HomeMy WebLinkAboutD-2 - Staff Report - Follow-up to Fiscal Sustainability Assessment - Adressing Long-term Employment LiabilitiesSCHEDULED ITEM
D-2
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
VIA: SERGIO GONZALEZ, CITY MANAGER
FROM: TALIKA M. JOHNSON, DIRECTOR OF ADMINISTRATIVE SERVICES
DATE: DECEMBER 2, 2019
SUBJECT: FOLLOW-UP TO FISCAL SUSTAINABILITY ASSESSMENT – DISCUSS
STABILIZATION STRATEGIES FOR LONG-TERM PENSION AND OPEB
LIABILITIES
BACKGROUND:
The City has significant long-term liabilities relating to pension and other post-employment
benefits (OPEB) which increasingly strains the City’s budget. These rising retirement related
costs are a challenge for the City, while trying to maintain current service levels. Understanding
the importance of addressing rising OPEB and pension liabilities, Council authorized Staff to set
aside $1.5 million in reserves with adoption of the FY 2018/19 budget. As part of the ongoing
Fiscal Sustainability Assessment performed, Council also directed Staff to report back with
funding and stabilization strategies to mitigate further constraints on the City’s budget. Staff
researched and explored the best ways to utilize the established reserves to begin tackling these
retiree benefit obligations which will require policy decisions by the Council on how best to
address the unfunded liabilities.
This report provides an overview of the potential stabilization strategies and recommends
issuance of Pension Obligation Bonds (POBs) in order to provide sufficient cash flows to both
stabilize the budget for rising pension costs and increasing health care costs for retirees.
RECOMMENDATIONS:
Staff recommends that the City Council take the following actions:
1)Authorize the City Manager to commence Judicial Validation Proceedings related to the
Sale of Pension Obligation Bonds; and
APPROVED
CITY COUNCIL
12/2/2019
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 2
2) Authorize Urban Futures, Inc. to serve as municipal advisor to the City; and
3) Authorize BB&K to serve as Bond & Disclosure Counsel to the City and to manage the
validation proceedings; and
4) Authorize Staff to informally solicit proposals for an Underwriter for the Bonds; and
5) Direct Staff to return to Council with a written policy relating to managing pension and
OPEB debt.
ANALYSIS:
Current revenue sources project annual deficits ranging from $1.3 to $2.7 million for the next
five years, beginning in Fiscal Year (FY) 2019/20. Council directed Staff to report back
regarding a fiscal sustainability assessment and near and long-term budget impacts for direction
and next steps. Staff performed an in depth Assessment with emphasis on the following four
areas and reported back to Council on November 4th and November 18th with recommended
actions to enhance revenues and reduce costs:
1. Reviewing existing contracts and franchise agreements to ensure the City is capturing
all contractual obligations
2. Identifying contracts to potentially renegotiate
3. Examining areas of organizational efficiency opportunities
4. Exploring extraordinary measures to generate additional revenues
A fifth component of the Assessment was to explore ways in which to mitigate increasing costs
relating to long-term employment liabilities which constrain the City’s budget.
Cities, including Azusa, provide various benefits to employees which generally include pensions
for retirement. The City of Azusa has contracted with California Public Employees’ Retirement
System (CalPERS) for pension benefits since 1949. Over the years, the plans offered to
employees have changed in response to negotiations with the bargaining groups to remain
competitive within the local government market.
In addition to pension plans, cities also offer benefits to attract and retain quality employees and
to promote longevity within the organization. Lifetime medical plans is one of those benefits that
has helped Azusa stabilize its workforce and retain employees for tenures of 20 years or more.
While Azusa’s pension and life-time medical benefits have helped the City maintain a quality
workforce, these benefits over time have stressed the City’s budget and are difficult to maintain
status quo given the current revenue base. Therefore, Staff recommends the Council consider
issuing Pension Obligation Bonds (POBs) in order to provide additional cash flows to address
rapidly rising health care costs and to stabilize the budget in future years for anticipated spikes in
pension costs.
Following are details relating to both the pension and OPEB liabilities.
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 3
Pension
The City’s Annual pension payments are comprised of two components:
1. Normal Costs, which are equal to the pension benefits earned by employees in the
current year. These payments are based on a percentage of payroll.
2. Unfunded Accrued Liability (UAL), represent payments for past due amount for the
funding shortfall of benefits earned by current employees and retirees. UAL payments
are fixed dollar payments.
Pension costs are calculated by actuaries at CalPERS based on various actuarial assumptions
including: member information; benefit provisions in the Azusa contracts with CalPERS; actual
experience with Azusa retirees; and actuarial assumptions & methods as approved by the
CalPERS Board. CalPERS actuaries evaluate all of this information and provide the City an
annual valuation update with the employer rates which are used in the preparation of the City’s
budget.
Pension costs continue to rise due to decisions adopted by the CalPERS Board of
Administration. The passage of SB400 (1999) and AB616 (2001), which provided enhanced
pension benefits with the assumption the Fund would always remain strong, earning over 8%
annually, and suffer no losses, spearheaded the erosion of the CalPERS fund. Once the new
enhanced plans were offered to State employee groups, local bargaining groups followed closely
behind requesting the same benefit plans. Subsequently, dramatic market losses of the stock
market turmoil in 2008 and 2009 contributed to further eroded value of the pension fund, where
30% of the portfolio was lost during the Great recession.
Consequently, in April 2013, CalPERS approved an amortization and smoothing policy to pay
for all gains and losses over a fixed 30-year period with the increases or decreases in the rate
spread directly over a 5-year period, as opposed to the previous policy which spread investment
returns over a 15-year period with gains and losses paid over a rolling 30-year period. Following
the amortization and smoothing policy changes, in December 2016, CalPERS announced they
were lowering their discount rate from 7.5% to 7% by FY 2020/21, and most recently, in
February 2018, CalPERS adopted a reduced amortization period for gains and losses to 20 years
beginning with the June 30, 2019 valuation with no amortization for surpluses. All of these
changes combined, results in significantly higher costs to the City.
CalPERS made these changes to address concerns that the funds confidence level was getting
dangerously low to the point of paying more in retirement benefits than contributions and
investment earnings could sustain. In essence, the fund would go broke if such adjustments were
not made. CalPERS pension costs account for approximately 13% of the General Fund’s total
operating expense in FY 2019/20. Below is a summary of projected city-wide payments over the
next five years:
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 4
Pension Cost Mitigation Efforts
In an effort to mitigate the pension issues, the State legislature passed legislation referred to as
the “Public Employees’ Pension Reform Act of 2013 (PEPRA), which became effective January
1, 2013. PEPRA had several aspects to the law intended to cap costs. The most significant was
all “new to CalPERS” employees would now have a lower pension plan benefit. The City
currently has around 84 active employees under PEPRA plans. The savings from PEPRA are
long term.
