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RFP No. 21-025 EXHIBIT B The City funds most of its capital projects with restricted money. Therefore, the restricted fund's allocation of the unfunded pension liability, and thr_ cash available forthe project, limits the use of this strategy. In addition, frequent debt issues can negatively affect the City's credit rating. 4. It shall be the City's policy to consider paying down the unfunded pension liability when there is at least 520 million of cash available for capital projects, and it is feasible and economically prudent to issue tax exempt debt for the projects. Irrevocable Section 115 Trust As an alternative to making an ADP to CalPERS, the City can choose to set aside additional money in a Section 115 Trust. Money placed into the trust is irrevocable, meaning it cannot be withdrawn and used for another expenditure of the City. The City has already established a Section 11S Trust with an initial small deposit. There are two primary benefits associated with a Section 11S Trust. The City has more control over the investment, and the City can use the Trust for rate stabilization. If there are future spikes in pension costs, the City could use money from the Section 115 Trust to help pay some of the required CaIPERS contributions. However, in order to utilize the Trust, additional money must be set aside in advance. 5. It shall be the City's policy to consider adding money to the Section 115 Trust account during each annual budget process. Pension Obligation Bonds The City may consider issuing Pension Obligation Bonds (POBs) to refinance its unfunded pension liability. In a low interest rate environment, issuing POBs can significantly reduce the City's cost. However, there is risk associated with the refinancing. If actual pension plan results consistently exceed CAPERS assumptions over a long-term period, the City may pay more overall. The following illustrates this concept. Scenario: The City refinances its pension obligation at 3.75%; and CAPERS assumes a 7% investment return, yet consistently earns a 9% return over a 30-year period. oo >8i7 `>Tu ";6I) ,aft S)If Year Y("sr Year Yr.0 YUar Yc.n Yr"sr Ycai Y(1.11 Year Yeti Yrar Y(.I[ Year Year I _i ., 1 9 11 1-', P, 17 19 21 11 Z, )i 13 -li,�, Ine ;�enario Baseline is the CalPERS projection jrorn the June 30, 2019 Actuarial Valuation Report. Dollar rrmnunrs are, in rndlinns. For the first 11 years in this scenario, the City would save money; but over the entire 30-year period, the City would pay $444 million more. City Council 23 — 60 5/18/2021 UNFUNDED EMPLOYEE PENSION LIABILITY COST REDUCTION POLICY Page 3