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HomeMy WebLinkAboutCM Pension Obligation BondsAgenda Item No: 13, Meeting Date: March 1. 2010 SAN RAFAEL CITY COUNCIL AGENDA REPORT Department: Management Services Prepared by: Jim Schutz, Assistant City Manager City Manager Approval: SUBJECT: RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN RAFAEL AUTHORIZING THE FILING OF A VALIDATION ACTION REGARDING THE ISSUANCE OF PENSION OBLIGATION BONDS TO REFINANCE THE OUTSTANDING OBLIGATIONS OF THE CITY TO THE MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION RECOMMENDATION: Adopt resolution. BACKGROUND: Regarding pension benefits, City of San Rafael employees and retirees are members of the Marin County Employees' Retirement Association (MCERA). MCERA additionally administers pension benefits for the County of Marin, Marin County Courts, Novato Fire Protection District, and a number of other Marin districts. For the last ten years, the City's pension costs have been increasing. These increases have taken place due to factors including, but not limited to, pension fund investment losses, benefit improvements, actuarial assumption changes, and city employee/retiree demographic changes. These increases are typical across a huge number of cities, counties, and special districts in California. They are not limited to impacting MCERA, but have also impacted the Public Employees' Retirement System (PERS) and other retirement systems. The current severe recession has taken a significant toll on retirement investment funds. For fiscal year 2008-09, MCERA's investment return was -16.7%. Because MCERA makes an annual actuarial assumption of a 7.75% gain, the fiscal year 2008-09 loss results in a real loss of approximately 25%. The year before the return was -6.7% or a real loss of almost 15%. Losses such as these drive up our unfunded liability, increase our rates and therefore our pension payments to MCERA, and reduce our funding ratio — or the ratio of our assets to our liabilities. FOR CITY CLERK ONLY File No.: Council Meeting: Disposition: SAN RAFAEL CITY COUNCIL AGENDA REPORT / Paee: 2 At the Council's February 1, 2010 study session on the topic, staff recommended a three part approach to addressing the issue of rising rates and greater unfunded liabilities. These included: 1. Consider Pension Obligation Bonds (POBs) as a strategy for short term relief, 2. Work with MCERA to decrease the impact of the fiscal year 2008-09 losses, and 3. Work towards local reform (through labor negotiations) and State-wide reform (through the legislative process) to have a significant effect on our pension costs over a longer period of time. While the subject of this report is limited to the first item above, Pension Obligation Bonds, staff is simultaneously pursuing the second and third items as well. Regarding the second item, the MCERA Board of Directors is scheduled to review their actuaries assumptions at their March 10, 2010 meeting and is expected to set the pension rates at their April 14, 2010 meeting. These pension rates would apply as of July 1, 2010 and would be based off the actuarial report as of June 30, 2009. Regarding the third item, staff made a presentation to the Employee Benefits Committee on February 9t" on POBs and other general pension topics. The Committee recommended that staff invite all city employees to one or more informational sessions on pension costs and pension reform with the intent of educating employees on the issues and presenting the facts. These will begin in March. ANALYSIS: Pension rates paid by the city are made up of two components, 1) normal costs — which are the actuarial present value of benefits allocated to the current year, and 2) the unfunded amortization — which is a financing of the benefits not covered by the assets and anticipated future normal costs. As an illustration, a large investment loss would shrink a city's assets causing a greater unfunded liability. The liability is passed along over time to the city in increased pension rates. POBs are taxable bonds that are used by governments to fund all or some of their unfunded pension liability and/or all or some of their normal cost. Jurisdictions could issue a POB to fund their unfunded liability. This increases their assets and lowers the payment required to the pension system. However, it also adds a new fixed liability to pay off the POB. This process results in a financial gain to the jurisdiction to the extent that the rate paid on the POB is less than the rate earned by the pension system over the same period of time. For example, our unfunded liability is currently amortized through MCERA at a financing cost of 7.75%. POBs can be sold with rates in the 6.25-6.75% range. The difference between those two rates results in the savings that make POBs attractive. The greater the difference, the more attractive