The City also took actions to mitigate increasing costs. One action was to implement a second
tier pension plan for Safety employees that became effective July 2011; any new hire, considered
a “classic” employee because they are already in CalPERS, are now in this second tier. There are
currently 8 employees under the Tier 2 plan. The other action was to negotiate with the
bargaining units that employees would pay for their own pension benefit contribution as
provided in the law. Through successful negotiations, Miscellaneous employees pay 7% of their
pension benefit and Safety employees pay 9%. Below is the list of pension plans for the City:
Miscellaneous (non-sworn)
Classic Tier 1 – 2.5% @ 55
PEPRA – 2% @ 62 (effective January 1, 2013)
Safety (sworn)
Classic Tier 1 – 3% @ 50
Classic Tier 2 – 3% @ 55 (effective July 1, 2011)
PEPRA – 2.7% @ 57 (effective January 1, 2013)
Employees agreeing to pick up a portion of their share helped to reduce the amount the City has
to pay annually for normal costs and the reduced benefit tiers helped with the unfunded liability
portion, however, significant unfunded liability still exists and annual payments are expected to
continue to rise through Fiscal Year 2030/31 before beginning to fall slightly.
Addressing the City’s UAL
As of the most recent CalPERS actuarial valuation, June 30, 2018, the City’s UAL is equal to
$80.6 million (see chart below).
Fiscal Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24
Normal Cost 3,736,165$ 3,252,053$ 3,530,861$ 4,150,008$ 4,111,214$ 4,071,214$ 4,029,214$
UAL Payment 3,104,675 3,924,662 4,814,689 5,620,206 6,434,000 7,120,000 7,532,000
Total ER Contribution 6,840,840 7,176,715 8,345,550 9,770,214 10,545,214 11,191,214 11,561,214
% Change from PY 4.910%16.286%17.071%7.932%6.126%3.306%
COMBINED MISCELLANEOUS SAFETY
Accrued Liability (AL)287,354,697$ $ 155,388,663 $ 131,966,034
Market Value Assets (MVA)206,764,788$ 113,412,988 93,351,800
Unfunded Accrued Liability (UAL)80,589,909$ 41,975,675$ 38,614,234$
72%73%71%
CalPERS Unfunded Accrued Liability (UAL) -2018
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 5
Unfunded Accrued Liability and Amortization Bases
The City’s unfunded accrued liability
(UAL), is comprised a series of
Amortization Bases, each base has its own
repayment term or amortization schedule.
The City’s $80.6 million UAL is which is
comprised of 38 amortization bases:
• $42.0 million for Miscellaneous
Plan - 20 Amortization Bases
• $38.6 million for Safety Plan - 18
Amortization Bases.
The City is required to repay its UAL via a
series of fixed dollar payments. These
payments schedules should be viewed
effectively as “loan” payments at 7.0%
interest rate with various repayment terms.
The scheduled UAL payments are growing
each year; they are projected to increase
from $3.6 million in FY 18-19 to a peak of
$8.8 million in 2031.
Annual Adjustment – Additional Bases
Each year, CalPERS adjusts the unfunded accrued liability by adding new amortization bases.
These bases reflect changes resulting from changes in actuarial methodology or assumptions,
investment earnings or losses, change in benefit levels, or experience study (i.e.,
longevity/mortality). Therefore, the City’s UAL should be considered a dynamic and ever-
changing amount.
The City’s UAL was $69.4 million in 2017. In 2018, the City’s UAL increased by $11.2 million,
primarily due to a continued decrease in the discount rate from 7.25% to 7.00% and a change in
methodology. The City also received a credit of $1.5 million for CalPERS return of 8.60% that
exceeded the CalPERS discount rate of 7.25% in 2018.
The chart below also illustrates the schedule of fixed dollar UAL payments in 2017 (gold line)
compared to 2018. Annual UAL payments increased by $1.2 million at the peak in 2031 (from
$7.6 million to $8.8 million).
Year Term Balance Payment
FY 18-19 Year Term Balance Payment
FY 19-19
1 2003 5 2,634,362$ 440,833$ 1 2013 17 11,535,503 892,564
2 2004 6 (210,151) (31,383) 2 2013 25 (153,354) (8,131)
3 2009 11 1,828,661 185,064 3 2013 25 13,508,661 716,276
4 2009 21 2,195,019 150,661 4 2014 26 118,975 4,743
5 2010 22 640,051 42,843 5 2014 26 (9,564,098) (381,258)
6 2011 13 2,376,709 216,439 6 2014 16 6,396,332 351,890
7 2011 23 114,800 7,506 7 2015 27 (20,783) (561)
8 2012 24 (277,658) (17,758) 8 2015 27 5,632,178 151,977
9 2012 24 1,181,299 75,553 9 2016 28 (1,125,453) (15,618)
10 2013 25 19,357,225 1,026,388 10 2016 28 6,792,151 94,252
11 2014 16 5,954,819 327,601 11 2016 18 2,136,346 40,314
12 2014 26 (12,867,591) (512,947) 12 2017 29 82,906 -
13 2015 27 5,759,685 155,418 13 2017 29 (3,234,065) -
14 2016 18 2,553,098 48,178 14 2017 19 2,534,422 (84,576)
15 2016 28 7,566,656 105,000 15 2018 30 463,741 -
16 2017 19 2,285,902 (154,587) 16 2018 30 (961,797) -
17 2017 29 (4,226,948) - 17 2018 20 3,621,146 (69,432)
18 2018 20 1,220,156 3,012 18 2018 20 851,423 (1,603)
19 2018 20 4,277,309 (117,951) FY 18-19 38,614,234 1,690,837
20 2018 30 (387,728) - 2nd Tier 52,742$ (12,041)$
FY 18-19 41,975,675$ 1,949,870$ Combined 80,642,651$ 3,628,666$
MISCELLANEOUS PLAN - 2018 SAFEY PLAN 2018
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 6
It is important to note that each year CalPERS adds new amortization bases and, it is likely that
the City may add a significant amount of new bases in the event of a recession/economic
downturn.
Options to begin addressing rising pension costs include:
1) Wait and see option. This option is hoping the legislature will step in and do
something to provide relief for the cities. Or it means handling the rising costs within
the current revenue structure. Because revenues are not increasing and keeping pace
with increasing costs, this will likely mean the City will have to reduce some other
expense and/or forgo fully funding other program/services that have rising costs within
the current budget structure of programing.
This is likely the least attractive for a variety of reasons. Given the Governor’s
statement recently that he has ‘no real sympathy for cities as they made those
decisions’, it is likely that there is this underlying sentiment in the Capitol. In addition,
many in the Capitol feel that with PEPRA the State has answered or assisted cities, at
least in the long run.
2) Get out of PERS. The Termination fee is the cost for an agency to sever its ties to
PERS and for PERS to pay all service credit due the participants through their
obligation period. That may be up to 40 or more years into the future. PERS uses
the most conservative assumptions to generate this termination cost estimate. Below is
the hypothetical termination liability.
$3.6
$5.6
$7.1
$8.0 $7.9
$8.4
$8.8 $8.7
$8.0
$6.8
$4.3
$3.6
$2.4
$0.9
$0.3
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
UAL AMORTIZATION PAYMENT SCHEDULES
Misc.
