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HomeMy WebLinkAbout03-07-2005 Special MinutesCITY OF SAN BERNARDINO 300 N. "D" Street San Bernardino, CA 92418 Website: www.sbcity.org MINI JTF.S MAYOR AND COMMON COUNCIL AND COMMUNITY DEVELOPMENT COMMISSION JOINT SPECIAL MEETING MARCH 7, 2005 MIC ROOM, SIXTH FLOOR CITY HALL Mayor Judith Valles Council Members: Esther Estrada Susan Longville Gordon McGinnis Neil Derry Chas Kelley Rikke Van Johnson Wendy McCammack NOTICE IS HEREBY GIVEN that the Mayor and Common Council and Community Development Commission of the City of San Bernardino have called a joint special meeting of the Mayor and Common Council and Community Development Commission for 12:00 p.m., Monday, March 7, 2005, in the MIC Room, Sixth Floor, City Hall, 300 North "D" Street, San Bernardino, California. The purpose for which this meeting was called was to discuss Pension Obligation Bonds. The joint special meeting of the Mayor and Common Council and Community Development Commission of the City of San Bernardino was called to order by Mayor/Chairman Valles at 12:10 p.m., Monday, March 7, 2005, in the MIC Room, Sixth Floor, City Hall, 300 North "D" Street, San Bernardino, California. Roll Call Roll call was taken by Deputy City Clerk Hartzel with the following being present: Mayor/Chairman Valles; Council Members/Commissioners Estrada, Longville, McGinnis, Derry, Kelley, Johnson, McCammack; City Attorney Penman, Deputy City Clerk Hartzel, City Administrator Wilson. Absent: None. 1. Resolution of the City of San Bernardino authorizing the issuance of one or more series of Pension Obligation Bonds, approving the form of and authorizing the execution and delivery of a Trust Agreement, and authorizing a validation action and other matters relating thereto. 03/07/2005 City Administrator Wilson stated that the purpose of today's workshop was to give the Council an overview of the feasibility of doing Pension Obligation Bonds (POBs). He stated that approximately two weeks ago the Ways and Means Committee had heard Cathy Bando talk about the Pension Obligation Bond Program being sponsored by the League of Cities. She had explained what the program is all about and the merits of doing or not doing POBs; and the Committee's recommendation had been that there should be a discussion with the complete Council in a workshop setting. Mr. Wilson advised that today there would be a three-part presentation, starting with John Bartel, the City's actuary, who does the City's analysis of its PERS rates each year. Secondly, Cathy Bando with RBC Dain Rauscher, an underwriting firm that the League of California Cities has selected to handle the pool Pension Obligation Bond Program, would review what a pension obligation bond is. Lastly, Jan Mazyck, a financial advisor with Public Financial Management, would talk about what she does and her perception of the merits of doing pension obligation bonds. Staff distributed two additional backup documents: 1) City of San Bernardino Safety Plan - CalPERS Actuarial Issues - 6/30/03 Valuation, and 2) City of San Bernardino Miscellaneous Plan - Ca1PERS Actuarial Issues - 6/30/03 Valuation. John E. Bartel, Bartel Associates, LLC, 411 Borel Avenue, Suite 445, San Mateo, CA, reviewed with the Council the Safety Plan document beginning with a definition of terms. He stated that there were two key definitions —the Actuarial Liability and the Current Normal Cost. He stated that the Actuarial Liability represents the value of benefits earned up through the valuation date — what the City owes City employees for the benefits that they have earned, also thought of as a target asset value. He explained that the Normal Cost represents the value of benefits that are going to be earned in the upcoming fiscal year. From a taxpayer point of view, if every year the City contributes its portion of the Normal Costs, then it is contributing the value of benefits being earned during the year by people who are rendering service to the taxpayer. Therefore, from a taxpayer generational equity standpoint, that Normal Cost is a pretty good target contribution rate. Mr. Bartel explained that if the City has assets greater than its actuarial liability, it is ahead in the game and is then allowed to contribute a little less than the normal cost. If assets are below the actuarial liability, then the City is behind and it needs to contribute more than the normal cost. He added, however, that 2 03/07/2005 if you have, for example, a million dollars worth of excess, you are not allowed to use that up right away. Instead, PERS will amortize that and give the City a credit against the normal cost. Similarly, if you have an unfunded amount, you are not required to pay it right away—PERS makes you pay it off over time, so it is an amortization of that unfunded liability. Mr. Bartel reviewed the change in funded status from the two most recent valuations prepared by Ca1PERS—June 30, 2002 and June 30, 2003. He explained that the June 30, 2003, valuation determines the City's 05/06 contribution rate, so there is a two year lag between the actual valuation date to when the City needs to make that contribution. He pointed out that on June 30, 2002, the City's assets were short $59,100,000 from its actuarial liability; on June 30, 2003, the City was $72,800,000 short from its actuarial liability —a relatively large swing in the unfunded liability of approximately $14 million. Mr. Bartel explained that this was due to two things: 1) An investment loss of almost $12.7 million, and 2) noninvestment losses of $4.6 million. Mr. Bartel then reviewed with the Council a graph that showed the history of how well funded the City's Safety Plan has been over the last several years. He pointed out that in 1996 and 1997 liability was modestly