HomeMy WebLinkAboutD-2 Staff Report - Update of Funding of Pension UALSCHEDULED 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: MARCH 2, 2020
SUBJECT: UPDATE ON ISSUANCE OF PENSION OBLIGATION BONDS AND
AUTHORIZE FUNDING OF UNFUNDED ACCRUED LIABILITY
BACKGROUND:
On December 16, 2019 the City Council authorized validation proceedings for issuance of
Pension Obligation Bonds (the “POBs”). The City Council has determined to issue POBs as a
measure to address the City’s $80.6 million unfunded accrued liability (“UAL”) for employee
pensions provided through the California Public Employees’ Pension System (“CalPERS”). The
issuance of POBs is a strategic plan to mitigate rising pension payment mandates from the State
which strain the City’s budget. While validation proceedings are still commencing, this report
provides an update on the issuance timeline, provides analysis of allocated pension liabilities to
major enterprise Funds and ability to pay their respective portions of the City’s UAL, and
requests authorization for the City Manager to approve lump sum payments of the City’s UAL
for pensions to CalPERS from the Electric and Sewer funds based on results of the analysis
performed.
RECOMMENDATIONS:
Staff recommends that the City Council take the following actions:
1)Authorize the City Manager to approve lump sum payments of the City’s Unfunded
Accrued Liability for pensions to CalPERS from the Electric Utility (Fund 33) in a not-
to- exceed amount of $5,400,000; and
2)Authorize the City Manager to approve lump sum payments of the City’s Unfunded
Accrued Liability for pensions to CalPERS from the Sewer Utility (Fund 34) in a not-to-
exceed amount of $1,820,000; and
APPROVED
CITY COUNCIL
3/2/2020
Update POB Validation Proceedings and UAL Funding
March 2, 2020
Page 2
3) Direct Staff to return to Council for authorization of a payment plan to fund the Water
Utility’s (Fund 31) portion of the City’s Unfunded Accrued Liability for CalPERS
pensions at a later date.
ANALYSIS:
In order to authorize the sale of the bonds, the Council authorized Staff to commence validation
proceedings for the issuance of Pension Obligation Bonds with a not-to-exceed amount for the
bonds. As of the June 30, 2018 actuarial valuation, the City had a total UAL of $80.6 million,
comprised of approximately $41.975 million for Miscellaneous employees and approximately
$38.614 million for Safety employees. Therefore, Council authorized an issuance up to $82
million (which includes UAL payments and bond issuance fees), but also requested Staff return
with an analysis of how much on cash monies could be used to pay down the unfunded debt in
order to minimize the amount of POB debt issuance.
The majority of the UAL is a debt obligation of the General Fund. However, nearly 17 percent of
the liability is assigned to the Water, Electric, and Sewer funds, which amounts to $13.6 million
of the total $80.6 million debt. In order to minimize debt issuance, Staff, along with the POB
financing team, performed in-depth analysis of these three major enterprise funds to determine
each utility’s ability to pay its portion of the UAL, including analysis of unrestricted cash
balances, debt service coverage ratios to meet issued debt requirements, and the amount of days
cash on hand to continue operations in light of a catastrophic event. Following is a summary of
the metrics for each utility:
Water Fund
Water’s portion of the overall UAL is 7.9%, or $6.4 million of the $80.6 million debt. By the end
of the current fiscal year, Staff estimates Water Fund unrestricted cash balances to be
approximately $21.6 million. Making a lump sum payment to CalPERS for Water’s $6.4 million
portion of the UAL is problematic for two main reasons: 1) the Water Fund has a cash reserve
policy of $19 million, so paying the total UAL upfront would put Water in jeopardy of not
meeting its reserve target; and 2) reduction of cash balances by $6.4 million would provide less
Fiscal Year End 2020 Financial Metric Projections Water Electric Sewer
Total
Allocated
UAL
Unrestricted Cash Balance 21,631,163$ 33,882,639$ 5,695,275$
Allocation of Unfunded Accrued Liability 7.9%6.7%2.3%16.9%
Total Allocated Pension Unfunded Accrued Liability 6,409,491 5,387,062 1,817,417 13,613,970
Projected Days Cash on Hand 467.54 343.85 1,002.87
Projected Days Cash on Hand (w/o UAL Payment)329.00 289.18 682.85
Debt Service Reserve Requirement per covenant 1.25 1.10 1.25
Projected Debt Service Reserve Ratio 1.28 12.90 2.76
Projected Debt Coverage w/o UAL Payment 1.46 5.06 1.90
Update POB Validation Proceedings and UAL Funding
March 2, 2020
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than 400 days of cash on hand given the Utility’s operating cost projections, to a forecasted 329
days cash on hand.
