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Home My WebLink AboutBUDGET AND FINANCE ACTION SUMMARY 11-05-1211 Central Contra Costa Sanitary District Protecting public health and the environment 5019 bnhoff Place, Martinez, CA 94553 -4392 SPECIAL MEETING OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT BUDGET AND FINANCE COMMITTEE ACTION SUMMARY Chair McGill Member Nejedly Monday, November 5, 2012 3:00 p.m. Second Floor Conference Room 5019 Imhoff Place Martinez, California BOARD OF DIRECTORS: JAMIES A NEJEDLY Preadent DAVID R. WILLIAMS President Pro Tem BARBARA D- HOCKETT MICHAEL R AICGILL AIARIO At HENESINI PHONE: (925) 228 -9500 FAX: (925) 676 -7211 www.centralsan.org PRESENT: Mike McGill, Jim Nejedly, Curt Swanson, Thea Vassallo, Todd Smithey, Dan Wiles and Tom DeMars from Fieldman, Rolapp & Associates 1. Call Meeting to Order Chair McGill called the meeting to order at 3:00 p.m. 2. Public Comments None. *3. Receive detailed discussion of Alternatives 1 and 6 in the report on funding a portion of the Unfunded Actuarial Accrued Liability (UAAL) with pension obligation bonds (POBs) prepared by Fieldman, Rolapp & Associates. Mr. Dan Wiles and Mr. Tom DeMars of Fieldman, Rolapp & Associates discussed their overhead presentation (attached), covering three scenarios as follows: 1) Base Case, UAAL prepayments (a total of $75 million over 7 years) are made each fiscal year (FY) 15 -16 through FY 21 -22, 2) Alternative 1, replacing $30 million of prepayments, FY15 -16, with $30 million of POB's; and Budget and Finance Committee November 5, 2012 Page 2 3) Alternative 6, POB and full prepayments, a combination of $30 million in POBs and the full prepayment schedule of $75 million pay down of the UAAL. Mr. Wiles and Mr. DeMars suggested both Alternative 1 and 6 provide flexibility for the District's prepayment of the UAAL. After the risk factors associated with issuing POBs were discussed, it was decided that POBs do not appear to be in the best interest of the District at this time. The Board would have to significantly increase the Sewer Service Charge (SSC) to cover the additional debt of POBs to sustain the current funding requirements and would be exposing the District's retirement assets to uncontrollable market risk and volatility. Issuing POBs would lock the District into a long -term cost that may end up costing the District more than if it followed its current plan to pay down $75 million of the UAAL starting in 2015. Per review of the market returns of the last 18 years, future market fluctuations, and expected returns, possible changes by Contra Costa County Employees' Retirement Association ( CCCERA), and the sluggish economy projected in the next few years, it appears that there are too many factors that do not support a decision to issue POBs. Member Nejedly was against funding the CCCERA UAAL with POBs. Chair McGill concurred that, given all the research and analysis of the numbers, it does not appear to be a good decision to issue POBs at this time. COMMITTEE ACTION: Reviewed the report and presentation and concurred against funding a portion of the UAAL with POBs. Chair McGill decided to delay final reporting from Fieldman, Rolapp and Associates until after the California Public Employers Labor Relations Association (CALPELRA) conference in December. 