Safety
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 7
High Low
Misc. $155,388,633 $113,224,479
Safety 131,966,034 93,351,800
Total $287,354,667 $226,576,27
The City cannot realistically deal with over $200 million to exit CalPERS – whether that
would be a good employer move or not. Any consideration in this area requires getting official estimates from CalPERS and also requires negotiating the impact with the bargaining groups. It is highly likely the groups would use every tool available to them to prevent or slow the process down even if the City had $200 million.
3) Negotiate additional concessions with the bargaining group. Through labor
negotiations, the City can seek additional concessions from the various Associations as
it relates to pension costs. There is no option to implement new plans since they are
currently set by State statute as to what PERS may offer member agencies. However,
there may be options with cost sharing. Under PEPRA, the City can now negotiate or
impose a full 50/50 split of the Normal costs as long as the rate does not exceed 8% for
Miscellaneous and 12% for Sworn. Right now our Miscellaneous employees are paying
7% and Sworn are paying 9%. Hypothetically, the additional 1% for Miscellaneous and
3% for Sworn would amount to about $326,500 annually out of the $8.3 million (total
City costs) in expected total payments to PERS for 2019-20 fiscal year. Again, that has
to be done through the meet and confer process.
4) Make pre-payments to CalPERS. This option would include making a “locked-in”
decision to make a lump sum payment towards the City’s UAL. PERS offers short and
long-term amortization bases for prepayments, but prepayments do not pay off
the UAL faster. Making extra payments from existing resources saves money by
reducing future interest payments. For example the State of California contributed an
extra $6 billion to pay down their UAL resulting in reduced annual required
contributions for FY 2018/19 of $177.3 million. More and more agencies are pursuing
this option. Each year for the last three years, approximately 120 agencies have made
additional discretionary payments. The following table provides illustrates potential
interest savings if Azusa were to make a $1M prepayment to CalPERS.
The challenge with making extra payments and paying a shorter amortization period is cash flow. The City also does not have available resources to make large additional payments or to make higher monthly payments for a shorter amortization period. Just like the homeowner who considers a shorter amortization period on the home loan and
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 8
needs to have cash flow for higher monthly payments, the City would also have significantly higher payments exceeding currently known revenue sources.
5) Establish Pension Trust Account. With this option, the City would make extra
payments to a Supplemental Pension Trust (Rate Stabilization/ Section 115 Trust) and
have the ability to decide if, when, and how much money to put into the Trust and if,
when, and how much to withdraw to pay CalPERS or reimburse itself (the City) for
CalPERS payments. Funds can be accumulated in the Supplemental Trust until CalPERS
rates peak and used as a budget stabilization tool. However, this option does not provide
immediate budget relief.
Many government agencies have established Pension Trust Funds under IRS Section
115 Trust rules. In short, this allows an agency to save or set aside money on an on-
going basis to fund future pension costs. Trust funds become restricted and can only be
used for pension costs. The Trust prevents the local agency from later transferring funds
for other uses.
Pros – Funds are kept under local control and can be disbursed when needed. Investment
strategies are more flexible than the City investment policy allowing for more earnings
depending on the risk tolerance and investment options, and the Trust is an asset reported
on the financial statements.
Challenges – Investment earnings are subject to the same market pressures and risks
faced by CalPERS. Earnings must exceed CalPERS actuarial assumptions in order to
achieve an impact on the unfunded liability. Costs for administration of the Trust often
exceed the cost of administration charged by CalPERS. Regarding the UAL and rates,
unless PERS receives direct payments to reduce the UAL, they will continue to show
the full amount owed. So the City may be saving money for the future but the City is
still paying the increasing costs PERS is passing along, which is taking resources
away from the City’s ability to pay for services and/or labor contracts.
This strategy may be more effective after the UAL is paid down and when some
resources are available to apply towards the Trust and future pension rate stabilization.
The ultimate challenge with all the aforementioned options is cash flow. In order to adopt one of the above options, service cuts to program services would need to be considered in order to free up funds. A better option to mitigate rising costs and provide sufficient cash flow to address both the pension and OPEB liabilities is to issue Pension Obligation Bonds.
Pension Obligation Bonds (POBs)
In 2008, the City issued POBs in the amount of $7,215,000 to refinance a side-fund obligation
for the City’s Safety Plan. In 2008, CalPERS was charging a fixed rate of 7.75% which at the
time matched the assumed discount rate for the all CalPERS plans. The bonds were sold with a
blended interest rate of approximately 5.8%, saving the City 2% on the discount rate equal to an
estimated $600,000 savings.
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 9
In today’s taxable municipal bond market, savings from POBs can be significant – more than
30% and can provide significant cash flow relief. Similar to the City’s POB issuance in 2008,
POBs essentially refinance existing CalPERS UAL payments, which have a fixed dollar
repayment schedule, which essentially operate like a series of loans with a 7.00% interest rate.
POBs are taxable bonds that refinance the City’s UAL ($80.6 million) at a lower interest rate –
approximately 3.50% to 4.00%,
under current market
conditions. As a result, the
savings potential is significant.
Based on a financing cover
100% of the unfunded liability
of $80.6 million. The City
could issue up to $81.5 million
in POBs, which based on
current market conditions
would result in in an estimated
savings of $38 million in total
cash flow savings (UAL
payments) over the next 25
years.
The POBs would carry an average rate of ~3.65%, based on current interest rates as of
November 25, 2019.
Validation Proceedings
In California, POBs do not require voter approval due to a judicially created exception to the
State Constitutional debt limitation. However, in order to obtain authorization to issue POBs, the
City is required to file a validation action with the Los Angeles County Superior Court. The
judicial proceedings are largely an administrative matter, which will be handled by the City’s
Bond Counsel firm, Best, Best & Krieger.
The validation proceedings require a 7-step sequential process, which can take approximately 90
days or more in Los Angeles County. The process and estimated timeline are outlined below:
1. City Council passes a resolution authorizing the sale of POBs **.
2. File Validation Action with Los Angeles County Superior Court
3. Receive Order for Publication of Summons from the Court – 1-2 weeks
4. Publication in San Gabriel Valley Examiner for 21 consecutive days
5. Waiting period to file petition – minimum of 10 days, typically 2-3 weeks
6. Clerk enters hearing for a default judgement, schedules a hearing 15 days
7. Hearing for default judgement
8. 30-day Appeal Period
Bonds can be sold after the 30-day Appeal Period has ended and the City Council approves the
final issuance of bonds.
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
POB 100% UAL: 25-Year Level Debt Service
POB Debt Service
CalPERS UAL Payments
$80.6 Million POB (100% of UAL)
$81.5 million Par Value POBs
$38.0 Million Interest Cost Savings
$26.4 Million NPV Savings = 33%
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 10
Hiring the financing team and drafting is the first step in the process, once the bond counsel has
drafted a set of legal documents, then City staff will return to the City Council to adopt a
resolution: 1) authorizing the City to issue Pension Obligation Bonds (POBs) to refund its
CalPERS Unfunded Accrued Liability (UAL); and 2) authorizing judicial validation proceedings
related the issuance of such POBs.
During the 90-120 day validation period, Urban Futures will work with City staff to solicit and
evaluate underwriting proposals for Council consideration.
