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Home My WebLink About05.a.1) Report on outcome of Fieldman Rolapp study re possible use of Pension Obligation Bonds to fund CCCERA UAALSOS& *I) Central Contra Costa Sanitary District March 4, 2013 TO: BUDGET AND FINANCE COMMITTEE VIA: CURT SWANSON, PROVISIONAL GENERAL MANAGER FROM: THEA VASSALLO, FINANCE MANAGER SUBJECT: PENSION OBLIGATION BONDS REVIEW AND ANALYSIS FOR FUNDING OF CCCERA UNFUNDED ACTUARIAL ACCRUED LIABILITY The District began looking into the possibility of issuing Pension Obligation Bonds (POB's) in April 2012 to address the funding of the District's Unfunded Actuarial Accrued Liability (UAAL). The District's General Manager, Finance Department, and Budget and Finance Committee were involved throughout the process, which was completed in November 2012. It is extremely important to realize that the issuance of POB's is not as simple as refinancing a home mortgage. There are several factors that were analyzed and considered during our review of whether POB's are a good option for the District. The following Attachments are a summary of the facts and staff's findings: Attachment 1 Basic concept of no POB's versus issuing POB's Attachment 2 POB analysis and fact findings — pros versus cons Summary Attachment 3 Impact on Sewer Service Charge (SSC) rates based on POB's issued for 18 years period in various amounts 2nd Opinion At the November 13, 2012 Budget and Finance Committee meeting, staff was asked to contact Andrew Brown, CFA, Vice President, Senior Portfolio Investment Manager for the District's GASB 45 OPEB Trust with HighMark Capital Management, in order to get another opinion on the Fieldman, Rolapp & Associates October 2012 Draft Memorandum. Andrew Brown reviewed Feildman's Memorandum and District staff's analysis and information provided to you in Attachments 1 and 2. Per Andrew Brown, "From your standpoint, and from mine, I would offer that there are more Cons vs. Pros for doing this transaction." Staff concurs with this assessment. Commission Fieldman Rolapp & Associates — POB Financial Advisors On Issuance Principal Amount Compensation Less than $50M $55,000 $50M and above $79,000 Prager & Co., LLP — Bond Underwriter 0.5% - 0.6% which amounts to $150,000 - $180,000 on a $30M issuance In summary, the Budget and Finance Committee participants discussed the risk factors associated with issuing POB's and decided that POB's do not appear to be in the best interest of the District at this time. The Board would have to significantly increase SSC rates to cover the additional debt of POB's to sustain the current funding requirements and would be exposing the District's retirement assets to uncontrollable market risk and volatility. Issuing POB's 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 FY 2014 -15. Per review of the market returns of the last 18 years and future market fluctuations and expected returns, possible changes by CCCERA, and the current sluggish economy projected in the next few years, it appears that there are too many factors that do not support a decision to issue POB's. Member Nejedly was against funding the CCCERA UAAL with POB's. Chair McGill concurred that, given all the research and analysis of the numbers, it appears not to be a good decision to issue POB's. Chair McGill decided to delay final reporting from Fieldman, Rolapp and Associates until after the CALPELRA conference in December. It was later decided by Budget and Finance Committee that the results would be presented to the new Board at the appropriate time. Central Contra Costa Sanitary District No POB's vs Issue POB's District pays CCCERA assumed rate = 7.75% Issue POB's Actual Market 2% Return Diff Owed CCCERA Cost of POB's Total Cost (Current Policy) ATTACHMENT 1 Prepared By: Thea Vassallo 7.75% Bad ( Good I ==> 3% 1 5% 6% 7.750) 5.75% 4.75% 4.15% 4.15% 9.90% 8.90% Cost is > 7.75% Earnings by CCCERA 5 Year Return Ten Year Return 4.15% Cost of POB's (Breakeven Point) 3.60% 2.75% 1.75% 0.00% 4.15% 4.15% 4.15% 4.15% 7.75% Breakeven Point Market Value Return 1.02% 4.77% 6.90% 5.90% 4.15% Cost is < 7.75% Actuarial Value Return 4.01% 4.41% Source: Per Fieldman 11/5/12 presentation/The Segal Group, Inc. Actuarial Valuation and Review as of 12/31/11. C: \Documents and Settings \cgee \Local Settings \Temporary Internet Files \Content.Outlook \4VS9801A \Bond cost chart no pob vs pob 3/1/2013 Central Contra Costa Sanitary District POB Analysis and Fact Findings PRO's vs CON's Summary ATTACHMENT 2 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 ?? See Attachment 3. CON's POB's are a "Fixed /Hard" obligation, locked into 4.15% cost Significant SSC rate increase required to fund additional debt service See attachment 3 Investment is made at a single point in time, no dollar cost averaging Investment is amortized over a 18 year period by CCCERA Higher funding brings more volatility Higher volatility to market changes, smoothing goes away with funding Increase in POB size = increased volatility District has no control over risk factors: Changes by CCCERA, future market fluctuations, investment choices POB's would be secured by revenues which decreases bonding capacity CCCERA returns are not in line with OPEB Trust returns Investment would be considered an aggressive investment move POB's are viewed as red flags in financials California economy is in line with the national projected sluggish recovery the next few years Have not seen good press on issuance of POB's PRO's Good to be higher funded, (District already has plan in place to fund $75M) District has more control of cash balances UAAL rate will decrease in the future Provides short term cash flow relief by smaller debt service pymts In a perfect world, over the life of the bonds there is savings Other Unknowns & Findings (Cad time of analysis) Affects of PEPRA ?? Super funding possibilities "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 C: \Documents and Settings \cgee \Local Settings \Temporary Internet Files \Content.Outlook \4VS98O1A \POB pro vs cons 3 -4 -13 3/1/2013 Impact on SSC rates based on POBs issued for 18 years at various amounts ATTACHMENT 3 Based on data contained in the 10 -Year Financial Projections issued on February 16, 2012 Prepared By: Todd Smithey 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 avaliable 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 No POB issued SSC Increase $38 38 38 36 36 36 36 36 36 SSC Total $409 447 485 521 557 593 629 665 701 $5,007 $30M POB /CCERA Returns 7.75% Annually SSC Increase $46 36 35 35 35 35 35 35 34 SSC Total $417 453 488 523 558 593 628 663 697 $5,020 $40M POB /CCERA Returns 7.75% Annually SSC Increase $49 35 35 35 34 34 34 34 33 SSC Total $420 455 490 525 559 593 627 661 694 $5,024 $50M POB /CCERA Returns 7.75% Annually SSC Increase $51 35 34 34 34 34 34 34 34 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 funds 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. C: \Documents and Settings \cgee \Local Settings \Temporary Internet Files\ Content .Outlook \4VS9801A \10 -year plan -POB table 102912 (2)