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Home My WebLink About05.a.1) Report on outcome of Fieldman Rolapp study re possible use of Pension Oblication Bonds to fund CCCERA UAAL (Handout)FIELDMAN I ROLAPP & ASSOCIATES Managing Pension Obligations Central Contra Costa Sanitary District n v Note: Recent action by CCCERA to reduce rate of return to 7.25% not reflected in calculations. March 7, 2013 General Savings Estimates ➢ If CCCERA realizes 7.75 %* return: ■ PV savinLys estimated from POB sizes. $30 m i I I i o n $ 12, 778, 858 $ 81624,715 $40 m i I I ion $ 17, 447, 658 $ 11, 786, 091 $50 m i I I ion $ 22,116, 437 $ 14, 946, 873 $75 million $ 33, 794, 517 $ 22, 851,190 Entire UAA L $ 49, 753, 780 $ 33, 652, 726 rce cd--C�s P q Savings are based on achievement of CCCERA return assumption. March 7, 2013 7 Impact of CCCERA's Actual Earnings =- ➢ The general savings estimates are accurate if CCCERA earns 7.75%* 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 Gain from POB Loss from POB A& A iuk March 7, 2013 3 Earnings by CCCERA ➢ Over 18 years CCCERA has earned 1994 1995 1996 1997 1998 1999 2000 2001 2002 -1.96% 26.75% 15.09% 20.69% 14.53% 15.16% 0.79% -4.23% - 10.28% 3.16% 2003 23.44% 2.52% 11.28% 2004 12.27% 3.85% 13.29% 2005 8.71% 5.74% 16.14% 2006 14.23% 8.63% 17.84% 2007 6.03% 11.63% 17.48% 2008 - 28.35% 4.73% 13.75% 2009 19.68% 0.34% 9.73% 2010 13.35% 1.82% 3.05% 2011 1.76% 2.78% 2012 14.10 %* --- - - - - -- Note: Red numbers indicate returns below 3.704% Market Value Investment Actuarial Value Investment Return through 2011 Return through 2011 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 ' * Updated CCCERA Return March 7, 2013 4 CCCERA Historical Returns 1993 -2012 -- 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% - 10.00% - 15.00% - 20.00% - 25.00% - 30.00% - 35.00% v n D7 Ql � 41 N N Market Return Actuarial Return POB Break Even Point 3.704% >n lD r- 00 Dl O .--I N In r7' l!1 lD n 00 Dl O N N M On Ql a, O O O O O O O O O O Dl m M Dl O O O O O O O O O O O O O N N r-I c-1 N 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 March 7, 2013 5 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 volatility rC(,Ct7C:S1 March 7, 2013 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 March 7, 2013 7 Base Case Scenario - ➢ Prepayments are made each year FY 15 -16 through FY 21 -22 !� Gave o �� 2 d ■ 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: I March 7, 2013 g 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 I March 7, 2013 g Base 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 ➢ Much of remainder is dealt with by UAAL amortization 1 March 7, 2013 g Alternate 1 - $30 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: 2013 -2014 2014 -2015 2015 -2016 2016 -2017 2017 -2018 2018 -2019 2019 -2020 2020 -2021 2021 -2022 Beginning Balance Revenues After O &M and Debt Service Draws for CIP Ending Balance Debt Service Coverage Debt Service Coverage including POB $44,138,989 $38,771,412 $40,344,387 $53,655,803 $63,875,065 $79,680,100 $88,324,535 $88,264,641 $96,339,262 24,351,622 28,047,667 40,369,209 46,434,051 51,374,247 47,688,106 60,708,454 66,296,043 71,118,736 - 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 $38,771,412 $40,344,387 $53,655,803 $63,875,065 $79,680,100 $88,324,535 $88,264,641 $96,339,262 $103,954,013 5.71x 6.39x 21.36x 13.81x 15.03x 14.83x 18.48x 20.01x 21.43x 4.31x 4.78x 11.05x 9.02x 9.73x 9.29x 11.42x 12.22x 12.90x ➢ Without prepayments, cash balances increase ■ Some savings realized through 2022, mostly deferral of payments beyond 2022 ➢ Debt service coverage is impacted, but not significantly. k'k4-'F March 7, 2013 10 Alternate 6 - POB and Full Prepayments =- ➢ A combination of $30 million in POB and the full prepayment schedule of $75 million V " 0- @kCt(S • 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 March 7, 2013 11 Alternate 6 -Cash Flow ➢Resulting cash flow Beginning Balance Revenues After O &M and Debt Service Draws for CIP Ending Balance Debt 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 $38,771,412 $40,344,387 $44,780,695 $46,880,549 $55,353,993 $66,363,244 $68,768,670 $79,413,387 24,351,622 28,047,667 31,494,101 