Other Post-Employment Benefits (OPEB)
Due to the implementation of GASB Statement No. 75, Accounting and Financial Reporting for
Postemployment Benefits Other Than Pensions (GASB 75), the City’s Fiscal Year End June 30,
2018 financial statements reflect a $41.2 million OPEB liability, an increase of $2.2 million from
2017. The most recently updated OPEB actuarial study shows the liability increased to $48.5
million in 2019, an 18% increase.
Unaudited Participation in CalPERS health plan programs contractually obligates the City to pay
at least the PEMHCA minimum cost for each retiree. Furthermore, the City continues to offer
50-100% of paid retiree medical to employees with 10-20 years of service, including spousal
coverage. City-paid medical benefit for employees and their spouses for the rest of the retirees’
lives is extremely generous and financially unsustainable going forward, especially in light of
rapidly increasing health-care costs and longer life spans.
To mitigate future costs, the City established a Health Reimbursement Arrangement (HRA) for
its Executive Staff and six (6) of seven (7) of the City’s bargaining groups to replace the lifetime
medical benefit. The City has to negotiate with the remaining one (1) bargaining group to
implement this medical benefit alternative for all new employees. Implementation of the HRA
for most of the groups took effect after the fiscal 2019 year end and so the OPEB liability is
expected to decrease up to $10 million by 2020. However, annual payments for those still under
the lifetime medical benefit provision are still expected to rise and cause strain on the City’s
budget.
The City has a “pay-go” system for OPEB obligations. Meaning, we pay retiree medical costs
annually as incurred. In Fiscal Year 2018, payments for retiree medical were $933,743, an 8%
increase from the prior year. Annual retiree medical payments have increase 60% over the last
five years and costs are expected to continue to rise with pending retirements and longer life
expectancies. Cash flow savings from issuance of POBs could be used to establish an interest
baring OPEB trust account, where the City would make deposits and have the ability to allow the
account to grow over time or to set aside internally restricted funds as a budget stabilization tool.
With Council direction, Staff will return at a later date with a written policy including long-term
budget stabilization strategies.
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 11
FISCAL IMPACT:
Best, Best & Krieger will be paid $25,000 to handle the validation proceedings, plus $5,000 for
filing fees and out-of-pocket costs. The lead underwriter, financial advisor, and bond counsel
are paid from the proceeds of the POBs; the financing team is not paid unless the POBs are sold,
except for the costs of the judicial validation proceedings.
The chart below provides the detailed assumptions for the issuance of POB, including annual
debt service and estimated savings based on current market conditions. Assuming market
conditions will change over the validation period, City staff and the financing team will present
an update saving analysis when the financing documents are presented to Council after the
validation proceedings are completed. At that time, the Council can determine if the issuance of
POB’s is in the best financial interest of the City.
11/25/19 0.50%100%3.77%
POB Principal H.15 AA
Spread Coupon Interest POB Debt
Service
CalPERS UAL
Payments Savings NPV Savings
1 2020 2,765,000 1.58%0.35%2.43%2,723,747 5,488,747 4,788,534 (700,213) (674,774)
2 2021 2,835,000 1.61%0.40%2.51%2,656,558 5,491,558 6,433,999 942,441 875,207
3 2022 2,905,000 1.60%0.50%2.60%2,585,399 5,490,399 7,120,016 1,629,616 1,458,377
4 2023 2,990,000 1.61%0.60%2.71%2,509,869 5,499,869 7,531,968 2,032,098 1,752,498
5 2024 3,070,000 1.62%0.70%2.82%2,428,840 5,498,840 7,969,261 2,470,421 2,053,109
6 2025 3,160,000 1.67%0.75%2.92%2,342,266 5,502,266 7,659,984 2,157,717 1,728,079
7 2026 3,260,000 1.71%0.80%3.01%2,250,152 5,510,152 7,909,277 2,399,125 1,851,613
8 2027 3,350,000 1.73%0.85%3.08%2,152,026 5,502,026 8,126,782 2,624,756 1,952,155
9 2028 3,455,000 1.74%0.90%3.14%2,048,958 5,503,958 8,350,269 2,846,311 2,040,027
10 2029 3,575,000 1.76%0.95%3.21%1,940,356 5,515,356 8,579,901 3,064,545 2,116,644
11 2030 3,685,000 1.79%1.00%3.29%1,825,598 5,510,598 8,815,848 3,305,250 2,199,958
12 2031 3,815,000 1.82%1.05%3.37%1,704,325 5,519,325 8,797,789 3,278,464 2,102,851
13 2032 3,940,000 1.85%1.10%3.45%1,575,683 5,515,683 8,712,479 3,196,796 1,975,974
14 2033 4,075,000 1.88%1.15%3.53%1,439,635 5,514,635 8,294,436 2,779,801 1,655,801
15 2034 4,225,000 1.92%1.20%3.62%1,295,624 5,520,624 8,042,175 2,521,550 1,447,406
16 2035 4,375,000 1.95%1.20%3.65%1,142,891 5,517,891 7,614,254 2,096,364 1,159,625
17 2036 4,475,000 1.98%1.20%3.68%983,378 5,458,378 6,816,609 1,358,231 724,024
18 2037 4,050,000 2.01%1.20%3.71%818,832 4,868,832 4,869,185 353 181
19 2038 3,655,000 2.04%1.20%3.74%668,658 4,323,658 4,324,998 1,339 663
20 2039 3,370,000 2.07%1.20%3.77%531,998 3,901,998 3,901,653 (345) (165)
21 2040 3,225,000 2.08%1.25%3.89%404,949 3,629,949 3,629,857 (92) (42)
22 2041 2,375,000 2.10%1.25%3.89%279,497 2,654,497 2,655,656 1,159 514
23 2042 2,200,000 2.11%1.25%3.89%187,109 2,387,109 2,388,632 1,523 650
24 2043 1,775,000 2.13%1.25%3.89%101,529 1,876,529 1,876,024 (505) (208)
25 2044 835,000 2.14%1.25%3.89%32,482 867,482 867,524 43 17
26 2045 2.15%1.25%- - 31,948 31,948 12,206
27 2046 2.17%1.25%- - - - -
28 2047 2.18%1.25%- - - - -
29 2048 - 2.20%1.25%- - - - -
30 2049 - 2.21%1.25%3.96%- - - -
81,440,000$ 36,630,361$ 118,070,361$ 156,109,057$ 38,038,696$ 26,432,390$
33%
Fiscal Sustainability Assessment – LT Pension and OPEB Liabilities
December 2, 2019
Page 12
Prepared by: Reviewed and Approved:
Talika M. Johnson Sergio Gonzalez
Director of Administrative Services City Manager
Attachments:
1. UFI Pension Presentation
2. UFI Engagement Proposal
Pension & OPEB
Management Strategies
Attachment 1
Pension / OPEB Experience
2
UFI: The Leader in Pension Experience
Created Pension
