool in 2004, California Communities
has issued pension obligation bonds for 23 local agencies for over $400 million.
Pursuing this opportunity will require close work between the financing team, City Staff,
and City Attorney. Issuing bonds will require document review by the City Attorney and
rendering of certain opinions which are outside the scope of the City Attorney's retainer
agreement. All fees incurred as part of the bond issue will be paid from bond proceeds.
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RECOMMENDATION:
It is recommended that the City Council:
1) Direct staff to pursue a pension obligation bond. Should Council so
direct, staff will return with. a Council resolution approving the bonds
and trust agreement .
2) Authorize $7,500 commitment fee for the California Communities
pension obligation pooled program
Attachment
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