(23)AR 061907 Pension Obligation Bonds

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pooled cash is available to draw from to execute a timely payment to PERS and pooled cash will be replenished from bond proceeds after sale of bonds. The estimated taxable interest rates, at the time of preparation of this staff report, range from 5.75% to 6.00%, with an approximate average of 5.85%. These rates are approximately 190 basis points, or 32%, lower than the 7.75% rate charged by PERS. Finally, it should be noted that the UAAL for PERS is based on actuarial studies. Such studies are a snapshot in time and have variables such as mortality rates and interest earnings. For example, PERS assumes a 7.75% rate of return on investments. If the organization does not achieve this actuarial assumed rate of return over a period of time the UAAL for the City of Colton could increase in the future. The same is true if assumptions changed dramatically that could also increase the UAAL. However, this does not diminish the value of the City in moving forward with a POB program that will manage pension costs effectively today. ALTERNATIVE The City Council could elect to not issue POB's and leave the remaining UAAL with PERS. However, adoption of this alternative would cause the City to not realize the significant budgetary and net present value savings expected as a result of the proposed transaction. FINANCIAL IMPACT The fiscal impact of the proposed POB financing would be to reduce annual retirement costs during the first 10 years of the bond transaction by approximately $280,000 each year; by approximately $250,000 each year in years 11 through 18; and by approximately $180,000 each year in years 19 through 30. The gross savings for all plans approximate $7.0 million with net present value savings approximating $3.6 million, nearly 13% of the total current PERS debt service. In addition to these savings, the City will have no Miscellaneous Plan balance in 30 years, whereas under the current PERS methodology an approximate balance of $17.5 million is again expected by 2038. The interest rates on the POBs, unlike most City of Colton and Redevelopment Agency debt, will have a taxable rate. This is due to the fact that the proceeds of the POBs are going to fund a retirement benefit, as opposed to being invested in publicly owned capital infrastructure (which would allow the City to issue the bonds on a tax- exempt basis). Again, as a result, it is expected that the POBs will have interest rates ranging from 5.75% to 6.00°/x, based upon rates in effect as of June 5, 2007. The actual rates upon bond pricing, which is expected by early next month (July, 2007), cannot be readily predicted, but it is unlikely they would increase to a level that causes the proposed POB"s to be uneconomical. These rates are considerably lower than the 7.75% that PERS charges the City for its unfunded liability. All costs associated with the bond financing including bond counsel, underwriter, financial advisor, disclosure counsel and actuarial consultant will be paid through this bond issue and will not impact the City's General Fund. ENVIRONMENTAL IMPACT The proposed issuance of POB's does not constitute a project or trigger other applicability to the California Environmental Quality Act (CEQA). There is no environmental impact as a result of this proposed transaction. RECOMMENDATIONS 1. Authorize staff and the bond financing team to proceed with the issuance of Pension Obligation, Bonds. 2. Approve the bond documents, including the Indenture of Trust and the Preliminary Official Statement. 3. Authorize staff to perform any other routine administrative procedures in executing the transaction.