Focus Group in
2017
Includes 25 Agencies
Throughout the State
Includes CalPERS
Senior Actuary Staff
Customized
Model & Scenario
Analysis
POBs
Leveraged Refunding
Synthetic Fresh Start
Tax-Exempt Exchange
Restructured the
San Bernardino
POB
Negotiated Directly
with the Bond Holder
and Bond Insurer
(AMBAC)
Saved over $50
Million in Total Debt
Repayments
Served as
Financial Advisor
25 Pension Clients
(9 POBs)
Customized Pension
Model + 7 Solutions
Integrated with
Financial Forecast
Assistance with Labor
Negotiations
3
4
South Orange
County
Wastewater
Authority
Pension Modeling
Beaumont
Cherry Valley
Water District
Pension
Model
Rowland
Water
District
Pension
Modeling
Walnut
Valley
Water
District
Pension
Modeling
Mid-Peninsula
Water District
Forecast +
Pension
Model/Solutions
Simi Valley
Pension
Model
+ POBs
City of Glendora
Forecast +
Pension
Modeling + POB
Culver City
Forecast +
Pension
Model
Pension & Financial Forecast Clients
City of
Lake
Elsinore
Financial
Forecast
City of
Cupertino
Financial
Forecast
City of San
Bernardino
Financial Forecast
City of
Pomona
Financial
Forecast +
POB
City of San
Fernando
Pension
Modeling
San
Gabriel
Valley
COG
Pension
Model
City of
Inglewood
Pension
Financing
City of
Monrovia
Pension
Financing
City of Fountain
Valley
Pension
Financing
City of
Arcadia
Pension
Modeling
City of San
Ramon
Pension
Financing
City of
Pasadena
Pension
Financing
Desert
Hot
Springs
Pension
Model
City of
Riverside
POB
City of Colton
POB
City of
Azusa
POB
Camrosa
Water District
Pension Model
How We Got Here
5
Primary Contributing Factors
5 Key factors that impact (unsustainability) CalPERS:
1.Enhanced & Retroactive Benefits
o SB 400 (1999) –Safety
o AB 616 (2001) -General
2.Investment Losses
3.Cost of Living Adjustments (COLA)
4.Demographics (life expectancy)
5.CalPERS Contribution Policy
CA League of Cities Pension Sustainability Report (2018)
6
Pension/OPEB
Funding Strategies
7
Annual Pension/OPEB Payments
Unfunded benefits earned
in prior years by
employees + retirees
Fixed
$ Amount
+
Benefits earned this
year by employees
$2.0 Million $5.0 Million
Unfunded
Accrued Liability
(UAL)
Normal
Costs
Past Due
Payment
Current
Payment
+OPEB
Net OPEB Liability +
PARS Unfunded
Liability
$1.6 Million
Past Due
Payment
Projected
$ Amount
2017 vs 2018
9
COMBINED MISCELLANEOUS SAFETY
Accrued Liability (AL)264,890,637$ $ 142,411,511 $ 122,479,126
Market Value Assets (MVA)195,450,105$ 106,549,793 88,900,312
Unfunded Accrued Liability (UAL)69,440,532$ 35,861,718$ 33,578,814$
74%75%73%
COMBINED MISCELLANEOUS SAFETY
Accrued Liability (AL)287,354,697$ $ 155,388,663 $ 131,966,034
Market Value Assets (MVA)206,764,788$ 113,412,988 93,351,800
Unfunded Accrued Liability (UAL)80,589,909$ 41,975,675$ 38,614,234$
72%73%71%
CalPERS Unfunded Accrued Liability (UAL) -2018
CalPERS Unfunded Accrued Liability (UAL) - 2017
PARS Retirement Enhancement Plans
10
COMBINED AMMA Executive IBEW SEIU
Accrued Liability (AL)10,573,118$ 3,519,223$ 3,079,117$ 3,364,706$ 610,072$
Market Value Assets (MVA)6,107,797 2,454,277 1,042,965 2,215,961 394,594
UAL = AL-MVA 4,465,321$ 1,064,946$ 2,036,152$ 1,148,745$ 215,478$
58%70%34%66%65%
Monthly Benefit % of Salary 0.50%0.50%0.50%0.50%0.50%
Employee Contribution 2.50%0.00%2.00%4.00%
Employer Contribution 9.97%14.00%5.44%3.72%
Covered Payroll 4,340,246 1,937,372 692,804 1,148,745 561,325
Annual Normal Contribution 373,522 193,156 96,993 62,492 20,881
Discount Rate = 7.0%
PARS Defined Benefit Plan
OPEB Benefits & Combined Unfunded
Liabilities
11
June 30, 2018 ACEA single
Total Accrued Liability 41,175,085$ CAPP single
MVA Assets - "Pay-Go"- SEIU single
Net OPEB Liability 41,175,085$ IBEW single
APOA single
APMA 2-party
Exececutives 2-party
OPEB - Retiree Medical Benefits 20 -Year (5%) Vesting Schedule
Unfunded Liabilities
12
COMBINED MISCELLANEOUS SAFETY
Accrued Liability (AL)287,354,697$ $ 155,388,663 $ 131,966,034
Market Value Assets (MVA)206,764,788$ 113,412,988 93,351,800
Unfunded Accrued Liability (UAL)80,589,909$ 41,975,675$ 38,614,234$
72%73%71%
June 30, 2018 ACEA single
Total Accrued Liability 41,175,085$ CAPP single
MVA Assets - "Pay-Go"- SEIU single
Net OPEB Liability 41,175,085$ IBEW single
APOA single
PARS Unfunded Liability 4,465,321$ APMA 2-party
Exececutives 2-party
COMBINED PENSION & OPEB 126,230,315$
OPEB - Retiree Medical Benefits
CalPERS Unfunded Accrued Liability (UAL) -2018
20 -Year (5%) Vesting Schedule
Unfunded Liability (UAL)
Total Liability (Misc. Plan): $155 Million
$42 Million
UAL
73%$113 Million
Market
Value of
Assets
June 30, 2018
Year Term Balance Payment
FY 18-19
1 2003 5 2,634,362$ 440,833$
2 2004 6 (210,151) (31,383)
3 2009 11 1,828,661 185,064
4 2009 21 2,195,019 150,661
5 2010 22 640,051 42,843
6 2011 13 2,376,709 216,439
7 2011 23 114,800 7,506
8 2012 24 (277,658) (17,758)
9 2012 24 1,181,299 75,553
10 2013 25 19,357,225 1,026,388
11 2014 16 5,954,819 327,601
12 2014 26 (12,867,591) (512,947)
13 2015 27 5,759,685 155,418
14 2016 18 2,553,098 48,178
15 2016 28 7,566,656 105,000
16 2017 19 2,285,902 (154,587)
17 2017 29 (4,226,948) -
18 2018 20 1,220,156 3,012
19 2018 20 4,277,309 (117,951)
20 2018 30 (387,728) -
FY 18-19 41,975,675$ 1,949,870$
MISCELLANEOUS PLAN - 2018
Unfunded Liability (UAL)
Total Liability (Safety): $132 Million
$38.6
Million
UAL
71%
$93 Million
Market
Value of
Assets
June 30, 2018
Year Term Balance Payment
FY 19-19
1 2013 17 11,535,503 892,564
2 2013 25 (153,354) (8,131)
3 2013 25 13,508,661 716,276
4 2014 26 118,975 4,743
5 2014 26 (9,564,098) (381,258)
6 2014 16 6,396,332 351,890
7 2015 27 (20,783) (561)
8 2015 27 5,632,178 151,977
9 2016 28 (1,125,453) (15,618)
10 2016 28 6,792,151 94,252
11 2016 18 2,136,346 40,314
12 2017 29 82,906 -
13 2017 29 (3,234,065) -
14 2017 19 2,534,422 (84,576)
15 2018 30 463,741 -
16 2018 30 (961,797) -
17 2018 20 3,621,146 (69,432)
18 2018 20 851,423 (1,603)
FY 18-19 38,614,234 1,690,837
2nd Tier 52,742$ (12,041)$
SAFEY PLAN 2018
UAL Amortization Schedule
15
$3.6
$5.6
$7.1
$8.0 $7.9
$8.4
$8.8 $8.7
$8.0
$6.8
$4.3
$3.6
$2.4
$0.9
$0.0
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
UAL AMORTIZATION PAYMENT SCHEDULES
Misc.
