CALPERS AND PENSION OBLIGATION

BONDS

City Council WorkshopJuly 13, 2005

April 6, 2005 – Council approves the issuance of Pension Obligation Bonds, Court Validation Action and supporting documentation

April 14, 2005 – Validation Proceedings commenced May 31, 2005 – Response period ends for validation

complaint June 15, 2005 – Council requests workshop to better

understand retirement system and pension obligation bonds

June 16, 2005 – Judgment received on validation. Appeal period commences with expected July 18, 2005 completion

July 13 – Council workshop and approval of resolutions August 1-5, 2005 – Sale of Bonds

Recap

Presentation Summary

Overview of City pension programExplanation of Unfunded Accrued

Actuarial LiabilityOverview of Pension Obligation

BondsRequest approval of resolution for

official statement and continuing disclosure agreement

Key Questions

Is it okay for the City to have an Unfunded Accrued Actuarial Liability?

Is something wrong with having an Unfunded Accrued Actuarial Liability?

Does the issuance of pension obligation bonds create new debt for the City?

Does the issuance of pension obligation bonds add additional benefits to employees?

What are the advantages and disadvantages of issuing pension obligation bonds?

CalPERS - General Information

City contracts with California Public Employees Retirement System (CalPERS) to provide retirement benefits for employees

City has two separate plansSafety Plan for full-time sworn safety

personnel Miscellaneous Plan for full-time non-

sworn personnel

CalPERS - General Information

Current retirement benefit for active employees Safety Plan is 3% at 60 Miscellaneous Plan 2% at 55

City pays both Employer share and Employee share of retirement cost Safety Plan Employee share is 9% of payroll Miscellaneous Plan Employee Share is 7% of

payroll

CalPERS - General Information

Employer Share of retirement cost, or Normal Annual Contribution, is determined by CalPERS on an annual basis, based on actuarial assumptions that include, but are not limited to, Retirement Age Salary and Merit Increases Mortality Rates Valuation of Current Plan Assets Investment Returns

Unfunded Accrued Actuarial Liability (UAAL)

The UAAL is determined by CalPERS actuaries to be the amount that CalPERS is short, without further payments from the City, to pay benefits already earned by current and former employees covered by the pension system.

City is required to pay CalPERS the UAAL

Unfunded Accrued Actuarial Liability (UAAL)

The UAAL is amortized over a period of 20-years according to an agreement with CalPERS

The assigned interest rate is equivalent to the assumed rate of investment return on pension fund asset

Current Actuarial Rate = 7.75%

Unfunded Accrued Actuarial Liability (UAAL)

Asset investment gains or losses are currently smoothed by CalPERS over a three-year period to help avoid market valuation volatility

New CalPERS Employer Rate Stabilization policy to go into effect FY 06-0730-year rolling amortization period15-year smoothing calculation

City’s Projected UAAL

Safety Plan Miscellaneous PlanProjected UAAL Balance

as of June 30, 2005$32,668,442

Estimated Payment for FY 05/06

$3,261,154

Projected UAAL Balance as of June 30, 2005

$3,357,952

Estimated Payment for FY 05/06$487,425

Projected 05-06 City Pension Costs

Safety Plan Miscellaneous Plan

(As a % of Payroll)Employer CostNormal Rate18.10%Unfunded Rate12.82%

Total30.92%

Employee Cost 9.00%

(As a % of Payroll)Employer CostNormal Rate 8.42%Unfunded Rate 1.48%

Total 9.90%

Employee Cost 7.00%

Estimated CalPERS Cost FY 05-06$13,775,115

UAAL Funding Alternatives

Use Reserves to make full UAAL payment

Decrease plan benefitsIssue Pension Obligation Bonds

Issuing Pension Bonds

The issuance of POBs refinances the unfunded liability with CalPERS

Savings based on the difference between actuarial rate (7.75%) and All-in True Interest Cost (All-in TIC) of bonds issued (currently estimated at 5.35%)

How Do Pension Bonds Work?

