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Item # 11
City of Santa Ana
20 Civic Center Plaza, Santa Ana, CA 92701
Staff Report
February 15, 2022
TOPIC: Pension Debt Cost Savings Update
AGENDA TITLE:
Pension Debt Cost Savings Update
RECOMMENDED ACTION
Receive and file and the pension debt cost savings update.
EXECUTIVE SUMMARY
The City has completed the project to refinance its debt to the employee pension plan.
The result is significant long-term savings, immediate short-term savings, and a long-term
strategy for predictable budgeting and cost reduction in 2029 and 2039 to coincide with
Measure X revenue decreases.
DISCUSSION
Project History
On February 2, 2021, the City Council adopted the Unfunded Employee Pension Liability
Cost Reduction Policy and directed staff to proceed with pension debt refinancing.
On September 21, 2021, staff reported the pension debt refinancing was complete with
$425.8 million of bonds sold and the proceeds sent to the California Public Employee
Retirement System (CalPERS), resulting in estimated savings with a net present value of
$138 million. At that time, the remaining $40.6 million of the FY 2021-22 budget for
pension debt payments was set aside in the Section 115 Trust for future additional pay-
down of the pension debt. The next step in the pension cost-savings strategy was to wait
until the CalPERS Board set its new discount rate (the interest-rate charged on the City’s
pension debt), and then analyze the best way to apply the remaining $40.6 million to
maximize long-term savings in accordance with the Policy noted above.
On November 15, 2021, the CalPERS Board set the discount rate to 6.8 percent.
On December 20, 2021, the City sent the remaining $40.6 million to CalPERS and
acquired a 20-year fresh start amortization on the remaining debt. The original CalPERS
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February 15, 2022
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amortization estimated pay-off of the City’s pension debt in 2046. The new estimated
pay-off year is 2042.
As a reminder, the schedule of debt payments to CalPERS are estimates. The pension
debt with CalPERS will increase when plan assumptions are not met (e.g. investment
return, retiree mortality, employee wage increases) and will decrease when actual results
are better than plan assumptions. When and if the pension debt increases, CalPERS will
amortize each new base over 20 years, thereby extending pay-off of the pension debt.
Long-Term Outlook
The following chart summarizes the bond debt service and the estimated remaining
payments to CalPERS. The chart shows future obligations compared to the current year
budget of $54.3 million for pension debt payments.
The FY 2022-23 savings vs. the budget is $9.5 million across all funds. With the proposed
FY 2022-23 budget, staff will recommend funding at the same $54.3 million level, but
deposit the $9.5 million savings into the City’s Section 115 Trust for future cost
stabilization.
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Strategy
Accumulating money in the Section 115 Trust will enable the City to pay for spikes in
future debt service and reduce the budget in 2029 and 2039 to coincide with Measure X
revenue decreases.
The illustrative example below includes the following assumptions.
The budget to fund pension debt predictably increases by 3 percent per year.
The City deposits or withdraws any difference between the stable budget amount
and the fluctuating pension debt payments.
The Section 115 Trust earns 4.2 percent per year, based on the 10-year
performance for the PARS Trust conservative investment strategy at June 30,
2021.
The budget for pension debt decreases by $18 million in 2029 and $36 million in
2039, in conjunction with future Measure X revenue decreases.
In this illustrative example, the City is able to reduce its pension debt budget each time
Measure X revenue decreases and still afford pension debt payments through 2042.
Even if the City’s debt to CalPERS continues to grow with unfavorable plan performance,
this strategy still enables the City to have a predictable budget for pension debt. The City
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may simply not be able to reduce the budget to coincide with future Measure X revenue
decreases.
Staff will continue to provide a pension debt update to City Council during each budget
cycle and make strategic recommendations.
ENVIRONMENTAL IMPACT
There is no environmental impact associated with this action.
FISCAL IMPACT
There is no fiscal impact associated with the recommendation.
Submitted By: Kathryn Downs, Executive Director Finance and Management Services
Approved By: Kristine Ridge, City Manager