the POBs. In this way, POBs are similar to refinancing a house. If your home interest rate is 6% and you can refinance at 4.5%, you re -coup the savings. However, the nature of pension costs make POBs more complicated because the liability and costs are re -calculated annually based on investment gains/losses, assumption changes, and a number of other factors. SAN RAFAEL CITY COUNCIL AGENDA REPORT / Page: 3 To be clear, adopting the Resolution recommended in this report would not be approving the sale of POBs at this time. However, staff continues to recommend the consideration and further analysis of POBs to fund a portion of our unfunded liability or all or some of our normal costs. This analysis is recommended as a component of our 3 -part approach to address our pension costs. It is prudent to analyze and consider all of our options to make the most informed recommendations going forward. Staff plans several more POB discussions with the City Council over the next couple of months in order to reach a final recommendation based on all of the facts prior to any bond issuance. Staff is in the process of preparing financial outlooks, risk analysis, policy for use of proceeds, and other tools. Meanwhile, there are a number of legal steps and actions that are required prior to issuance of POBs. The main requirement is filing a validation action. Bond documents and a Preliminary Official Statement must also be prepared. This "validation process" typically takes approximately two months. Staff recommends adopting the Resolution which would begin the validation process so it could run concurrently with the analysis mentioned above. In that way, should the Council wish to proceed with a POB at a later date, staff would be fully prepared to take immediate action and capture the most favorable rates available. Should the Council not wish to proceed with a POB at that later date, the validation is still worthwhile because it does not have a set "expiration date' and therefore could be used in the future if desired. Specifically, the Resolution would authorize Jones Hall, Professional Law Corporation, to act as bond counsel and file the validation action. To allow maximum flexibility to cover whatever options the Council may wish to pursue, the total amount validated would be $97.6 million. This would allow flexibility to address future normal costs and/or a portion of the unfunded liability. The authorization would not bind the city to issuing POBs. Should the Council decide to issue POBs, Council approval would be required at a later date for actions such as: issuing the bonds, an agreement for purchasing the bonds, the Preliminary Official Statement, the final form of the bond indenture, and other documents as necessary to implement the issuance, sale, and delivery of the bonds. FISCAL IMPACT: The fiscal impact of approving the Resolution to carry out the validation process is limited to the fees charged by the bond counsel which is a flat fee of $7,500. No other compensation is approved by this action. OPTIONS: The City Council may accept, deny, or seek additional information from staff pertaining to the Resolution and modify it. ACTION REQUIRED: Adopt the resolution authorizing the filing of a validation action. RESOLUTION NO. RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SAN RAFAEL AUTHORIZING THE FILING OF A VALIDATION ACTION REGARDING THE ISSUANCE OF PENSION OBLIGATION BONDS TO REFINANCE THE OUTSTANDING OBLIGATIONS OF THE CITY TO THE MARIN COUNTY EMPLOYEES' RETIREMENT ASSOCIATION WHEREAS, the City of San Rafael (the "City") adopted Resolution No. 5294 on May 2, 1977, approving an agreement (as further defined herein, the "MCERA Agreement") with the Marin County Employees' Retirement Association ("MCERA") established by the County of Marin pursuant to the County Employees Retirement Law, commencing with Section 31450 of the Government Code of the State of California, as amended, whereby the employees of the City have been accepted as members of MCERA; WHEREAS, pursuant to the MCERA Agreement, the City is obligated to make certain payments (including normal costs for the current year) to MCERA in order to fund retirement benefits for such employees; and WHEREAS, the City has not, at this time, fully funded on an actuarial basis, the cost of retirement of its employees that are members of MCERA and has unfunded obligations as a result (the "MCERA Obligations"); WHEREAS, the City is authorized under the provisions of Articles 10 and 11 of Chapter 3 of Part 1. of Division 2 of Title 5 of the California Government Code, commencing with Section 53570 of said Code (the "Bond Law"), to issue its bonds for the purpose of refunding certain outstanding obligations of the City, including the MCERA Obligations; and WHEREAS, in order to refund a portion of the MCERA Obligations and thereby realize interest savings, the