4. Reports and Announcements None. 5. Suggestions for future agenda items None. 6. Adjournment — at 4:20 p.m. * Attachment Central Contra Costa Sanitary District No POB's vs Issue POB's No POB's District pays CCCERA assumed rate = 7.75% (Current Policy) Prepared By: Thea Vassallo Issue POB's I Bad I Good Actual Market Return Diff Owed CCCERA Cost of POB's Total Cost r7 5.75% 4.75% 4.15% 4.15% 9.90% 8.90% Cost is > 7.75% 4.15% Cost of POB's (Breakeven Point) 3.60% 4.15% 7.75% Breakeven Point 5% L 7.75% 2.75% 1.75% 0.00% 4.15% 4.15% 4.15% 6.90% 5.90% 4.15% Cost is < 7.75% W N:\ADMINSUP\ADMIN \FINANCE MANAGER \Bonds \Bond cost chart no pob vs pob.xls 10/29/2012 Central Contra Costa Sanitary District POB Analysis Summary of Report pg 9 -10 Financed Amount 30M 40M 50M 75M Entire UAAL Perfect World 7.75% assumed = mkt rate Gross Net Present Savings Value 11,290,005 7,313,461 15, 476, 520 10, 037, 540 19, 663, 516 12, 761, 551 30,132, 833 19, 572,441 44,438,043 28,879,907 Decrease of 2.75% 7.75% assumed vs 5% market rate Gross Savings Net Present NPV Savings Change Value Change 2,665,696 (8,624,309) 1,726,789 (5,586,672 3,654,178 (11,822,342) 2,369,975 (7,667,565 4,642,775 (15,020,741) 3,013,144 (9,748,407 7,114,697 (23,018,136) 4,621,271 (14,951,170 10,492,316 (33,945,727) 6,818,867 (22,061,040 Prepared By: Thea Vassallo Decrease of 4.75% 7.75% assumed vs 3% market rate Gross Savings Net Present Savings Change Value (3,606,529) Additional (2,336,244) (4,943,888) Cost than (3,206,436) (6,281,401) if no POB's (4,076,607) (9,625,766) Issued (6,252,308) (14,195,486) (9,225,526) 11/5/2012 Central Contra Costa Sanitary District POB Analysis PRO's vs CON's Prepared By: Thea Vassallo Ultimate Question: Is the Board tolerable and in support of such a large SSC increase to cover the additional debt ?? Funds required ?? CON's Have not seen good press on issuance of POB's Agencies that have issued wish they hadn't POB's are viewed negatively in financials CCCERA returns are not in line with OPEB Trust returns Higher volatility to market changes, smoothing goes away with funding Locked into 4.15% cost of POB's District has no control over risk factors Changes by CCCERA, future market fluctuations, investment choices California economy is in line with the national projected sluggish recovery the next few years Debt Service should be saved for CIP financing (see SSC rates below) SSC rate Operations I Capital Total 2001 -02 204 20 8.9% 224 2002 -03 207 41 16.5% 248 2003 -04 218 54 19.9% 272 2004 -05 204 76 27.1% 280 2005 -06 234 46 16.4% 280 2006 -07 213 76 26.3% 289 2007 -08 242 58 19.3% 300 2008 -09 260 51 16.4% 311 2009 -10 292 19 6.1% 311 2010 -11 300 11 3.5% 311 2011 -12 302 39 11.4% 341 2012 -13 344 27 7.3% 371 PRO's District already has plan in place to fund $75M District has more control of cash balances UAAL rate will decrease "no way compensated for the additional volatility or risk that the funds are exposed to" "the Board will never go down that road again ", Orinda Moraga Fire Provides short term cash flow relief by smaller debt service pymts Other Unknowns Affects of PEPRA ?? Super funding possibilities 11/5/2012 Central Contra Costa Sanitary District HighMark Capital Management PARS Trust Analysis - Per Quarterly Statements Trust Objective: Provide current income and moderate capital