38,314,643 44,042,656 50,052,922 63,173,774 68,866,139 73,798,061 - 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 $38,771,412 $40,344,387 $44,780,695 $46,880,549 $55,353,993 $66,363,244 $68,768,670 $79,413,387 $89,707,463 5.71x 6.39x 17.09x 11.66x 13.10x 15.49x 19.16x 20.72x 22.18x 4.31x 4.78x 8.84x 7.62x 8.49x 9.71x 11.84x 12.65x 13.35x );;> Cash flow is increased over Base Case ■ The cash flow impact from the POB is reflected in an increase in FY 21 -22 fund balance March 7, 2013 12 Comparison of Options -Cash Flow ➢ Cash flow results from the Base Case and Alternate 6 are comparable $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 2014 -2015 Fund Balance Projections Base Case: $75 Million of Prepayments Alternate 6: $30 Million POB and $75 Million Prepayments Alternate 1: $30 Million POB and $45 Million Prepayments 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 _= 1 March 7, 2013 13 Recommendation #� ➢ CCCSD is fortunate to be able to handle UAAL amounts and have options ➢ POB amount being discussed is moderate FIR While failure to achieve long term bond rate is possible, it is less likely over an 18 year period mr 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 Can delay to slow rate growth ��Ls March 7, 2013 14 _cCC1 APPENDIX A BACKGROUND INFORMATION Pension Funding -Flow Chart rR I ER contributions (1) EE contributions (2) Pension benefit Expenses (3) 1. Employer Contributions: Normal Cost Unfunded Accrued Actuarial Liability 2. CCCSD negotiating for decreasing share of EE contributions 3. Expenses paid to financial professionals March 7, 2013 Investment at assumed net 7.75 %* 16 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 P r -w- acs ■ For each element - discussed below March 7, 2013 17 How Did CCCSD Fall Behind? ➢ 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, March 7, 2013 18 How Far is CCCSD Behind? ➢ District has UAAL of $109,168,803 • Segal valuation of 12/31/11 • Represents significant increase in recent years ➢ Components: 12/31/2007 Amortization Restarts , "j ,,,$ 12/31/2008 Actuarial Loss 12/31/2009 Actuarial Loss'A� 12/31/2009 Assumption Change 12/31/2oo9 Depooling Implementation 12/31/2010 Actuarial Loss 12/31/2010 Assumption Change 12/31/2011 Actuarial Loss 33,338,142.00 11 31664,806.00 15 10,071,912.00 11993,825.00 16 19,945,450.00 16 18,167,454.00 17 11,472,679.00 17 10,514,535.00 18 'BAs of 12/31/11 116tal UAAL Balance $ 109,168,803.00 JAVL March 7, 2013 19 Paying Down the UAAL ➢ Amortization of UAAL is sum of the requirements to satisfy each amortization base ➢ Payments grow along with payroll growth: assumed at 4.25% ➢ 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: 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 %. Awf March 7, 2013 20 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 ➢ Payroll growth: 4.25% assumption W _ Growth above 4.25% means that payments were more than anticipated Below 4.25% creates a 'loss" March 7, 2013 21 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 W _ Growth above 4.25% means that payments were more than anticipated Below 4.25% creates a 'loss" March 7, 2013 21 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 • All or part • Absorbs some of District's capacity to finance ➢ Combination of all Three options -= 1 March 7, 2013 22 District Intentions on UAAL ➢ Annual prepayment on UAAL obligation each FY from 15 -16 to 1 -22: • FY 15 -16 $10,000,000 • FY 16 -17 $101000,000 • FY 17 -18 $101000,000 • 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 .c 7(tCSS � ■ Not likely to impact UAAL issue — can have long term impact on District costs March 7, 2013 23 s Pension Reform Impact ➢ AB 340 and AB 197 change numerous provisions for new government employees ➢ UAAL concerns existing employees Changes only matter to the extent that existing employees and retirees are impacted Fundamentally would need some alteration of Actuarial Liability to alter UAAL PF This would require benefit changes March 7, 2013 24 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 • District already has obligation • Refinancing is over the term of UAAL amortization —18 years ■ Serves to "re- amortize" existing debt March 7, 2013 25