HomeMy WebLinkAboutPresentation - #21Pension Refinancing Options
Tonight’s GoalShould we proceed with pension refinancing?If yes:•Direct staff to propose a bond counsel contract•Adopt the proposed Unfunded Employee Pension Liability Cost Reduction PolicyTonight’s action will not obligate the City to issue refinancing bonds
Why Refinance Pension Debt?City’s pension cost grows faster than City revenue•Estimated to grow 40% over the next 7 years•City can refinance pension debt at 3‐4%, vs. the 7% charged by CalPERS•Refinancing can help create more predictable level debt paymentsIFCalPERS outperforms assumptions consistently over the next 20+ years, the City could pay more with refinancing
Our ProcessAnalyze Pension Liability•Review Actuarial Reports, CAFR, & Model Bases•Develop Pension ModelEvaluate Funding Strategies•Budget & Financing Approaches•Base Selection: Cash Flows vs. SavingsPension Refinancing Analysis•Recession Scenarios •Market Timing Risk: Stress Test + Monte Carlo SimulationStakeholder Education & Communication•City Council Presentation•Adopt Pension Funding PolicyDevelop Specific Plan + Implementation•Pension Management Plan
Comprehensive ApproachProposedPension Liability Cost Reduction Policy addresses a comprehensive approachPension ModelFunding StrategiesDebt Service & ReservesPolicy ConstraintsForecasting & Revenue CliffsBudget & CIP Recession & Contingency PlanningPension Management Plan
Pension DebtOverview
Unfunded Accrued Liability(UAL = Pension Debt)MISCELLANEOUSSAFETY COMBINEDAccrued Liability (AL) $ 916,997,454 $1,162,151,002 $ 2,079,148,456 Market Value Assets (MVA)623,923,788 774,128,328 1,398,052,116 UAL = AL‐MVA 293,073,666$ 388,022,674$ 681,096,340$ 69%67%67%MISCELLANEOUSSAFETY COMBINEDAccrued Liability (AL) $ 948,084,339 $1,191,809,847 $ 2,139,894,186 Market Value Assets (MVA)645,902,345 787,086,636 1,432,988,981 UAL = AL‐MVA 302,181,994$ 404,723,211$ 706,905,205$ 69%66%67%Unfunded Accrued Liability (UAL) June 30, 2018Unfunded Accrued Liability (UAL) June 30, 2019
Amortization Bases Layers of Liability/(Asset) based on actual annual experienceYear Reason Ramp Term June 30, 2019 Year Reason Ramp Term June 30, 20191 2006 Fresh Start NO 17 (1,541,128) 1 2005 Fresh Start NO 16 (2,937,840)$ 2 2007 Benefit Change NO 7 32,701,223 2 2006 Benefit Change NO 6 2,091,015 3 2007 Benefit Change NO 8 148,699 3 2009 Assumption Change NO 10 16,377,191 4 2009 Assumption Change NO 10 31,696,131 4 2009 Special (gain)/loss NO 20 32,208,187 5 2009 Special (Gain)/Loss NO 20 29,579,873 5 2010 Special (gain)/loss NO 21 (11,831,291) 6 2010 Special (Gain)/Loss NO 21 10,838,947 6 2011 Assumption Change NO 12 17,057,934 7 2011 Assumption Change NO 12 13,733,629 7 2011 Special (gain)/loss NO 22 (4,372,256) 8 2011 Special (Gain)/Loss NO 22 (7,376,144) 8 2012 Payment (gain)/loss NO 23 8,208,025 9 2012 Payment (Gain)/Loss NO 23 5,607,564 9 2012 (gain)/loss NO 23 74,156,553 10 2012 (Gain)/Loss NO 23 (263,221) 10 2013 (gain)/loss 100% 24 140,600,831 11 2013 (Gain)/Loss 100% 24 100,300,176 11 2014 Life Exp. + 2.0/2.5 yrs. 100% 15 55,792,670 12 2014 Assumption Change 100% 15 46,677,512 12 2014 (gain)/loss 100% 25 (82,908,692) 13 2014 (Gain)/Loss 100% 25 (62,621,643) 13 2015 (gain)/loss 100% 26 57,135,136 14 2015 (Gain)/Loss 100% 26 31,205,036 14 2016 7.50% to 7.375% 80% 17 19,004,711 15 2016 Assumption Change 80% 17 15,553,637 15 2016 (gain)/loss 80% 27 46,990,724 16 2016 (Gain)/Loss 80% 27 35,371,912 16 2017 7.375% to 7.25% 60% 18 21,123,048 17 2017 Assumption Change 60% 18 12,655,874 17 2017 (gain)/loss 60% 28 (29,671,462) 18 2017 (Gain)/Loss 60% 28 (19,195,295) 18 2018 Method Change 40% 19 4,647,516 19 2018 Method Change 40% 19 5,584,776 19 2018 7.25% to 7.00% 40%1933,928,210 20 2018 Assumption Change 40% 19 26,831,729 20 2018(gain)/loss40%29(1,304,860) 21 2018 (gain)/loss 40% 29 (11,435,367) 21 2019 Non‐Asset (Gain)/Loss No 20 4,528,943 22 2019 AL Significant IncreaseNO 20 126,996 222019Investment (Gain)/Loss20%203,898,918 23 2019 Non‐Asset (Gain)/Loss NO 20 2,662,634 Safety Plan404,723,211$ 24 2019 Investment (Gain)/Los20% 20 3,338,444 Misc. Plan 302,181,994$ Combined UAL 706,905,205$ MISCELLANEOUS PLAN SAFETY PLAN