Bonds are issued to refinance all or a portion of the Pension Plans’ UAAL

Proceeds of bonds are deposited in Pension Funds: funds will be invested according to pension fund policy

City’s periodic UAAL amortization payments replaced with principal and interest payments to bondholders

Net effect is to lower and restructure the City’s annual budgetary payments

Projected “Reduction” = Difference between actuarial requirement (current payments) and bond payments

OceansidePension Funds

Annual UAAL Amortization

Payment at 7.75%

$

Current Plan

ProceedsPOB

Oceanside Pension Funds

One-Time Deposit to Pension Funds

$

Investors

POB Transaction

Semi-Annual Debt Service

Payments at 5.35%

Benefits of Issuing POBs

Interest Rate SavingsAssigned CalPERS interest rate at 7.75%

versus bond rate of 5.35% produces cash flow savings

Interest ArbitrageProceeds from POBs will be invested by

CalPERS at higher rate of return than the interest cost on the bonds. Benefit of higher return credited to City in lower normal annual contributions.

Possible Disadvantages of Issuing POBs

Possibility of the assigned interest rate by CalPERS will drop below the bond interest rate or CalPERS will have negative earnings for a sustained period of time

Lump sum payment to CalPERS is invested at one time versus over a period of time which could concentrate market timing risks

City Pension Obligation Bonds

20-year Taxable Pension Obligation BondsFixed Rate with 10-year Call Option

Par Value $36,880,000All-in Total Interest Cost 5.35%Net Present Value Savings

$8,763,037 (23%)Estimated annual savings $735,000

POB Issuance by Cities Since 1995

SaleDate Issuer Issue Description

Par Amount($ mils)

7/28/1995 Santa Rosa-California Pension Oblig Refunding Bonds 8.67

10/25/1995 Long Beach City-California Pension Obligation Ref Bonds 108.64

2/14/1997 Oakland-California Taxable Pension Oblig Bonds 436.29

5/19/1998 Berkeley-California Pension Refunding Bonds 12.42

7/29/1999 Pasadena-California Taxable Pension Funding Bonds 50.74

7/29/1999 Pasadena-California Taxable Pension Funding Bonds 51.21

11/3/1999 Richmond City-California Taxable Ltd Oblig Pension Bonds 36.28

7/11/2000 Fresno-California Taxable Pension Obligation Bonds 211.30

6/13/2001 South Gate City-California Taxable Certs of Participation 8.50

10/3/2001 Oakland-California Taxable Pension Obligation Bonds 195.64

1/23/2002 Fresno-California Taxable Pension Oblig Bonds 205.34

POB Issuance by Cities Since 1995

SaleDate Issuer Issue Description

Par Amount($ mils)

8/9/2002 Long Beach City-California Taxable Pension Oblig Ref Bonds 43.95

8/9/2002 Long Beach City-California Taxable Pension Oblig Ref Bonds 44.00

7/9/2003 Santa Rosa-California Pension Obligation Ref Bonds 20.50

7/9/2003 Santa Rosa-California Pension Obligation Ref Bonds 30.17

6/17/2004 Union City-California Pension Obligation Bonds 23.00

6/29/2004 Pomona City-California Pension Obligation Ref Bonds 38.00

1/20/2005 Fairfield City-California Pension Obligation Ref Bonds 8.92

1/20/2005 Fairfield City-California Pension Obligation Ref Bonds 21.00

3/1/2005 South Gate City-California Pension Obligation Ref Bonds 24.40

4/13/2005 Fairfield City-California Pension Obligation Ref Bonds 11.83

6/13/2005 Huntington Park City-California Pension Obligation Ref Bonds 23.05

Source: SDC Thomson Financial

Historical PERS Rates of Return

CalPERs Annual Returns (%)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Annual Return(1) 7.75% Assumed Earnings Rate -7.8% Low at 95% Certainty

31.8% High at 95% Certainty 12.0% 20 Year Avg. Return

Notes:(1) Year end 6/30/85-6/30/04 as reported by CalPERs: beginning 6/30/02 performance figures are reported as gross of fees

31.8% High Certainty

12% 20 year Avg Rtn

7.75% Assumed Earnings Rate

-7.8% Low Certainty

Projected 05-06 City Pension Costs with Pension Obligation Bonds

Safety Plan Miscellaneous Plan

(As a % of Payroll)Employer CostNormal Rate18.10%

Employee Cost 9.00%

(As a % of Payroll)Employer CostNormal Rate 8.42%

Employee Cost 7.00%

Estimated CalPERS Cost FY 05-06$11,432,156