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<br />We understand that the City has been working with its advisor in identifying all the 'tools in the toolbox' to combat rising
<br />pension costs, including POBs. POBs are an important financial decision and can be a valuable tool to help stabilize costs;
<br />however, they should be considered as just one component of a more comprehensive pension managernent plan. Our
<br />recommendations below tit within 4 specific objectives designed to address the immediate concerns of rising costs while
<br />preparing the City for long-term fiscal sustainability.
<br />Obiective
<br />1. Achieve Long Term
<br />Fiscal Sustainability
<br />2. Mitigate Market Timing Risks
<br />3. Design Optimal Structure
<br />(Present -Forward Thinking)
<br />4. Ongoing Liability Management
<br />1. le F,Ia:,i 5ua,:unifl ta.v LailVt:y
<br />Recommendation
<br />Refinance $385 million of UAL with 2021 POBs
<br />—Target Short/Long-Term Safety Bases
<br />Given Risks, Target 85% Funded Ratio with 2021 POBs
<br />(Funding a Higher A May Limit Available Tools in the Future)
<br />—'Modified Level' Repayment Schedule
<br />—Modest 'Upfront' Savings to Bolster Reserves
<br />—Shorten UAL Payments by 3 Years to 2044
<br />—Evaluate Use of Insurance from BAM
<br />—Earmark Surplus Revenues for Contributions
<br />—Dedicate Deferred UAL/POB Savings to Pay Down Liabilities
<br />—future POBs Dictated by Pension Policy
<br />Refinance 5385 million of Safety Plan Bases; Balanced Approach (Short and Long -Term) to Targeting Bases. It is our
<br />understanding that the City is considering refinancing anywhere from 50% ($372 million) to 90% ($671 million) of its
<br />unfunded liabilities. Over the past few years, most POS issuers have opted to refinance 100% and while an attractive
<br />prospect given the historic low interest rate environment, market timing vis-a-vis CAPERS investment performance merits
<br />careful consideration and analysis, as we further explain in the second step of our 4-step pension management plan
<br />('Mitigate Market Timing Risks'). In short, a dollar cost average strategy to issuing and investing can help address these
<br />concerns. We believe the most prudent approach is for the City to target a payoff amount of $38SM, or roughly half of
<br />the City's outstanding pension liabilities, which would result in a funded ratio of 85%. As cxplomcd below, after a few
<br />years, the City could evaluate the need to refinance the remaining half. Please see the chart below for estimated savings
<br />for each of the considered funding scenarios.
<br />Assuming a partial refinancing, issuers have the discretion to apply POB proceeds either on a pro-rata basis or toward
<br />specific amortization bases. Given our objective of long-term fiscal sustainability, we recommend targeting both short and
<br />long-term bases. This approach is designed to achieve long-term savings while providing near -term flexibilityto proactively
<br />manage future pension costs. Addressing solely long-term bases will limit near -term flexibility and targeting only short-
<br />term bases would not address long-term fiscal sustainability.
<br />Since our primary concern is the General Fund, and because the
<br />scenario
<br />Recommended
<br />Alternarive
<br />General Fund is financially responsible for 100% of the Safety Plan
<br />Funded Ratio
<br />85%
<br />97%1
<br />and only 72% of the Miscellaneous Plan, we focus our analysis on
<br />Par Amount
<br />$387,190
<br />$638,790
<br />the Safety Plan. As illustrated on the following page, we have
<br />TIC
<br />2.76%
<br />2.75%
<br />carefully selected short and long-term Safety Plan bases that
<br />UAL Savings
<br />$3.76,311
<br />5291,242
<br />5 NPV
<br />$139,152
<br />5240,479
<br />aggregate to roughly $385M, which if prepaid, would bring the City's
<br />% NPV
<br />361/
<br />381Y
<br />UAL funded ratio to SS%.
<br />Mitigates
<br />Higher
<br />Primary Benefit
<br />Timing Risks
<br />PV Savings
<br />Both scenarios incorporates
<br />our stricture recommendations
<br />(Step
<br />City Council 23 —
<br />21 esign p .nu
<br />rue ure an M$wl&,�rf
<br />Cily raf Santa Ana I Proposal to Provide Underwriting Services Page 9
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