Pension Debt By Plan (at June 30, 2019)$302.2 MillionUAL$645 MillionMarket Value of AssetsJune 30, 201969% Funded Status$404.7 MillionUAL$787 MillionMarket Value of AssetsJune 30, 201966% Funded StatusTotal Liability (Misc. Plan): $948 Million Total Liability (Safety): $1.2 Billion
Pension Debt By Plan (at June 30, 2019)Plan Liability$948,084,339Plan Liability$1,191,809,847
CalPERS Estimate of UAL Payments$56.2M$61.1M$64.2M$67.5M$69.5M$71.4M$72.9M$69.3M$71.1M$73.0M$67.9M$67.0M$61.8M$59.7M$56.4M$50.7M$48.1M$45.1M$42.8M$41.5M$27.3M$25.8M$21.6M$4.6M$1.2M$0.1M$0$10,000,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,000$70,000,000UAL Amortization Payment SchedulesSafetyMisc. ‐
Toolbox Approach to Pension Liability Management
Pension Management Toolbox1. Allocate Pension Debt costs to funds with personnel costs2. Section 115 Trust•Set aside additional money for future CalPERS payments to stabilize costs over time•More control over the investments3. Use of Reserves & One‐Time Monies to make additional discretionary payments•1.0% City Investment Return vs 7.0% CalPERS Discount Rate4. Tax‐Exempt Exchange•Use accumulated cash for capital projects and issue tax‐exempt debt at a lower rate than taxable pension refinancing bonds5. Issue Bonds to Refinance the Debt
Additional Discretionary Payments (ADPs)
Example of ADP Targeting Strategy10‐Year Strategy: •Utilized for short term budget / cash flow relief30‐Year Strategy: •Utilized for maximum interest cost savings$0$20,000$40,000$60,000$80,000$100,000$120,000$140,000$160,000$180,0001 2 3 4 5 6 7 8 9 101112131415161718192021222324252627282930TARGETING STRATEGIES$1 Million UAL: 10‐Year vs. 30‐Year Amortization 10 Year = $1,413,000 Payments 30‐Year = $2,761,000 PaymentsWe select which layers to pay, which can make a big difference in savings
Targeting Strategy ConsiderationsA specific exampleWater Fund pension debt for Water employees is $13.5 million.•If we pay Misc. Base #4 with a 10‐year amortization, we save $11.3 million•If we pay Misc Base #16 with a 27‐year amortization, we save $17.5 million
Recommended ADP for Base #16•Allocated $13.5 Million from the Water Enterprise•Funds 38% of Base #16 UAL •Pro‐Rata reduction in balance & payments •$17.5 Million in Interest Costs Savings •Reduction of $31 Million In Total Annual UAL Payments $0$500,000$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000202220232024202520262027202820292030203120322033203420352036203720382039204020412042204320442045204620472048ADP Base #16 ‐ $35,371,912Original PaymentsPro‐Rata
Bond Trends and Options
Recent Refinancing Activity Issuer Par Value Pricing Date Issuer Par Value Pricing Date1El Cajon 147,210,000$ 1/13/202114North Co Fire 20,305,000 6/11/20202Coachella 17,590,000 12/8/202015Riverside 432,165,000 6/11/20203Ukiah 49,875,000 11/30/202016Carson 108,020,000 6/10/20204Gardena 101,490,000 11/24/202017Montebello 153,425,000 6/10/20205Arcadia 90,000,000 10/27/202018Fort Ord 30,405,000 6/10/20206Placentia* 52,950,000 10/26/202019El Monte 118,725,000 6/9/20207Torrance* 349,515,000 10/12/202020Inglewood 101,620,000 6/2/20208Azusa 70,075,000 9/30/202021Ontario 236,585,000 5/21/20209Pomona 219,890,000 8/20/202022Larkspur 18,295,000 5/14/202010West Covina* 204,095,000 7/30/202023Riverside Co 719,995,000 5/6/202011San Bernardino 5,945,000 7/23/202024Pasadena 131,805,000 2/26/202012San Bernardino 13,905,000 7/23/202025Orange Co 463,895,000 1/14/202013El Monte 21,000,000 6/30/202026Orange USD 33,595,000 12/19/2019* Lease Revenue BondTOTAL 3,912,375,000$
Upcoming Refinancing ActivityIssuer Par Value Pricing Date1Downey 200,000,000$ 2/11/20212San Fernando 45,000,000 2/15/20213Monterey Park 220,000,000 3/1/20214Orange 290,000,000 3/1/20215Chula Vista 300,000,000 Q1 20216Huntington Beach 350,000,000 Q1 20217El Segundo 150,000,000 4/1/20218Manhattan Beach 92,500,000 5/19/20219Corona 272,000,000 Q2 202110Covina 72,000,000 TBD11Commerce 31,000,000 TBD12Corte Madera 50,000,000 TBD13Whittier 143,000,000 TBDTOTAL 2,215,500,000$