Additionally, due to the amount of debt Water has issued for the construction of its treatment
plant, its margin for actual debt service coverage to its required coverage has been very small
each year. Therefore, establishing direct UAL payments to CalPERS from Water has to be
strategic so the City does not have a risk of defaulting on its legally required debt coverage
requirement of 1.25 times its annual debt service payments. Water currently maintains a good
credit rating with Moody’s at AA. Altogether, cash balances, and financial metrics such as days
cash on hand, meeting the requirements of established reserve policies, and debt coverage ratios,
is important in maintaining good credit ratings, which in turn helps to maintain lower water rates
for customers.
In order to maintain cash balances and meet important financial metrics, Staff recommends the
Council direct staff to return to Council at the time to authorize bond issuance documents with a
plan to pay down Water’s portion of the UAL without jeopardizing its credit standing. Example
of a recommendation to pay Water’s $6.4 million pension UAL is to: 1) approve an action for the
General Fund to issue bonds for Water’s $6.4 million allocation; 2) authorize forgiveness of the
existing $2.9 million outstanding loan balance owed by the General Fund to the Water Fund; and
3) approve a repayment plan or allocation of the annual POB debt service payment to Water for
its outstanding share of the POB.
Electric Fund
Electric’s portion of the overall UAL is 6.7%, or $5.4 million of the $80.6 million debt. By the
end of the current fiscal year, Staff estimates Electric Fund cash balances (for unrestricted and
rate stabilization) to be approximately $33.9 million. Making a lump sum payment to CalPERS
for Electric’s $5.4 million portion of the UAL still allows the utility to exceed important
financial metrics in order to maintain good credit ratings. The Utility’s current credit rating with
S&P is A+. S&P recommends days cash on hand for electric utilities of 200 days and examines
how well the Utility meets its legally required debt coverage ratio of 1.1 times its annual debt
service payments. Based on this analysis, Staff requests Council approval to allow the City
Manager to authorize payment to CalPERS from the Electric Utility in an amount not-to-exceed
$5,400,000 from Electric’s cash on-hand, which will decrease the amount of POB issuance
needed to cover the City’s $80.6 million liability.
Sewer Fund
Sewer’s portion of the overall UAL is 2.3%, or $1.8 million of the $80.6 million debt. By the end
of the current fiscal year, Staff estimates Sewer Fund unrestricted cash to be approximately $5.7
million. While Sewer bonds are privately placed and not credit rated, making a lump sum
payment to CalPERS for Sewer’s $1.8 million portion of the UAL still allows the utility to meet
its legally required debt coverage ratio of 1.25 times its annual debt service payments and
maintain sufficient cash on hand. Based on this analysis, Staff requests Council approval to allow
the City Manager to authorize payment to CalPERS from the Sewer Utility in an amount not-to-
exceed $1,820,000 from Sewer’s cash on hand, which will decrease the amount of POB issuance
needed to cover the City’s $80.6 million liability.
Update POB Validation Proceedings and UAL Funding
March 2, 2020
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General Fund
Recommendation of the approved actions will decrease the need for POB debt issuance to fund
the City’s $80.6 million UAL (plus the cost of issuance) by up to $7.2 million.
Validation Proceedings
As previously presented, 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 pension obligation bonds*
2. File Validation Action with LA County Superior Court
3. Receive Order for Publication of Summons from the Court – 1-2 weeks
4. Publication in San Gabriel Valley Tribune for 21 consecutive days
5. Waiting period to file petition – minimum of 10 days, typically 2-3 weeks for LA County
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. Based on current activities of the above schedule, completion of bond
issuance is anticipated in June-July 2020, pending Council approval of necessary issuance
documents.
FISCAL IMPACT:
Staff has to return to Council for authorization of documents necessary to issue bonds. With
approval of recommended actions in this report, the City Manager will be able to authorize lump
sum payments of the City’s Unfunded Accrued Liability for pensions to CalPERS from the
Electric and Sewer enterprise funds in not-to-exceed amounts of $5,400,00 and $1,820,000
respectively.
Prepared by: Reviewed and Approved:
Talika M. Johnson Sergio Gonzalez
Director of Administrative Services City Manager