appreciation. * Inception date 4/1/09 per quarterly statements, 1st payment ran 11/18/2008. Check was cashed 3/18/09, trust uses 1st of the following month as inception date which is 4/1/09. N:\ADMINSUP\ADMIN \FINANCE MANAGER \PARS TRUST \B &F summarv.xls 11/5/2012 Quarter 1 year Since Strategy: Moderate Total Assets Return Return Inception 2009" 6/30/2009 2,342,664 10.64% N/A 10.64% 9/30/2009 3,771,422 10.89% N/A 22.69% 12/31/2009 6,179,386 3.51% N/A 26.99% 2010 3/31/2010 8,138,717 3.89% N/A 31.94% 6/30/2010 9,309,721 -5.35% 12.87% 19.45% 9/30/2010 12,920,945 8.12% 10.05% 22.16% 12/31/2010 15,318,173 5.60% 12.27% 22.47% 2011 3/31/2011 16,879,790 3.16% 11.48% 21..28% 6/30/2011 18,077,291 0.85% 18.79% 19.16% 9/30/2011 17,408,643 -9.60% -0.69% 12.45% 12/31/2011 19,638,846 6.47% 0.13% 13.82% 2012 3/31/2012 22,386,182 8.25% 5.07% 15.62% 6/30/2012 22,718,513 -1.80% 2.31% 13.70% 9/30/2012 25,054,259 4.43% 18.19% 14.06% Trust Objective: Provide current income and moderate capital appreciation. * Inception date 4/1/09 per quarterly statements, 1st payment ran 11/18/2008. Check was cashed 3/18/09, trust uses 1st of the following month as inception date which is 4/1/09. N:\ADMINSUP\ADMIN \FINANCE MANAGER \PARS TRUST \B &F summarv.xls 11/5/2012 Impact on SSG rates based on POBs issued for 18 years at various amounts Based on data contained in the 10 -Year Financial Projections issued on February 16, 2012 Only data changed is the inclusion of new debt service expense and a reduction in retirement benefit expense Key carry-overs still included in the model: - Year 10 funds available ending amount is approximately $20M over funds required for large projects in years 11 -15 - UAAL pay -down totaling $75M in cash to start in FY 2021 -22 - Rate - smoothing principle applied Note: Only nine years listed as this model previously contained projections for FY 2012 -13 Scenario FY 2013 -14 FY 2014 -15 FY 2015 -16 FY 2016 -17 FY 2017 -18 FY 2018 -19 FY 2019 -20 FY 2020 -21 FY 2021 -22 Nine -Year Total SSC Increase $38 38 38 36 36 36 36 36 36 No POB issued SSC Total $409 447 485 521 557 593 629 665 701 $5,007 SSC Increase $46 36 35 35 35 35 35 35 34 $30M POB /CCERA Returns 7.75% Annually SSC Total $417 453 488 523 558 593 628 663 697 $5,020 SSC Increase $49 35 35 35 34 34 34 34 33 $40M POB/CCERA Returns 7.75% Annually SSC Total $420 455 490 525 559 593 627 661 694 $5,024 SSC Increase $51 35 34 34 34 34 34 34 34 $50M POB /CCERA Returns 7.75% Annually SSC Total $422 457 491 525 559 593 627 661 695 $5,030 Note - The reason for the sharp increase in year one of any POB scenario is due to our fund's required policy. POBs increase of Debt Service Fund expenses while lowering our Running Expense Fund expenses by a slightly greater amount; this results in lower overall expenses when totaling all funds. However, our funding requirements call for the District's to have 100% of Debt Service expenses covered while only having 32% of next year's O &M expense. N:\ACCOUNTING \GMTEMPI \UAAL \10 -year plan -POB table 102912 FIELDMAN Managing Pension Obligations Central contra Costa Sanitary District November 5, 2012 W General Savings Estimates );> If CCCERA realizes 7.75% return: -7(cocss PV savings estimated from POB sizes. $30 million $ 11, 290,005 $ 7,313,461 $40 million $ 15,476, 520 $ 10,037,540 $50 million $ 19,663,516 $ 12,761,551 $75 million $ 30,132,833 $ 19,572,441 Entire UAAL $ 44,438,043 $ 28,879,907 Savings are based on achievement of CCCERA return assumption. November 5, 2012 7M 2 Impact of CCCERAs Actual Earnings r The eneral savings estimates are accurate if CCCERA earns 7.75 0 on an actuarial basis over the term of the POB ➢ If CCCERA earns less than 7.75% but more than the cost of the POB issue, the District realizes savings through the POB If CCCERA's return is less than the cost of the POB, the POB imposed an additional cost on the District . 41Q& Gain from POB Loss from POB November 5, 2012 3 Earnings by CCCERA ➢ Over 18 years CCCERA has earned Note: Red numbers indicate returns below 4.15% Market Value Investment Actuarial Value Investment Return Return Five Year Return 1.02% 4.01% Ten Year Return 4.77% 4.41% ' Source: The Segal Group, Inc. Actuarial Valuation and Review as of December 31, 2011 November 5, 2012 4 Year Market Actuarial Year Market Actuarial 1994 -1.96% 3.16% 2003 23.44% 2.52% 1995 26.75% 11.289to 2004 12.2796' 3.85% 1996 15.09% 13.29% 2005 8.71% 5.74% 1997 20.69% 16.14% 2006 14.23% 8.63% 1998 14.53% 17.849eo 2007 6.03% 11.63% 1999 15.16% 17.48% 2008 -28,01 4.73% 2000 0.79% 13.75% 2009 19.68916 0.3496' 2001 -4.23% 9.73% 2010 13.35% 1.82% 2002 - 10.28% 3.05% 2011 1.76% 2.78% Note: Red numbers indicate returns below 4.15% Market Value Investment Actuarial Value Investment Return Return Five Year Return 1.02% 4.01% Ten Year Return 4.77% 4.41% ' Source: The Segal Group, Inc. Actuarial Valuation and Review as of December 31, 2011 November 5, 2012 4 CCCERA Historical Returns 1993 -2Q11 30.0016 1— 26.75% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% - 10.00% - 15.00% - 20.00% - 25.00% - 30.00% .Cr Ln Q� Qm Q� Ol N r-1 Market Return Actuarial Return POB Break even point �D n CO Qm O .-'1 N M �r Ln b n CO 01 O O� M m m O O C C C O O O O O 0% O O O O O O O C O O O C N N N N N N N N N N N N Source: The Segal Group, Inc. Actuarial Valuation and Review as of December 31, 2011 November 5, 2012 5 15% F-0I a Earnings Over 18 Years Future Value Estimated $100,000 Investment 1993 -2011 1993 $100,000.00 $100,000.00 1994 -1.96% 3.16% $98,040.00 $103,160.00 1995 26.75% 11.28% $124,265.70 $114,796.45 1996 15.09% 13.29% $143,017.39 $130,052.90 1997 20.69% 16.14% $172,607.69 $151,043.43 1998 14.53% 17.84% $197,687.59 $177,989.58 1999 15.16% 17.48% $227,657.03 $209,102.16 2000 0.79% 13.75% $229,455.52 $237,853.71 2001 -4.23% 9.73% $219,749.55 $260,996.87 2002 - 10.28% 3.05% $197,159.30 $268,957.28 2003 23.44% 2.52% $243,373.44 $275,735.00 2004 12.27% 3.85% $273,235.36 $286,350.80 2005 8.71% 5.74% $297,034.16 $302,787.34 2006 14.23% 8.63% $339,302.12 $328,917.88 2007 6.03% 11.63% $359,762.04 $367,171.03 2008 - 28.35% 4.73% $257,769.50 $384,538.22 2009 19.68% 0.34% $308,498.54 $385,845.65 2010 13.35% 1.82% $349,683.09 $392,868.04 2011 1.76% 2.78% $355,837.51 $403,789.77 Avg. Return 7.306% 8.063% Note: Earnings based on CCCERA's annual percentage return on 1993 -2011 from Segal 's Valuation Report dated 12/31/11. November 5, 2012 6 Earnings Volatility Return 1993 -2000 12.597% 13.177% Return 19942011 7.878% 8.358% Return 1993 -2001 10.3429oo' 12.740% Return 1995 -2011 6.796% 8.178% Return 1993 -2002 7.834% 11.620% Return 1996 -2011 6.265% 7.846% Return 1993 -2003 9.302% 10.675% Return 