City proposes at this time, subject to additional approvals of this City Council, to authorize the issuance of its bonds under the Bond Law for the purpose of refinancing the MCERA Obligations in whole or in part; and WHEREAS, the City Council wishes at this time to institute judicial proceedings to determine the validity of such bonds; NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of San Rafael, as follows: Section 1. Authorization of Bonds. The City Council hereby authorizes the issuance of its bonds under the Bond Law for the purpose of financing the MCERA Obligations of the City which are due and owing to MCERA (the "Bonds"). The Bonds may be issued by the City in one or more series from time to time. The aggregate principal amount of the Bonds shall not exceed the aggregate amount of the unfunded accrued actuarial liability represented by the MCERA Obligations, as reported to the City by MCERA, plus an amount required to pay all costs of issuing the Bonds (including underwriter's discount and original issue discount, if any). Section 2. Material Provisions of Bonds. The Bonds shall be issued under an Indenture of Trust (the 'Bond Indenture") between the City and a trustee to be selected by the City (the "Trustee"), in substantially the form on file with the City Clerk. The final form of the Indenture shall be subject to approval by resolution of the City Council adopted following the conclusion of proceedings described in Section 3. Additional series of the Bonds may be issued by the City from time to time in accordance with the provisions of the Bond Indenture and subject to the limitations contained herein. All Bonds at any time issued by the City shall be subject to the following limitations: (a) Any series of Bonds shall mature over a term not exceeding 30 years from the date of the original issuance of such series of Bonds. (b) Interest on the Bonds may be calculated at a fixed, variable or adjustable rate. The Bonds may be issued as current interest bonds, as capital appreciation bonds or as any combination thereof. Interest on the Bonds shall not exceed the maximum rate of interest permitted by law. (c) Principal of and interest and redemption premiums (if any) on the Bonds shall be payable from the General Fund of the City and from any other source of legally available funds of the City. The Bonds shall not constitute an obligation of the City for which the City is obligated to levy or pledge any form of taxation. (d) Proceeds of the Bonds, except to the extent required to pay the costs of issuing and underwriting the Bonds, shall be deposited with the Trustee and applied to discharge the MCERA Obligations of the City in whole or in part. Section 3. Institution of Judicial Validation Proceedings; Engagement of Legal Services. The City Council hereby authorizes the filing of an action to determine the validity of the Bonds, the Bond Indenture and related matters in the Superior Court of Marin County, under the provisions of Sections 860 et sea. of the Code of Civil Procedure of the State of California. To that end, the City Council hereby approves the engagement of Jones Hall, A Professional Law Corporation, to act as bond counsel for the Bonds, and authorizes the City Manager or his designee to execute an agreement with said firm in the form on file with the City Clerk. Said firm is hereby directed, in concert with the City Attorney, to prepare and cause to be filed and prosecuted to completion all proceedings required for the judicial validation of the Bonds, the Bond Indenture and related matters. Section 4. Approval of Additional Documents. Upon completion of the validation action authorized under Section 3, the City staff shall cause the following to be submitted to this City Council for final approval: (i) an agreement for the purchase of the Bonds by E.J. De La Rosa as underwriter, (ii) a Preliminary Official Statement relating to the Bonds, to be prepared by Jones Hall, A Professional Law Corporation, acting as disclosure counsel to the City, (iii) the final form of the Bond Indenture and (iv) such other agreements and documents as are necessary or convenient to implement the issuance, sale and delivery of the Bonds. Notwithstanding anything in this resolution to the contrary, Bonds shall not be issued without the subsequent approval of this City Council as provided in this Section 4. -2- Section 5. Effective Date. This Resolution shall take effect from and after the date of approval and adoption thereof. I, ESTHER C. BEIRNE, Clerk of the City of San Rafael, hereby certify that the foregoing resolution was duly and regularly introduced and adopted at a regular meeting of the Council of the City of San Rafael held on the 1st day of March, 2010, by the following vote, to wit: AYES: COUNCILMEMBERS: NOES: COUNCILMEMBERS: ABSENT: COUNCILMEMBERS: -3- ESTHER C. BEIRNE, City Clerk