(23)AR 061907 Pension Obligation Bonds

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ITEM #22 CITY OF COLTON AGENDA REPORT FOR CITY COUNCIL MEETING OF JUNE 19, 2007 TO: HONORABLE MAYOR AND CITY COUNCIL MEMBERS FROM: DILU DE ALWIS, FINANCE DIRECTOR SUBJECT: APPROVAL OF ISSUANCE OF PENSION OBLIGATION BONDS AND RELATED DOCUMENTS AND ACTIONS DATE: JUNE 5, 2007 BACKGROUND On April 3, 2007 the City Council approved the issuance of City of Colton Taxable Pension Obligation Bonds (POB's), including formation of a financing team, authorization of the court validation action process, and preparation of related bond documents. The proposed City Council action for the June 19, 2007 meeting will authorize staff to move forward with the POB program by approving the issuance of City of Colton Taxable Pension Obligation Bonds Series 2007 and all related bond documents required to complete the transaction. Primary bond documents include the Indenture of Trust and related appendices, and the Preliminary Official Statement. DISCUSSION/ ANALYSIS As of June 30, 2007, the City's unfunded actuarial accrued liability (UAAL) is projected to be $7,558,661 for the Police Plan, $5,845,135 for the Fire Plan (collectively the Police and Fire Plans will be referred to as the "Safety" Plans herein), and $14,582,593 for the Miscellaneous Plan under the Public Employees Retirement System (PERS). The City's obligation under the PERS Safety Plans is fully amortized with an 18 year term for Police and a 10 year term for Fire. Unlike the Safety Plans, the Miscellaneous Plan does not fully amortize the UAAL. Instead, based on current actuarial assumptions and assuming no additional surpluses or shortfalls in retirement benefits, the City's UAAL under the Miscellaneous Plan is expected to increase to $17.5 million by 2038, reflecting a negative amortization. The issuance of Pension Obligation Bonds ("POBs") will allow the City to manage effectively its UAAL with PERS. The POBs will serve different purposes for each of the City's retirement plans. Under the Safety Plans, the City intends to create upfront cash flow relief with lower annual debt service payments, based upon the same amortization periods that currently exist under PERS. Under the Miscellaneous Plan, the City intends to eliminate a negative amortizing obligation that after 30 years, assuming no additional surpluses or shortfalls, would have a UAAL balance of zero not an increase of $3 million, from $14.5 million today to approximately $17.5 million by 2038. In summary, the total bond issue is estimated to be sized at approximately $32 million and should be sold before the end of July, 2007. This aggregate sum also includes costs of issuance and an approximate $3 million financed payment of the City's 2007-08 PERS normal cost. By financing this normal cost, the City realizes one-time budgetary savings of $3 million, which will be added to the City's reserves. PERS rules calls for any prepayment of normal cost contributions to be made prior to July 15th of each year and all attempts will be made to close the bond financing prior to this date in order to fund the prepayment from bond proceeds. In the event the bond closing is delayed by a few days, the City Treasurer has confirmed that