greater than assets, and then in the late `90s, there were tremendous investment gains and the assets grew more rapidly; however, the problem is that the liability was growing in such a fashion as to keep up with the great asset returns. The liability then continued to grow, as the assets flattened out and decreased. Mr. Bartel acknowledged that we know today that those gains in the late `90s maybe should not have been recognized as gains. If that had happened, then the losses in the early 2000s would not have created a significant impact on contribution rates, and the contribution might have been stable over this whole period of time. Unfortunately, this is from hindsight, and we did not know this in advance. Mayor/Chairman Valles inquired whether the City could go back and average this out. Mr. Bartel stated that CAPERS has a project that is ongoing right now to try and smooth out the fluctuations in contribution rates and is looking at alternatives to do that. It was noted that this situation was not unique to San Bernardino —this happened with other Ca1PERS agencies, it happened with non-Ca1PERS agencies —in fact, there were very few agencies that did not see significant contribution fluctuation. Mr. Bartel stated that the funded status of the City on June 30, 2003, was an unfunded liability of $72.8 million. He explained that the City's "PERSable" wages for Safety, basically non -overtime wages, expected by Ca1PERS during 3 03/07/2005 2005/2006 are about $38 million. The City has an unfunded liability that is a little bit less than two years worth of PERSable wages. A few years ago, the City had no unfunded liability. So the City has gone from having no unfunded liability to an unfunded liability that is almost two years worth of wages. He then spoke regarding the impact this will have on the City's contribution rate, explaining that the City's contribution is the normal cost (whatever that may be), plus an amortization of its unfunded liability. If the unfunded liability is 200 percent of pay, if the City pays 10 percent of that off in a year, then its contribution is going to be normal cost plus 20 percent. Therefore, absent great investment returns and absent doing something about the unfunded liability, the City should not expect its contributions to be low in the near future —in fact they will be relatively high. Mr. Bartel explained "relatively high" by referring the Council to slide #17 in the Safety handout where it shows the City's contribution rate. He noted that the normal cost rate, the value of benefits being earned during the year, was relatively stable from 1996 through 1999; then what is seen is implementation of 3 percent at 55, and you see the normal cost rising about 2.8 percent. He stated that to the extent that the City issues the pension obligation bonds and wants to pay off the full unfunded liability, to get rid of that amortization of the unfunded liability the City would have to issue a bond for $77 million —basically write CalPERS a check for $77 million. Ultimately, what the City is doing is borrowing money at a specific interest rate, turning around and giving it to CalPERS, and betting that the investment return at CalPERS is going to be greater than what it is paying as the debt service on the Pension Obligation Bonds. He pointed out that how good of a deal it ends up being is what the difference is between CalPERS and the actual investment return —not expected investment return, but actual investment return —whether or not it is more or less than the City is going to pay on the debt service. City Attorney Penman inquired whether the interest rate on the bonds would be a fixed rate, and it was noted that it could be done as either a fixed or variable rate. Mr. Penman inquired whether this presentation had been given to other cities and other government agencies and, if so, he asked what they are doing. Mr. Bartel stated that there have been a lot of presentations. He noted that counties seem to be more comfortable with doing pension obligation bonds than cities. He stated that participating agencies in CalPERS are approximately 25 counties and 300 cities. Of these agencies, in the last 12 months approximately 4 03/07/2005 four or five counties have issued pension obligation bonds, but only seven or eight cities, including our neighboring City of Riverside. Mr. Bartel stated that cities and counties do bonds for two reasons. First, they like the arbitrage risk and think it is a worthwhile risk to take. Second, is the short term budget savings. He pointed out that a city can issue a pension obligation bond and almost without regard as to whether or not you win that arbitrage risk, you can structure your debt so that you can have significant short term budget savings. City Attorney Penman noted that it is difficult for a City in a budget crunch not to front load the savings. Council Member/Commissioner McCammack stated that front loading was not an option with the Legislative Review Committee. Catherine Bando, Managing Director, RBC Dain Rauscher, 777 S. Figueroa Street, Suite 850, Los Angeles, CA, advised that her company, along with another investment bank, had been selected by the League of California Cities to put together a pooled issue of pension obligation bonds. She noted that most POBs are issued by counties and are very large issues; in fact, in order to get efficient pricing you need to be part of a large transaction, which is why the League decided to form this pooled issuance. Ms. Bando provided an overview of the information in the backup materials titled, "CSCDA Pension Obligation Bond Program." She clarified that each year when the City makes its contributions it has its normal cost contributions and then, if there is an unfunded liability, there is an amortization