1997 -2011 5.303% 7.276% Return 1993 -2004 9.568% 10.036% Return 1998 -2011 4.625% 6.504% Return 1993 -2005 9.497% 9.672% Return 1999 -2011 3.792% 5.637% Return 1993 -2006 9.854% 9.591% Return 2000 -2011 4.069% 4.929% Return 1993 -2007 9.576% 9.736% Return 2001 -2011 4.938% 4.4600A Return 1993 -2008 6.516% 9.395% Return 2002 -2011 6.781% 4.618% Return 1993 -2009 7.295% 8.806% Return 2003 -2011 4.863% 4.884% Return 1993 -2010 7.642% 8.382% Return 20042011 3.846% 5.032% Return 1993 -2011 7.306% 8.063% Return 2005 -2011 3.056% 4.915% Return 2006 -2011 0.956% 4.187% Return 2007 -2011 - 0.274% 2.405% Return 2008 -2011 11.346% 1.642% Return 2009 -2011 7.399% 2.299% Return 2010 -2011 1.760% 2.780% � S Note: Red numbers indicate returns below 4.15% November 5, 2012 s 7 How Earnings Impact POB Results ➢Rough estimates of how savings change with investment returns: -CC S_ 7.75% $30million $ 11,290,005 $ 7,313,461 $40 million $ 15,476,520 $ 10,037,540 $50million $ 19,663,516 $ 12,761,551 $75 million $ 30,132,833 $ 19,572,441 Entire UAAL $ 44,438,043 $ 28,879,907 $30million $ 2,665,696 $ 1,726,789 $40 mi I lion $ 3,654,178 $ 2,369,975 $50million $ 4,642,775 $ 3,013,144 $75 million $ 7,114,697 $ 4,621,271 Entire UAAL $ 10,492,316 $ 6,818,867 3.00% $30million $ (3,606,529) $ (2,336,244) $40 million $ (4,943,888) $ (3,206,436) $50million $ (6,281,401) $ (4,076,607) $75 million $ (9,625,766) $ (6,252,308) Entire UAAL $ (14,195,486) $ (9,225,526) November 5, 2012 a E, a Higher Funding Brings More Volatility ➢ Exam e: CCCSD total actuarial assets are increased to $210,T010,000 as of December 31, 2012. Same actuarial return of 1% less than assumption means a loss of $2.1 million on larger asset base in one year Based on payroll of $24,734,000, this is about 8.5% of payroll in a single year. Would have an impact of 0.61% of payroll each year for 18 years ➢ It is still good to be better funded, but it is more volatile. �S 1% $2,100,000.00 2% $45200,000.00 3% $6,300,000.00 4% $ 8,400,000.00 8.49% $152,227.00 0.61% 16.98% $304,454.00 1.23% 25.47% $456,682.00 1.84% 33.96% $608,909.00 2.46% November 5, 2012 0 Risks from POB Issuance ➢ CCCERA may not sustain the return assumption If rates are below the cost of the POB, CCCSD incurs additional cost ➢ Investment of significant amount is made at single time rather than spreading the timing - no dollar cost averaging ➢ POB's would be secured by revenues and would use some of District's bonding capacity ➢ POB's area "hard" obligation - failure to pay is a default Obligation to CCCERA is "soft" ➢ Increases in POB size; increases volitility CIS � -, November 5, 2012 10 Impact on District Cash Flow and Rates ➢ Model of Cash Flow and Coverage Fieldman model of cash flow and coverage ➢ Assume CCCERA has maintained its assumed rate of return and do not include any additional or projected UAAL ➢ Multiple scenarios analyzed: Base Case - $75MM of Prepayments Alternate 1- $30 MM POB and $45 MM of Prepayments Alternate 6 - $30 MM POB and $75MM of Prepayments November 5, 2012 11 Base Case Scenario ➢ Prepayments are made each year FY 15 -16 through FY 21 -22 Each prepayment can be an independent decision ➢ When prepayment is made, an actuarial gain is produced that offsets some UAAL ➢ Gain is amortized over 18 years ➢ Resulting cash flow: 7M 9 November 5, 2012 12 2013 -2014 2014 -2015 2015 -2016 2016 -2017 2017 -2018 2018 -2019 2019 -2020 2020 -2021 2021 -2022 Beginning Balance $44,138,989 $38,405,967 $39,583,712 $43,593,720 $45,233,855 $53,211,164 $63,688,738 $65,526,897 $75,562,680 Revenues After O &M and Debt Service 23,986,178 27,652,437 31,067,801 37,854,924 43,546,521 49,521,246 62,606,506 68,257,205 73,144,987 Draws for CIP - 29,719,200 - 26,474,692 - 27,057,793 - 36,214,789 - 35,569,212 - 39,043,672 - 60,768,347 - 58,221,422 - 63,503,986 Ending Balance $38,405,967 $39,583,712 $43,593,720 $45,233,855 $53,211,164 $63,688,738 $65,526,897 $75,562,680 $85,203,681 Debt Service Coverage 5.32 5.99 15.95 11.01 12.43 14.74 18.39 19.92 21.33 Debt Service Coverage including POB 5.32 5.99 15.95 11.01 12.43 14.74 18.39 19.92 21.33 November 5, 2012 12 oase Case Result ➢Cash flow is increased over existing 9 year projection The actuarial gain impact is greater than staff assumed 2% per year impact on benefit costs ➢ With no new gains or losses, UAAL would be projected to be about $82 million by FY 15 -16. ➢ Prepayments deal with $75 million of that amount );;o- Much of remainder is dealt with by UAAL amortization FF S November 5, 2012 7 13 Alternate 1 - $3Q Million POB ➢ CCCSD replaces the first $30 million of prepayments, FY 15 -16 through 17 -18, with $30 million of POBs $45 million of prepayments are still intended ➢ Resulting cash flow: Beginning Balance Revenues After O &M and Debt Service Draws for CIP Ending Balance 7M 7M 2013 -2014 2014 -2015 2015 -2016 2016 -2017 2017 -2018 2018 -2019 2019 -2020 2020 -2021 2021 -2022 $44,138,989 $38,710,375 $40,221,488 $53,467,186 $63,617,082 $79,348,825 $87,921,776 $87,787,928 $95,786,734 24,290,586 27,985,805 40,303,491 46,364,684 51,300,955 47,616,623 60,634,499 66,220,228 71,040,316 - 29,719,200 - 26,474,692 - 27,057,793 - 36,214,789 - 35,569,212 39,043,672 - 60,768,347 - 58,221,422 - 63,503,986 $38,710,375 $40,221,488 $53,467,186 $63,617,082 $79,348,825 $87.921.776 $87,787.928 $95,786,734 $103,323,064 Debt Service Coverage 5.71 6.39 21.36 13.81 15.03 14.83 18.48 20.01 21.43 Debt Service Coverage including POB 4.27 4.74 10.88 8.92 9.61 9.18 11.28 12.06 12.73 ➢ Without prepayments, cash balances increase Some savings realized through 2022, mostly deferral of payments beyond 2022 ➢ Debt service coverage is impacted, but not significantly. November 5, 2012 14 Alternate 6 -POD and Full Prepayments IM ➢ A combination of $30 million in POB and the full prepayment schedule of $75 million F-4 7I-CkCS - When combined with the impact of existing UAAL amortization, this probably funds more than the existing $109 million of UAAL Not a likely problem as UAAL has continued to increase ✓ Lower payroll growth rate ✓ Actuarial return is less than 7.75% for next few years based on smoothing No vember 5, 2012 15 a Alternate 6 - Cash Flow );;;- Resulting cash flow Beginning Balance Revenues After O &M and Debt Service Dram for CIP Ending Balance Deli Service Coverage Debt Service Coverage including POB 2013 -2014 2014 -2015 2015 -2016 2016 -2017 2017 -2018 2018 -2019 2019 -2020 2020 -2021 2021 -2022 $44,138,989 $38.710.375 540.221,488 544,592,078 546.622.566 555,022,718 $65.960,485 S68.291.957 578,860.859 24.290.586 27.985,805 31.428.383 38,245,276 43,969.364 49.981.439 63,099.819 68.790.324 73.719.641 - 29.719.200 - 26,474.692 - 27.057,793 - 36,214.789 - 35.569.212 - 39.043,672 - 60,768.347 - 58,221,422 - 63.503,986 $38,710,375 $40.221,488 544.592,078 546,622,566 S55.022.718 565.960,485 $68.291.957 S78.860.859 589,076,514 5.71 6.39 17.09 11.66 13.10 15.49 19.16 20.72 22.18 4.27 4. '14 870 7.53 8.38 9 59 11.70 12.49 1317 ➢ Cash flow is increased over Base Case RSI The cash flow impact from the POB is reflected in an increase in FY 21 -22 fund balance November 5, 2012 16 Comparison of Options - Cash Flow 7W ➢ Cash flow results from the Base Case and Alternate 6 are comparable $120,000,000 $110,000,000 $100,000,000 $90,000,000 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 Fund Balance Projections —Base Case: $75 Million of Prepayments Alternate 1: $30 Million POB and $45 Million Prepayments — Alternate 6: $30 Million POB and $75 Million Prepayments 2013 -2014 2014 -2015 2015 -2016 2016 -2017 2017 -2018 2018 -2019 2019 -2020 2020 -2021 2021-2022 ➢ The impact of Alternate 1 is the lack of prepayment outflow in FY 15 -16 through 17 -18 Amf November 5, 2012 17 MN 7M ecommendation -M� ➢ CCCSD is fortunate to be able to handle UAAL amounts and have options ➢ POB amount being discussed is moderate ■ While failure to achieve long term bond rate is possible, it is less likely over an 18 year period Short term cash flow gain can be directed to repay additional UAAL even in early years ➢ Both Alternate 1 and Alternate 6 provide flexibility with regard to the prepayment options rict7csol Can delay to slow rate growth November 5, 2012 18 APAENDIX A BACKGROUND INFORMATION a Pension Funding Flow Chard ER contributions (1) EE contributions (2) Pension benefit Employer Contributions: Normal Cost Unfiinded Accrued Actuarial Liability Expenses (3) 1 1� Investment at assumed net 7.75% 2. CCCSD negotiating for decreasing share of EE contributions 3. Expenses paid to financial professionals November 5, 2012 20 Pension Funding - Cost to CCCSD ➢ CCCSD's retirement contributions Normal Cost - of projected Actuarial Liability that accrues during the current year Unfunded Accrued Actuarial Liability - amount by which CCCSD is "behind" ➢ CCCERA's asset pool allows CCCSD to incorporate market earnings to reduce its retirement contributions Contributions = Benefits + Expenses - Earnings CCCSD costs reduced by greater earnings ➢ CCCERA assumes 7.75% rate of earnings Also rate is smoothed over 5 years to lessen annual volatility ➢ UAAL is amortized over a period of 18 years For each element - discussed below A �h AIM I FL November 5, 2012 21 How Did CCCSD Fall Behind.? -a -a a ➢ Normal Cost is calculated as a percent of payroll to provide sufficient funds to meet accruing pension costs ➢ Pension cost is based on assumptions: Payroll and its growth Individual salary of retirees Benefit level at retirement Retirement age and mortality Earnings rate on investments ➢ If any of these vary from expectations, an actuarial gain (good) or loss (bad) is created ➢ CCCSD's UAAL comes about because of payroll changes, rM-SSD1-- November 5, 2012 22 riow Far is CCCSD Behind? ➢ District has UAAL of $109,168,803 Segal valuation of 12/31/11 Represents significant increase in recent years ➢ Components: 12/31/2001 12/31/2008 12/31/2009 12/31/2009 12/31/2009 12/31/2010 12/31/2010 1 *As of 12/31/11 Amortization Restart Actuarial Loss Actuarial Loss