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STIFEL
<br />payment. We recommend shortening the POB amortization by 3 years to match the last significant UAL payment in FY
<br />2043. While shortening would increase annual payments through 2039 by " $200,000, the City would save roughly $4
<br />million in overall interest costs over the life of the POBs. We do not recommend extending the maturity beyond 2047 as
<br />S&P could view this as a corrective measure to address an imbalance (potential credit challenge).
<br />Evaluate Use of Insurance (D). In most circumstances, bond insurance (rated 'AA') does riot 'pencil' on credits rated 'AA'
<br />or higher - and as detailed in the following question, we expect the 2021 POBs will achieve a 'AA' S&P rating. However, in
<br />recent months, some investors have been willing to pay a much higher price (resulting in a lower yield) for insured
<br />maturities. In the case of the recent Chula Vista and Orange PCB pricings (both 'AA' rated), Stifel identified demand for
<br />insured maturities, which resulted in a net benefit of roughly 5 basis points. While we understand that the City's POBS
<br />won't likely come to market for some time, we recommend evaluating the use of insurance closer to the time of sale.
<br />+: Modified Level Payments:
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<br />General Fund/Pension Reserves; Minimal
<br />Impact on NPV Savings
<br />a:. Shorten Final Maturity: n o
<br />Final POB Maturity in 2044 (Last Prepaid ...o
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<br />0 Evaluate Use of Insurance: Expected
<br />Net Benefit of "5 Basis Points on Terms
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<br />Additional Discretionary Payments and Future POB Issues. A critical componentto any successful comprehensive pension
<br />plan will be the proactive management of future liabilities. The City recently adopted the Unfunded Employee Pension
<br />Liability Cost Reduction Policy, which provides, among other things, guidelines for additional discretionary payments (e.g.
<br />surplus Measure X revenues, future TAB savings, future Water Bond savings for Miscellaneous Plan base prepayment,
<br />etc.) and the issuance of additional POBs. Strict adherence to the policy is important to ensure long-term fiscal health.
<br />A{lvdlila,DM,;I 1r h;,tA,• Iiy soar! (.qon ;rof rK iM1n.. u;c
<br />Annual CalPERS Prepayment and First POB Payment. We expect the City to continue its practice of prepaying its annual
<br />UAL liability by July 31 in order to realize a discount. Given the timeline of validation proceedings, the City could be in a
<br />position to price its POBs by late September or early October. To avoid 'double paying' in rY 2022, the City should consider
<br />delaying its first POB payment until FY 2023. We have assumed a long first payment date of December 1, 2022 as part of
<br />our 'Optimal Structure' detailed above.
<br />Select Convenient, Financially Viable POB Payment Dates. POB issuers Lypically select payrnenL dales Lhal rnirnic other
<br />General Fund debt, align with the fiscal year, or match large inflows of general fund tax revenue (generally
<br />November/December or May/June given large inflows of property tax revenues). We have assumed June (principal,
<br />interest) and December (interest) payment dates in our proposed structure.
<br />'Wrap' Around Other General Fund Supported Debt. The General Fund currently supports multiple debt issuances,
<br />including the Police Station bonds (mature in FY 2024) and several private placements (varying maturities from FY 2024
<br />to FY 2028). To minimize the impact to the General Fund over the next few years, the City could 'wrap' the 2021 POB
<br />payments around the other outstanding obligations. Of course, doing so would require deferring a portion of principal,
<br />which would result in a sliFhtly more expensive structure.
<br />Lease Revenue Bonds vs. POBs. Over the past year, several municipalities have structured their pension financings as
<br />lease reven challenges.
<br />However, LA9t"QMrWilateral (equal to the par amount of th@24nar?t1ir-4) and are rated one nckM42Wihan POBs by
<br />City of Santa Ana I Proposal to Provide Underwriting Services Page 11
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