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Pension Obligation Bonds Fire and Police Retirement System

Pension Obligation Bonds Fire and Police Retirement System. Presented by Department of Finance October 24, 2011 Finance Committee/City Council. Background. In 1999, the City issued $100 million pension obligation bonds (POBs) – funds System at 70 percent Actuarial Accrued Liability (AAL)

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Pension Obligation Bonds Fire and Police Retirement System

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  1. Pension Obligation BondsFire and Police Retirement System Presented by Department of Finance October 24, 2011 Finance Committee/City Council

  2. Background • In 1999, the City issued $100 million pension obligation bonds (POBs) – funds System at 70 percent Actuarial Accrued Liability (AAL) • Funding to increase ½ percent each year for 20 years to reach 80 percent AAL • Supplemental contributions required if short of annual funding target • Assumptions: 8 percent discount rate & 3.8 percent inflation based on average of retirement systems operating under the County Employees Retirement Law of 1937

  3. Background • Stock market collapse in 2000 significantly reduced plan assets • Dispute arose over the widening gap between Actuarial Value and Market Value of portfolio • In 2004, the City issued $40 million POBs as part of settlement and release agreement • Funding for 1999 and 2004 POBs made possible by SB 481 which authorized the repayment of prior advances from the General Fund to the Downtown Redevelopment Project Area

  4. Estimated Actuarial Accrued Liability (AAL) 179.3 Estimated Actuarial Value of Assets (AVA) 105.8 Estimated Unfunded AAL 73.50 Funding ratio = 59% 85% of estimated AAL 6/30/11 152.4 Estimated AVA 6/30/11 105.8 Difference to fund with a POB 46.6 Actuarial Valuation (in millions) as of 6/30/11

  5. Background On March 28, 2011 City Council approved: • Negotiation with the FPRS to amend the current Contribution Agreement • Issuance of not to exceed $65 million POBs • Approved in concept the refinancing in 2015 all outstanding balance of the POBs (1999, 2004, and 2011)

  6. Status of Council Approved Actions • Amend Contribution Agreement: • Decouple from ’37 Act Systems • Reset discount rate to 6.0 percent and inflation to 3.0% and review annually • FPRS approved agreement on October 20th • Today’s recommendation to issue up to $50 million of POBs to fund the system at 85 percent funding ratio • Restructure and Refinance $81 mandatory tender (1999 and 2004 POBs) and the proposed 2011 POBs in 2015

  7. Historic Interest Rates • Issue new POBs to fund the System at 85 percent AAL • Interest rates generally favorable • 30 year term, “all in” T.I.C. not to exceed 7.5 percent • 30 year term with a mandatory tender in 2016 at est 3 percent

  8. GF Debt Profile

  9. Debt Profile With New POBs

  10. Comparison of Do Nothing vs Recommended Restructuring

  11. Advantages More realistic assumptions given the characteristics of the FPRS Minimizes the volatility and the gap between actuarial value of assets and market value of assets Mitigates the risk of creating future unfunded liabilities Does not eliminate market or inflation risk

  12. Recommendation • Execution of the Amended and Restated Contribution Agreement with the FPRS, and; • Adoption of a Resolution authorizing the issuance of not to exceed the lesser of (i) $50 million of (II) the amount required to achieve a funding level for the FPRS of 85 percent based on the new actuarial assumptions and approving and authorizing the execution all the bond documents.

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