Assumption Change Depooling Implementation Actuarial Loss Assumption Change Actuarial Loss (Total UAAL Balance November 5, 2012 $ 33,338,142.00 11 3,664,806.00 15 10,071,912.00 16 1, 993, 825.00 16 19,945,450.00 16 18f 167f 454.00 17 11,472,679.00 17 10,514,535.00 18 $ 109,168,803.0 a 23 7 7 Paying Down the UAAL ➢ Amortization of UAAL is sum of the requirements to satisfy each amortization base y Payments grow along with payroll growth: assumed at 4.25% y Calculated under assumption that CCERA earns 7.75% on its investments In the short run, is similar to a loan at 7.75% interest rate ➢ For CCCSD, amortization is estimated like this: Fiscal Year UAAL Amortization Fiscal Year UAAL , 2012 -2013 $ 9,397,107 2021 -2022 $ 13, 667,174 2013 -2014 9,796,484 2022 -2023 14,248,030 2014 -2015 10,212,835 2023 -2024 9,233,703 2015 -2016 10, 646, 881 2024 -2025 9,626,136 2016 -2017 11,099,373 2025 -2026 10,035,247 2017 -2018 11,571,095 2026 -2027 10,461,745 2018 -2019 12,062,866 2027 -2028 10,337,415 2019 -2020 12,575,538 2028 -2029 5,845,715 2020 -2021 13,109,999 2029 -2030 1,546,523 $ 185,473,866 Caution: UAAL will change over the term and is likely to grow since CCCSD's payroll does not grow at 4.25 %. �`�� November 5, 2012 24 Impact of Gains or Losses on UAAL ➢ Variations from assumptions create either an actuarial gain or loss Earnings: Compare smoothed rate of return to assumed rate of return If smoothed rate is > 7.75 %, it's a gain If smoothed rate is < 7.75 %, it's a loss ➢ Payroll growth: 4.25% assumption P,?Rri-cs qp,-q Growth above 4.25% means that payments were more than anticipated Below 4.25% creates a "loss" November 5, 2012 a 25 Options to Manage UAAL ➢ Do Nothing (NOT what CCCSD is planning) Actuarial amortization is a "solution" Repayment of existing UAAL occurs over the specified amortization term at assumed 7.75% ➢ Prepay with cash Requires either reduction in fund balance or increases in rates ➢ Refinance through Pension Obligation Bond Issue 7 All or part Absorbs some of District's capacity to finance ➢ Combination of all Three options rck�CSS ID. - November 5, 2012 26 District Intentions on UAAL ➢ Annual �re�ayment on UAAL obligation each FY from 15 -16 to 1-22: FY 15 -16 $101000,000 FY 16 -17 $10,000,000 FY 17 -18 $10,000,000 FY 18 -19 $10,000,000 FY 19 -20 $10,000,000 FY 20 -21 $10,000,000 FY 21 -22 $15,000,000 ➢ Negotiate with employees to increase employee contribution F--4CtrCiCS1 Not likely to impact UAAL issue - can have long term impact on District costs November 5, 2012 7M 27 Pension Reform Impact a a ➢ AB 340 and AB 197 change numerous provisions for new government employees ➢ UAAL concerns existing employees _7C S Changes only matter to the extent that existing employees and retirees are impacted Fundamentally would need some alteration of Actuarial Liability to alter UAAL ■ This would require benefit changes November 5, 2012 28 Issuing Pension Obligation Bonds ➢ Bonds issued to repay UAAL (and normal cost, if desired) ➢ Interest on Bonds is Taxable You are borrowing expressly to earn more than the cost of the debt, that's arbitrage ➢ Allows replacement of estimated 7.75% debt cost with current taxable rates r S District already has obligation Refinancing is over the term of UAAL amortization -18 years Serves to "reamortize" existing debt November 5, 2012 29