Safety
2017 UAL
Payments
-
Pension/OPEB
Management Strategies
16
Internal Solutions –Impact on UAL
17
SOLUTIONS Impact on $100 Million Liabilities
1.Allocation Among Funds Shifts greater burden to Enterprise Funds
•$2-3 million UAL
•$4 million OPEB
2.Use of Reserves & 1-Time Monies General Funds Reserves above $8 million
•GFOA –10% of Operating Revenues
Enterprise Fund Reserves above $10 million
Utilities 180 days Operating Costs
3.Pre-Fund 115 OPEB Trust Requires additional contributions
•$1-1.5 million per year next 15-20 years
Adjusting benefits/eligibility requires
bargaining unit negotiations
4.Synthetic Fresh Start Identification of additional revenues
•$16.7 million ADPs = $17 million cash
flow saving ($3.4 million NPV)
Estimated Impact on UAL = $10 -$ 20 million
Allocation Among Funds
18
•Review Cost Allocation Methodology
•Enterprise Funds should pay commensurate share
•UAL and Normal Costs may be allocated differently
•Generally consistent methodology
•Percentage of salary or historical salary costs
General Fund Water Light Other Enterprise TOTAL
Pension 57,052,972$ 5,837,555$ 4,887,507$ 1,662,498$ 69,440,532$
82.2%8.4%7.0%2.4%100%
OPEB 39,939,832$ 823,501$ 411,752$ -$ 41,175,085$
97.0%2.0%1.0%0.0%100%
Source: 2018 CAFR p. 37
2018 CAFR Allocation UAL & OPEB Liability
Use of Reserves & One-time Monies
19
LAIF 2.0-2.5% vs
CalPERS 7.0%
Short-Term Money
Market Returns
vs.
Equities/Fixed
Income
Bonds/Alternative
Investments
1-Time Monies:
Address current
budget deficit
Minimum Reserve Requirements
Budget Stabilization 15% of budget expenses
($6.3M)
Capital & Infrastructure Replacement ($1.5M)
Insurance ($1M)
Retiree Benefits ($1.5M)
Reserve target June 30, 2020 ($10.6 M)
Estimated reserves June 30, 2020 ($9.86 M)
Establish 115 Trust Pre-Fund OPEB
20
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
OPEB Pay-Go Cash Flows
OPEB Section 115 Trust
Places monies in legally restricted trust
•Required to pre-fund costs” Pay-Go+
Additional Trust Contributions
•Can only be used to pay for pension costs
•OPEB Liabilities different than CalPERS
•Alternative investment Strategies
•Conservatives / Moderate/ Growth
•Should use at least 2 strategies
•No hedge against Health Care Inflation*
Perform Break-Even Analysis
21
$-
$5,000,000
$10,000,000
$15,000,000
$20,000,000
$25,000,000
$30,000,000
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
OPEB Trust Break-Even Analysis @ 6.0%
Soft Fresh Start
22
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
SOFT FRESH START
Misc. UAL Safety UAL Payments Pre-Payments Safety Pre-Payments Misc.Original UAL Payments
SOFT FRESH START SAVINGS
$16.7 million Additional Payments
$17 million Cash Flow Savings
$3.4 million NPV Savings = 9.7%
Financing Solutions –Impact on UAL
23
SOLUTIONS Impact on $100 Million Liabilities
5.Leveraged Refunding Future opportunities / Limited Savings
•2022
•$2-3 million UAL
6.Tax-Exempt Exchange Most efficient financing: 2.0% vs. 7.0%
•$6 million CIP project saves $7 million
•Limited by Budget -Pay-Go Projects
7.Pension Obligation Bonds Lowers City’s UAL Payments
Does NOT require Additional City Resources
•100% Funded Status
•$25 million Cash Flow Savings
“Bootstrapping”Applying savings realized from 7 solutions
applied to pre-pay additional liabilities
Estimated Impact on UAL = 100% UAL + $25 million Savings
Leveraged Refunding
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
LEVERAGED REFUNDING (UPFRONT SAVINGS)
Outstanding Debt Service Refunding Debt Service
Apply Up-Front Savings to Pre-Pay UAL
•2011 Sewer Capital One Lease $3.5 million –callable in 2022
•2012A Electric Revenue –callable in 2022
•2012B Water Refunding Bonds –callable 2022
Tax-Exempt Exchange
Tax-Exempt Exchange
1.Review of “Pay-Go” Capital Projects
•$1M FY 19-20 CIP & Capital Replacement
2.Issue Tax-Exempt Debt to finance Projects
•CIP and Equipment Replacement Totals
Insufficient/Uneconomical To Issue Debt
3.“Exchange” Budgeted CIP & UAL Payment
•UAL payments fund debt service at lower interest
rate (7% vs. 3-4%)
•Budgeted CIP used to pre-pay UAL
5. Tax-Exempt Exchange
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
UAL Payments Safety #7 Debt Service Private Placement Loan
TAX-EXEMPT EXCHANGE
Private Placement Loan for Cash Funded CIP Project
Safety #7 $5.8 million (28 Years)
$6.0 milllion Private Placement
$7.3 Million Cash Flow Savings
$4.0 million NPV Savings: 68%
2 Prong Pension Management Strategy
1). Internal Resource Allocation & Budgeting
Allocation Among Funds
•This should be in place supported by a cost allocation plan
Apply Reserves & 1-time Monies ($1.5M Retiree Benefit Reserve)
•Pre-Fund OPEB Trust -Adjust Benefits / Eligibility
•Soft Fresh Start
2). Financing Mechanisms
Leveraged Refunding
•No current refundings available
Tax-Exempt Exchange
•Minimal CIP projects to consider
Pension / OPEB Bonds
27
Summary of Key Terms in GFOA’s POB Advisory
POBs are complex instruments that carry considerable risk……
1.Issuing POBs increase debt burden/reduce capacity (flexibility)
2.POBs have “make-whole” call features, which no do allow
bonds to be economically refunded
3.POBs should not be structured in manner that defers the
principal payments or extends repayment over a longer period.
