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Home My WebLink AboutD-1.1. Authorize Plan to Fund the Calpers UAL Obligation_APPROVEDUB-1 Approved Utility Board 03/23/20 3) Authorize the City Manager to approve lump sum payments of the City’s Unfunded Accrued Liability for pensions to CalPERS from the Water Utility (Fund 32) in a not-to-exceed amount of $3,500,000. ANALYSIS: Major utility enterprise funds (Water, Electric, and Sewer) make up approximately 16.9% of the City’s overall $80.6 million CalPERS unfunded accrued liability. Water’s portion of the debt is $6.4 million. The following projected financial results at Fiscal Year ending June 30, 2020 for each utility was presented to Council on March 2nd: The above forecasted by the end of the current fiscal year, Water Fund unrestricted cash balances to be approximately $21.6 million, and that making a lump sum payment to CalPERS for its $6.4 million portion of the UAL was problematic for two main reasons: 1) the Water Fund has a cash reserve policy of $19.6 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 than 400 days of cash on hand given the Utility’s operating cost projections, to a forecasted 329 days cash on hand. For this reason Staff recommends funding the Water Fund $6.4 million UAL from a combination of a $3.5 million interfund loan from the Electric Fund and the forgiveness of the $2.9 million General Fund loan balance instead of drawing down Water Fund reserves. 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 had been very small each year. Therefore, establishing direct UAL payments to CalPERS from Water had to be strategic so the City does not risk of default of its legally required debt coverage requirement of 1.25 times its annual debt service payments. Council directed Staff to return for authorization of a payment plan to fund the Water Utility’s portion of the City’s Unfunded Accrued Liability for CalPERS pensions at a later date. Staff recommends two actions to pay Water’s $6.4 million portion of the CalPERS UAL while maintaining good credit rating with Moody’s, currently AA: Fiscal Year End 2020 Financial Metric Projections Water Electric Sewer Total Allocated UAL Unrestricted Cash Balance 21,631,163$ 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 1.39 4.70 1.76 Projected Debt Coverage w/o UAL Payment 1.46 5.06 1.90 UB-2 1) Forgive the estimated $2.9 million balance of the loan from the Water Fund to the General Fund, established by Resolution No. 14-C81, upon completion of the General Fund issuing Pension Obligation Bonds to pay the same $2.9 million towards Water’s $6.4 million portion of its Unfunded Accrued Liability for pensions to CalPERS - At the City Council Special Meeting held on November 24, 2014, Council adopted Resolution No. 14-C81 which approved an agreement for the Water Fund to loan funds of $4 million to the General Fund to resolve its cash reserve deficit. As of today, approximately $2.9 million remains outstanding owed by the General Fund to the Water Fund; and 2) Approve a $3.5 million loan from the Electric Fund to the Water Fund to make a lump sum to CalPERS - Forecasted cash balances in Electric after making a $3.5M loan to the Water Utility still projects days cash on hand over S&P’s preferred 200 days, at over 253.66 days, and provides sufficient cash to maintain operations. Together, these actions will minimize the amount of POB debt issuance and result in a higher lump sum payment to CalPERS for the unfunded accrued liability for pensions, thus, saving the Water Fund money over time. The attached resolution approves the forgiveness of the $2.9 million outstanding loan balance owed by the General Fund to the Water Fund and establishes a $3.5 million loan from the Electric Fund to the Water Fund. The loan from the Electric Utility (“Lender”) to the Water Utility (“Borrower”) will comply with the requirements of the City’s Interfund Loan Policy (“Policy”). The Policy states that the loan agreement must include the following: i) Purpose of the Loan – To pay a portion of the Water Utility’s Unfunded Accrued Liability to CalPERS for pensions ii) Loan Amount – $3,500,000 iii) Term – Five (5) Years, full payment due June 30, 2025, unless otherwise amended by mutual agreement of both parties iv) Source of Payments – Water Utility Revenues v) Interest Rate – Variable rate based on State of California’s Local Agency Investment Fund average annual fiscal year rates/yields. Interest will be accrued annually on outstanding balances at June 30. This recommended cash buy-down of the UAL will provide a significant financial benefit to the Water Utility because it will pay the Electric Utility an interest rate equal to the foregone investment earnings, which is currently approximately 2% and avoid paying CalPERS a 7% interest rate, which it is currently paying on the UAL. This is estimated to save the Water Utility approximately $280,000 per year as compared to the CalPERS 7% rate. Also, this interfund loan structure will save an additional $69,000 per year as compared to issuing POBs at an interest rate of approximately 3%. Approval of recommended actions would benefit the City by providing a larger lump sum payment to CalPERS to decrease the City’s $80.6 million UAL (plus the cost of issuance) to pay sooner at a lower cost of borrowing, and therefore, results in savings to Water rate payers. UB-3 FISCAL IMPACT: Approval of recommended actions, authorizes the City Manager to make lump sum payments towards the City’s Unfunded Accrued Liability for pensions to CalPERS from the Water Utility in a not-to- exceed amount of $3,500,000, and at a later date pay the balance of Water’s total $6.4 million UAL upon successful issuance of Pension Obligation Bonds. Recommended actions results in the greatest savings for the Water Utility by utilizing funds available in the Electric Utility, allowing Water to pay its debt at a lower cost of borrowing. Electric Utility financial metrics evaluated by credit rating agencies is expected to remain strong after loaning funds to Water. The proposed repayment scheduled is attached as an exhibit to the attached resolution. Prepared by: Reviewed and Approved: Talika M. Johnson Manny Robledo Director of Administrative Services Director of Utilities Reviewed and Approved: Sergio Gonzalez City Manager Attachment: 1) Resolution No. 2020-UB-01 2) Exhibit A - Interfund Loan Agreement 3) Exhibit B - Promissory Note UB-4