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.
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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:
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ESTHER C. BEIRNE, City Clerk