4.POBs must be part of a comprehensive plan to address pension
shortfalls
5.Invested POB proceeds may fail to earn more than interest rate
on the bonds
28
Pension Obligation Bonds
Pension Obligation Bond Savings
29
$0
$1,000,000
$2,000,000
$3,000,000
$4,000,000
$5,000,000
$6,000,000
$7,000,000
$8,000,000
$9,000,000
POB 100% UAL: 25-Year Level Debt Service
POB Debt Service
CalPERS UAL Payments
$80.6 Million POB (100% of UAL)
$81.5 million Par Value POBs
$38.0 Million Interest Cost Savings
$26.4 Million NPV Savings = 33%
POBs Impact in
Recession Scenario
30
Recession Scenario
31
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
Hypothetical Recession Scenarios UAL Payment Schedules
Misc.
Safety
Recession (0.0%) Return
Discount Rate 6.50%
CalPERS 0.0% = $14.5 million
Discount 6.50% = $19.8 million
POB Savings –Recession Scenario
32
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
Impact of POB Savings under Recession Scenario
POB Debt Service 100% POBs (0.0%) Return Discount Rate - 6.50%Recesssion UAL CalPERS UAL Payments
CalPERS Return (0.0%) = $2.1 million
Discount Rate 6.50% = $1.7 million
Increase UAL Payments = $62.4 million
POB Savings: $26 to $15 million
Pension/OPEB Funding Policy
City should consider adopting a formal written
pension policy:
▪Description of plans & liabilities
▪Financial metrics/targets:
•Level of reserves
•% funded target levels
▪Description of Funding Strategies
▪Implementation guidelines
▪Allocation Priority for Pre-payment
▪Pension vs OPEB vs PARS
▪Miscellaneous vs Safety Plans
33
POB Guidelines
•Target % Funded
•Maturity
•Structure
•Minimum Savings
•Coupon Differential
•Call Features
Urban Futures, Inc.
November 26, 2019
FROM: Urban Futures, Inc.
Michael Busch, CEO
TO: Talika Johnson, Director of Administrative Services
City of Azusa
123 E. Foothill Blvd.
Azusa, Ca 91702
RE: Engagement Letter for Pension Funding Analysis & Potential Bond Issuance
Dear Andrew:
This letter specifies the terms of the engagement between Urban Futures, Inc., located at 17821
E.Street, Suite 245, Tustin CA 92780 and City of Azusa located at 123 E. Foothill Blvd. Azusa, CA
91702.
This engagement between City of Azusa (the “City”) and Urban Futures, Inc. (“UFI”) shall become
effective as of the date of its acceptance as provided below.
Scope of Pension Funding Analysis Activities Completed to Date
The scope of this engagement focuses specifically on addressing the City’s unfunded pension and
OPEB liabilities. Urban Futures, Inc. (UFI) continue to serve as the City of Azusa (the “City”)
General Municipal Advisor; and, will has a fiduciary duty to the City to determine the suitability
of each financial proposal and recommendation made to the City regarding its unfunded pension
liabilities.
UFI has examined and the City’s unfunded pension liabilities. The scope of work for this
engagement was comprised of two phases: 1) creating a model of the City’s pension liabilities
to evaluate different funding strategies; and 2) designing and implementing recommended
funding strategies.
Phase 1 – Modeling/Evaluation of Funding Strategies
Phase 1 required a six-step sequential process:
1.Assess the City’s pension & OPEB liabilities in the context of other significant financial
obligations.
Attachment 2
Urban Futures, Inc.
2. Determine the City’s key financial objectives (e.g., annual cash flow targets, maximize
total interest cost savings, maximize cash flow relief, incorporating other financial cash
flows, etc.).
3. Develop pension forecasting model and amortization schedules
4. Identify available funding resources, critical policy issues, and potential funding
solutions, including pre-payments, synthetic/soft fresh start, and pension obligation
bonds.
5. Alignment of funding solutions with policy objectives and available resources
6. Determine recommendations
These steps provided a general guideline of the process, used by City management to direct UFI
regarding specific scenarios and analyses requested.
At the end of this phase, the City was provided three key deliverables: 1) a pension model that
can perform scenario analysis to determine savings generated by different funding options; 2) a
financial evaluation and assessment of each proposed option; and 3) recommended solutions
to the City Manager and Director of Administrative Services.
Pension Model - UFI developed a pension model that incorporates schedules of each
Amortization Base. The model incorporates the Amortization Bases for the “Classic”
plans, which comprise a significant amount of the unfunded liability. The amortization
schedules serve as the foundation of the model, which is being used to determine the
financial impact (savings) of different funding strategies and to “target” the most cost-
efficient Amortization Bases to prefund.
Now that the baseline model is established, the model has been used to run different scenario
analysis for proposed solutions, which include targeted pre-payments, fresh start, synthetic/soft
fresh start and the issuance of Pension Obligation Bonds (POBs). UFI has performed a rigorous
analysis for each proposed solution, reviewing cash flows calculations and savings estimates for
each scenario. UFI has meet with executive staff to present our findings.
Phase 2 – Design and Implementation of Recommended Strategies
The second phase of this engagement encompassed making a presentation and recommendation
to the Director of Administrative Services, City Manager and the City Council.
UFI is now ready to develop a plan of finance, which outlines the process/requires steps to
implement the recommended solution and establish a transaction timetable. UFI will help to
ensure that the solution is optimally priced and structured; and that it is implemented in a timely
manner.
Scope of Municipal Advisory Activities to be Performed
Because the Pension Funding Analysis described above involves a securities financing, UFI is
prepared to provide expert municipal advisory services. In doing so, a ssembling a team that
Urban Futures, Inc.
works for the municipality is a key part of the debt issuance process. Among the first to join the
team is the municipal advisor. As municipal advisor, UFI will successfully perform the following
duties.
• Assist in developing the plan of finance and related transaction timetable;
• Identify and analyze financing solutions and alternatives for funding the pension liability;
• Advise on the method of sale, taking into account market conditions and near-term
activity in the municipal market;
• Assist in the preparation of any rating agency strategies and presentations;
• Coordinate internal/external accountants, validation process, actuarial consultants and
CalPERS staff, as appropriate;
• Assist with underwriter compensation issues, syndicate structure and bond allocations;
• Assist with negotiated sales, including advice regarding retail order periods and
institutional marketing, analysis of comparable bonds and secondary market data, and
verify cash flow calculations;
• Prepare and/or review preliminary cash flows/ preliminary refunding analysis;
• Assist in procuring printers, verification agents, etc.;
• Plan and coordinate bond closings;
• Prepare any required post-sale reports of bond sales; and
• Evaluate market conditions and pricing performance of senior manager and co-managers’
distribution of bonds.
Independent Registered Municipal Advisor (“IRMA”)
If acting in the capacity of an Independent Registered Municipal Advisor (“IRMA”) with regard to
the IRMA exemption of the SEC Rule, Urban Futures, Inc. will review all third-party
recommendations submitted to Urban Futures, Inc. in writing by the City.