Refinancing Options for Santa Ana1. Issue Bonds for 50% of Pension Liability•$350 Million Bonds with Hybrid – Level Debt Service •25‐Year Final Maturity•Target Longest Safety Bases2. Issue Bonds for 90% of Pension Liability •$642 Million Bonds with Hybrid – Level Debt Service •25‐Year Final Maturity•Misc. Base #14 & #16 remain outstanding
Scenario #1 – 50% Refinancing$0$10,000,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,000$70,000,000$80,000,00020222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044204520462047204850% UAL POB 25 Year (Safety Only)Misc. UAL PaymentsRemaining Safety UALPOB Debt ServiceOriginal UAL PaymentsPar Value 357,790,000$ Deferred UAL Savings 183,002,882$ NPV Savings 144,438,666$ NPV %41%TIC 3.17%
Scenario #2 – 90% Refinancing$0$10,000,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,000$70,000,000$80,000,0002022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 20372038203920402041204220432044204520462047204890% UAL POB Hybrid Level Debt Service POB Debt ServiceMisc. Base #14 & #16Original UAL PaymentsPar Value 641,865,000$ UAL Savings 253,872,795$ NPV Savings 217,109,100$ NPV %34%TIC 3.01%
Refinancing Savings Matrix
Compare Estimated PaymentsTotal Estimated Payments Potential SavingsNo Refinancing $1,298,053,648 $050% Refinancing $1,115,050,766 $183,002,88290% Refinancing $1,044,180,853 $253,872,795Based on CalPERS estimate of future payments and market conditions in December 2020. Final numbers will likely change.Total Estimated Payments = Refinancing Bond Payments + Remaining CalPERS Liability Payments
Investment Return Risk Analysis
CalPERS Investment Return14.5%2.0%16.3%15.3%20.1%19.5%12.5%10.5%‐7.2%‐6.1%3.7%16.6%12.3%11.8%19.1%‐5.1%‐24.0%13.3%21.7%0.1%13.2%18.4%2.4%0.6%11.2%8.6%6.7%4.7%‐25.0%‐20.0%‐15.0%‐10.0%‐5.0%0.0%5.0%10.0%15.0%20.0%25.0%CalPERS Annual Investment Performance CalPERS Annual ReturnCalPERS Avg. Return = 7.79%CalPERS Could Outperform Their Return Assumption (7%) and Reduce UAL; OrCalPERS Could Underperform Their Return Assumption and Increase UALPension Refinancing can help avoid an increase of the City’s pension debt when CalPERS investment returns are less than the 7% assumption.
Monte Carlo Simulation•Monte Carlo Simulation compares ending portfolio balance: Pension Bonds vs CALPERS UAL payments over 25 years.•Calculates results based on running 10,000 different (random) scenarios•CalPERS Return over 25‐year period•Expected Return = 7.0% (Standard Deviation = 10.6%)Probability of SuccessResults change with each iteration and Bond Structure•87% with 90% Refinancing•84% with 50% Refinancing$0$500$1,000$1,500$2,000$2,500$3,000$3,50012345678910111213141516171819202122232425Monte Carlo SimulationEnding Portfolio Balance
Policy Consideration
Proposed Policy DocumentAddresses two basic strategies of contributing more to pay down faster, and/or debt refinancing at a lower rate•Apply ADP’s to layers with long amortization, maximizing overall savings•Consider one‐time money for ADP’s or set‐aside in 115 Trust for greater control over investments•Consider tax exempt exchanges only if at least $20 million of cash is available•Consider debt refinancing if:•Interest rate is at least 30% less than CalPERS rate•No more than 90% of debt is refinanced•Life of debt is not extended•Risk analysis is performed
31Key Decision Points – City CouncilTonight’s Presentation•Pension Refinancing Strategies•Decision to proceed and adopt PolicyProceed with Validation•Approve Bond Counsel Contract •Adopt Resolution to Proceed Validation ProcessConcurrent with Validation Process•Approve Underwriter •Develop Specific Dollar Plan Final City Council Decisions •Amount/Structure of POBs •Approve Preliminary Official Statement and other bond documents Validation 4‐6 Month Timeline
Questions?
Tax‐Exempt ExchangeTax‐Exempt Bonds1. Identify “Pay‐Go” Capital Project(s) 2. Issue Tax‐Exempt Bonds to financeBudget Exchange3. Reallocate cash to Pension Debt4. Pre‐Pay Bases with similar term7.0% CalPERS liability effectively refinanced using tax‐exempt rates ~2.0%This strategy is limited to the cash we have on hand, and the proposed policy recommends a tax‐exempt exchange for $20 million or more