payment. In the case of the City of San Bernardino, starting in 2005/2006 there will be an approximate $77 million unfunded liability in the Safety system. She advised that pension obligation bonds are essentially an arbitrage play in that the unfunded liability that is with Ca1PERS is amortized at their assumed earnings rate of 7.75 percent, yet you can go into the market now and issue taxable debt at about 5.5 percent going out 30 years, which results in a considerable savings —in the case of the City of San Bernardino, the present value savings would be $25.7 million. She pointed out that if the City does not issue pension obligation bonds and simply makes amortization payments to CaIPERS, the City will actually have approximately nine years of negative amortization. Ms. Bando advised that the City's requirement to provide a pension benefit to employees is a statutory requirement and, therefore, is considered a Mandated by Law Exception to the California Debt Limitation. So the City can issue these 5 03/07/2005 bonds without violating that limitation because it is a mandated by law exception and is an existing obligation that the City currently has. So essentially, it is funding an existing debt that the City has. She stated, however, that the mandated by law exception from the debt limitation is not firmly established; therefore, every agency in California that has issued pension obligation bonds (at least every city and county) is required to go through a court validation process. She stated that it takes 85-95 days and starts with the Council taking action approving the issuance. Ms. Bando confirmed that March 1 was the drop dead date for a pool that would be issued in June; however, if the City were to act this week, it could probably get its validation in time. Otherwise, there is another pool forming with a drop dead date of June 1, for a September issuance. City Attorney Penman stated that common sense would dictate that the City Treasurer be brought into the loop on this because he understands the issue a lot better than most of those present. Mayor/Chairman Valles stated that she would agree with Mr. Penman that the City Treasurer is the one person in our City structure that really knows this stuff, he is independent, and she thought the Council should hear what he has to say. Jan Mazyck, The PFM Group, 50 California Street, Suite 2300, San Francisco, CA, Managing Director with Public Financial Management, stated that PFM is basically broken down into four areas of practice —financial management or debt management, which is being discussed today, investment management, investment consulting, and strategic consulting. She stated that their role is to help an issuer, in this case the City, to meet its financial and policy objectives within the legal framework wherein the City would issue pension obligation bonds. She stated that while they are independent, what this means is that they do not trade or underwrite security, but they will have a collaborative relationship with all parties to the City's financing team. Ms. Mazyck spoke regarding common issues surrounding pension obligation bonds and the fact that they are an arbitrage financing. She stated that the success of the City's pension obligation bonds is reliant in total on the City's ability to out -earn the bond rate. She advised that it is really over time that the success of the program can be measured. Relative to the rate of the bonds, she stated that the two things the City wants to think about are minimizing its cost to borrowing and maintaining flexibility. 6 03/07/2005 She noted that over time things do change, so the City needs to be in a position to accommodate. She stated that when they first started doing POBs in the early `90s, they all issued them fixed rate, but they have learned a lot; and she would stress that flexibility is really a goal to keep in mind. She noted that if the City considers being in the pool, or even if the City is on a stand-alone basis, the City of San Bernardino will be evaluated in the context of its own credit, even if it is in the pool. Council Member/Commissioner McCammack inquired whether Ms. Mazyck could put together a table showing the savings that would result if the City issues POBs for one-third of its unfunded liability, with half of it being fixed and half of it being variable, over 10 years instead of over 29 years —that she would be interested in seeing what the savings would look like. Discussion ensued regarding the up-and-down spikes in the City's rates and the need for the Council to make decisions based on historical averages over longer periods of time; the need to know what the average payroll growth will be over the next ten years; and the fact that this decision will be made based on certain assumptions that may or may not evolve; and that it is not an entirely risk free game plan. Council Member/Commissioner McCammack noted that the cost of doing these bonds is $1.6 million and that it is a huge, huge borrowing decision. She stated that she did not think it was wise to look at just one scenario and make this decision —that the Mayor and Council needed to consider several different scenarios prior to making this kind of a decision. Mayor/Chairman Valles stated that she was not really comfortable with the fact that the City Treasurer was not here to evaluate things; and even though it was brought forward from the Ways and Means Committee, it was not a recommendation from the committee. City Attorney Penman advised that his office had prepared the resolution in case the Council wanted it; however, he did not know that City Treasurer Kennedy was not going to be attending the workshop. Mayor/Chairman Valles agreed that the Council was not ready to adopt a resolution and inquired about the timeline