Compensation and Out-of-Pocket Expenses
For the subject transaction, the not -to-exceed fee for pension modeling and financial advisory
services will range from $100,000 to $125,000, which includes a reimbursement of expenses in
an amount not to exceed $2,500. The exact fee will be based on several factors including
validation efficiency, credit rating, pension liability policy and stabilization fund development,
related OPEB related analysis and underwriting structure. Expense reimbursements typically
cover the following:
• Data Acquisition Costs
• Mandatory SEC/MSRB Compliance Requirements & Reporting
• Data Services (Bloomberg, Thompson Reuters, DBC)
• Travel (mileage, airfare, hotels, etc.)
Urban Futures, Inc.
The City shall not be obligated to compensate UFI any amounts, including expense
reimbursements, unless the bonds are issued and sold.
Fiduciary Duty
Urban Futures, Inc. is registered as a Municipal Advisor with the Securities and Exchange
Commission (“SEC”) and Municipal Securities Rulemaking Board (“MSRB”). As such, Urban
Futures, Inc. has a Fiduciary Duty to the City and must provide both a Duty of Care and a Duty of
Loyalty that entails the following.
Duty of Care:
a) exercise due care in performing its municipal advisory activities;
b) possess the degree of knowledge and expertise needed to provide the City with informed
advice;
c) make a reasonable inquiry as to the facts that are relevant to the City’s determination as
to whether to proceed with a course of action or that form the basis for any advice
provided to the City; and
d) undertake a reasonable investigation to determine that Urban Futures, Inc. is not forming
any recommendation on materially inaccurate or incomplete information; Urban Futures,
Inc. must have a reasonable basis for:
i. any advice provided to or on behalf of the City;
ii. any representations made in a certificate that it signs that will be reasonably
foreseeably relied upon by the City, any other party involved in the municipal
securities transaction or municipal financial product, or investors in the City
securities; and
iii. any information provided to the City or other parties involved in the municipal
securities transaction in connection with the preparation of an official statement.
Duty of Loyalty:
Urban Futures, Inc. must deal honestly and with the utmost good faith with the City and act in
the City’s best interests without regard to the financial or other interests of Urban Futures, Inc.
Urban Futures, Inc. will eliminate or provide full and fair disclosure (included herein) to the City
about each material conflict of interest (as applicable). Urb an Futures, Inc. will not engage in
municipal advisory activities with the City as a municipal entity, if it cannot manage or mitigate
its conflicts in a manner that will permit it to act in the City’s best interests.
Urban Futures, Inc.
Conflicts of Interest and Other Matters Requiring Disclosures
• As of the date of the Agreement, there are no actual or potential conflicts of interest that
Urban Futures, Inc. is aware of that might impair its ability to render unbiased and
competent advice or to fulfill its fiduciary duty. Urban Futures, Inc. represents that in
connection with the issuance of municipal securities, Urban Futures, Inc. may receive
compensation from the City for services rendered, which compensation is contingent
upon the successful closing of a transaction and/or is based on the size of a transaction.
Consistent with the requirements of MSRB Rule G-42, Urban Futures, Inc. hereby discloses
that such contingent and/or transactional compensation may present a potential conflict
of interest regarding Urban Futures, Inc.’s ability to provide unbiased advice to enter into
such transaction. This conflict of interest will not impair Urban Futures, Inc.’s ability to
render unbiased and competent advice or to fulfill its fiduciary duty to the City. If Urban
Futures, Inc. becomes aware of any potential conflict of interest that arise s after this
disclosure, Urban Futures, Inc. will disclose the detailed information in writing to the City
in a timely manner.
• The fee paid to Urban Futures, Inc. increases the cost of investment to the City. The
increased cost occurs from compensating Urban Futures, Inc. for municipal advisory
services provided.
• Urban Futures, Inc. does not act as principal in any of the transaction(s) related to this
Agreement.
• During the term of the municipal advisory relationship, this agreement will be promptly
amended or supplemented to reflect any material changes in or additions to the te rms or
information within this agreement and the revised writing will be promptly delivered to
the City.
• Urban Futures, Inc. does not have any affiliate that provides any advice, service, or
product to or on behalf of the client that is directly or indirectly related t o the municipal
advisory activities to be performed by Urban Futures, Inc.;
• Urban Futures, Inc. has not made any payments directly or indirectly to obtain or retain
the City’s municipal advisory business;
• Urban Futures, Inc. has not received any payments from third parties to enlist Urban
Futures, Inc. recommendation to the City of its services, any municipal securities
transaction or any municipal finance product;
• Urban Futures, Inc. has not engaged in any fee-splitting arrangements involving Urban
Futures, Inc. and any provider of investments or services to the City;
• Urban Futures, Inc. does not have any other engagements or relationships that might
impair Urban Futures, Inc.’s ability either to render unbiased and competent advice to or
on behalf of the City or to fulfill its fiduciary duty to the City, as applicable; and
• Urban Futures, Inc. does not have any legal or disciplinary event that is material to the
City’s evaluation of the municipal advisory or the integrity of its management or advisory
personnel.
Urban Futures, Inc.
Legal Events and Disciplinary History
Urban Futures, Inc. does not have any legal events and disciplinary history on its Form MA and
Form MA-I, which includes information about any criminal actions, regulatory actions,
investigations, terminations, judgments, liens, civil judicial actions, customer complaints,
arbitrations and civil litigation. The City may electronically access Urban Futures, Inc.’s most
recent Form MA and each most recent Form MA-I filed with the Commission at the following
website: www.sec.gov/edgar/searchedgar/companysearch.html.
There have been no material changes to a legal or disciplinary event disclosure on any Form MA
or Form MA-I filed with the SEC.
Recommendations
If Urban Futures, Inc. makes a recommendation of a municipal securities transaction or municipal
financial product or if the review of a recommendation of another party is requested in writing
by the City and is within the scope of the engagement, Urban Futures, Inc. will determine, based
on the information obtained through reasonable diligence of Urban Futures, Inc. whether a
municipal securities transaction or municipal financial product is suitable for the City. In addition,
Urban Futures, Inc. will inform the City of:
• the evaluation of the material risks, potential benefits, structure, and other characteristics
of the recommendation;
• the basis upon which Urban Futures, Inc. reasonably believes that the recommended
municipal securities transaction or municipal financial product is, or is not, suitable for
the City; and
• whether Urban Futures, Inc. has investigated or considered other reasonably feasible
alternatives to the recommendation that might also or alternatively serve the City’s
objectives.
If the City elects a course of action that is independent of or contrary to the advice provided by
Urban Futures, Inc., Urban Futures, Inc. is not required on that basis to disengage from the City.
Record Retention
Effective July 1, 2014, pursuant to the Securities and Exchange Commission (SEC) record
retention regulations, Urban Futures, Inc. is required to maintain in writing, all communication
and created documents between Urban Futures, Inc. and the City for 5 years.
If there are any questions regarding the above, please do not hesitate to contact Urban Futures,
Inc. If the foregoing terms meet with your approval, please indicate your acceptance by
executing both copies of this letter and returning one copy.
Urban Futures, Inc.
Sincerely,
Michael Busch, CEO
Urban Futures, Inc.
City of Azusa
By: __________________________________
Talika Johnson, Director of Administrative Services