for issuing the bonds. It was noted that in order to issue through the League of Cities pools, the City would need to act today to get the validation started, because that process takes about 90 days. The cost would be $7,500 in legal fees to Orrick, plus whatever publication requirements the City has. 7 03/07/2005 City Attorney Penman inquired what the consequences would be to waiting and joining the June 1 pool, rather than the March 1 group. Mr. Bartel advised that CalPERS' investment return is likely to be pretty good through June 30, 2005—that it is moving in the direction of being 12-14 percent. If the City issued a $77 million bond, and CalPERS does not change the way they credit interest (and that is a BIG and), then the City could really get credit for 13 percent on $77 million. He stated, however, that CalPERS has said they are going to change that. In fact, they have said they want to change it for June 30, 2004. However, it is one thing to say you are going to change something —it is something else to actually change it. So issue number one is that you should not count on getting that kick -up —you should not do a bond quickly just to count on getting that. Mr. Bartel stated that he was not an investment advisor, and the Council should not take his advice as investment advice. He stated that in his opinion, the Council should make sure they are making the right decision, and then if you can do it in a timely manner and you get the extra kick -up great; but if you don't, it's not the end of the world. He stated that he actually thought that CalPERS would make that change. He stated that issue number two is the fact that people keep saying interest rates are going to come up —long-term bond rates are going to come up —and they haven't yet, but that's the other risk. Council Member/Commissioner Estrada stated that in terms of doing this, the Council could approve it now for the June 1 pool, for September issuance. Council Member/Commissioner McCammack stated that if in fact that was what this body wanted to do, she would suggest that the resolution be amended from authorizing the issuance of one or more series of pension obligation bonds to simply approving an agreement to validate the City. She stated that it was her understanding in Ways and Means that the Council can simply activate an action to validate at any time, for any time permanently —it would be the City's permanent validation. Ms. McCammack stated that another thing she needed to talk about was the bondholder. If the bond interest rate goes up, are they going to go up for 10- year notes, or are they going to go up for 29-year notes, or are they going to go up for 30-year notes. She stated these are differences they haven't talked about and that she had a lot of questions. 8 03/07/2005 Cathy Bando advised that there was one technicality on the validation. She stated that in order to proceed with the validation, the City actually has to authorize the issuance of the bonds. You don't have to issue the bonds. City Attorney Penman encouraged the Council to wait until closed session before voting because there were some things they needed to talk about. He advised that once the Council adopts the resolution, they are on record as having made a decision to issue the bonds. Mayor/Chairman Valles asked Barbara Pachon, Director of Finance, if she wanted to add anything. Ms. Pachon stated that she had listened to the presentation and she thought she agreed with the comments that were being made. She agreed that it can be a good thing to do, but there are risks; and you've got to look at the long term. She noted that there were a lot of decisions to be made, and Finance could not come in and tell the Council what to do —they needed to go through it and understand it. The Mayor and Council asked the three consultants what they would do if it was their money. Mr. Bartel stated that if it was his portfolio he would do it in a heart beat. However, the problem is, that it is not the Mayor's and Council's money —it's the taxpayer's money —and that is the challenge that they all have. They have to be comfortable with the risk, whether that risk is 75 percent chance of success or 80 percent chance of success. He stated that it is interesting to him, because he has told other Councils that the success rate is probably in that 75-80 percent range, and some of the comments he gets from the Council members will be that with a 20 percent chance of failure, they are not going down that road. He advised the Council, that that is the issue they will all need to come to grips with. Council Member/Commissioner Derry asked Mr. Bartel to define what failure would be to him. Mr. Bartel replied that failure means with 30-year bonds, over the life of the bonds you are earning less than what you are paying on debt service on the bonds —so your contribution would be higher when you combine your debt service and your Ca1PERS rate than what it would have been if you had done nothing. Jan Mazyck stated that she was a former issuer —that she used to be the treasurer of the City of Oakland. She stated that she would recommend that the Council do it, but not the full $77 million —that she would do something less than $77 million thereby diversifying their opportunity. 9 03/07/2005 Cathy Bando agreed that she would not do 100 percent if she were the Council. No further action was taken. Adjournment At 1:33 p.m., the meeting adjourned. The meeting was immediately followed by the joint regular meeting of the Mayor and Common Council scheduled for 1:30 p.m., Monday, March 7, 2005, in the Council Chambers of City Hall, 300 North "D" Street, San Bernardino, California. No. of Items: 2 No. of Hours: 1.5 RACHEL G. CLARK, CMC City Clerk By: hie- Linda E. Hartzel Deputy City Clerk 10 03/07/2005