CalPERS Pension Liability Refinancing Community Workshop September 30, 2020

1 Overview

. CalPERS Pension Liability Background . City Financing Advisory Team . Pension Liability Refinancing - Lease Revenue Bonds . PARS Pension Section 115 Trust

2 CalPERS Pension Liability Background

3 Background – CalPERS

• Most cities in California, including Placentia, contract with CalPERS for their employees’ retirement benefits. • CalPERS provides for and manages the City’s employee pension plans. • CalPERS calculates what the current and future costs of retiree benefits are and then bills the City for those costs

4 Background – City CalPERS Membership

As of June 30, 2019 (Active Members) Participant Total Type Classic Members Active 123 • Misc – 24 (2% @ 55) Transferred 113 • Misc Tier II – 5 (2% @ 60) • Safety – 24 (3% @ 50) Separated 75 Retired 346 PEPRA Members Total 657 • Misc – 52 (2% @ 62) • Safety – 18 (2.7% @ 57)

5 Background – City CalPERS Membership

107 Active Participants 123 Active Participants June 30, 2014 June 30, 2019 Tier II 4%

Classic PEPRA 39% 57%

6 Background – City CalPERS Retirement Costs

• CalPERS estimates the costs to provide retirement benefits to current and future retirees. • Costs are estimated for a long-term, 25-year period. • Various factors are considered such as retiree mortality/longevity; annual cost of living/inflation adjustments; increases in payroll; and, CalPERS’ investment earnings. • CalPERS’ target earnings rate is 7%

7 Background – City CalPERS Plan Funding

Plan Funding Sources

ASSUMED ACTUAL Fiscal Year Investment Investment Funding Components: Earnings Earnings • Investment Earnings • Normal Cost 2017-18 7.50% 8.6% • Pension Liability Payments 2018-19 7.38% 6.7% (UAL) 2019-20 7.25% 4.7% 2020-21 7.00% N/A 2021-22 7.00% N/A

8 Background – City CalPERS Plan Annual Funding Sources (Assumed)

Assumptions: UAL • Assumed Investment 24% Earnings – 7% Assumed • Normal Cost – Fixed Investment Earnings • Pension Liability Payments 64% Normal Cost 12%

9 Background – City CalPERS Plan Annual Funding Sources (Actual)

Actual Assumptions: Investment • Actual Investment Earnings Earnings – 4.7% 43% • Normal Cost – Fixed UAL • Pension Liability Payments 45%

Normal Cost 12%

10 Background – City CalPERS Pension Liability

PENSION LIABILITY ASSUMED ACTUAL % Variance Fiscal Year Total All City Plans Total All City Plans (As reported August 2016)

UAL Balance UAL Payment UAL Balance UAL Payment UAL Balance

2017-18 $31,656,576 $2,846,492 $31,730,392 $2,846,965 0.2% 2018-19 $31,079,513 $1,970,654 $39,538,082 $2,084,391 27.2% 2019-20 $31,367,258 $2,325,206 $38,972,459 $2,577,931 24.2% 2020-21 $31,308,979 $2,474,576 $42,471,355 $2,949,527 35.7% 2021-22 $31,091,456 $2,641,931 $48,138,412 $3,447,626 54.8%

11 Background – Forecasted Annual UAL Payments* $5.5

Millions $5.1 million $5.0

$4.5

$4.0

$3.5

$3.0 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 *Excludes terminated Fire plan

12 City Financing Advisory Team

13 City Financing Advisory Team

• In July, the City Council Directed Staff to proceed with the refinancing of the City’s pension liability • City Financing Advisory Team was established  Robert Torrez, Finance Consultant - 40+ years of public finance experience  Kosmont, Municipal Advisor - 65+ years of experience, over 400 public financings  Harrell, Municipal Advisor - 20+ years of experience, nearly 325 public financings  Nixon-Peabody, Bond Counsel - 20+ years of experience, over 300 public financings  Stifel, Underwriter - 29 years of experience, over 250 public financings • Over 174 total years of experience, 1,275 public financings

14 Pension Liability Refinancing – Lease Revenue Bonds

15 Why Refinance the Pension Liability?

. Interest rates are at historic lows . Refinance 7% CalPERS liability payments at a lower fixed rate estimated in the range of 4.3%-5.3%

- Lease Revenue Bonds (LRBs) are issued at taxable rates and rates are based on City’s credit rating . More manageable payment . Given low interest rates, fiscally prudent decision . Budget savings result in more efficient use of City funds (fiscal sustainability) . Savings add to reserves and/or may be used for other City priorities/initiatives

16 Pension Refinancing Lease Revenue Bonds (LRBs)

• Cities may not issue “debt” without voter approval but may execute leases • Widely accepted form of financing public projects in CA • Use City assets as collateral and pledge lease payments to repay bondholders • Used to refinance pension obligations, accepted by investors as evidenced by other agencies (West Covina, Torrance, El Monte, Fairfax, Ridgecrest) • Generally obtain better interest rates than Pension Obligation Bonds (POBs) due to underlying “collateral” • While no “BBB” rated POB has been issued before, numerous “BBB” rated LRBs have been issued

17 Lease Revenue Bond Characteristics

• Both essential and non-essential assets can be used as leased property • If City does not make lease payments, Trustee is authorized to re-let the leased property (if ever possible) and try to recover missed payments from City • Per legal counsel, impractical to “enforce” with no known examples in CA • Lease payments must represent fair rental value of the leased property • Lease payments must be subject to annual appropriation • Lease must be subject to “abatement”

18 Mechanics of Lease Revenue Bonds

19 Potential City Properties for Consideration to Lease

Property Acres Estimated Land Value* Champions Sports Complex 12.98 $19,463,850 Kraemer Memorial Park 11.46 $17,193,900 Parque de Los Vaqueros 5.36 $8,040,000 Koch Park 4.30 $6,450,000 Parque Del Arroyo Verde 3.98 $5,975,250 Parque de los Ninos 3.70 $5,550,000 Richard Samp Park 3.38 $5,075,700 Tuffree Park 3.10 $4,650,000 Goldenrod Park 2.65 $3,973,800 Wagner Park 1.87 $2,805,000 Bradford Park 1.60 $2,399,700 McFadden Park 1.49 $2,231,250 Santa Fe Park 0.93 $1,400,700 La Placitta Parkette 0.26 $382,950 TOTAL 57.06 $85,592,100

* Land values estimated at $1.5 million per acre

20 Debt Service Comparison Savings

2020 Lease FYE June 30 Revenue Bonds Total CalPERS UAL Payments $84,735,578 Total Debt Payments $75,410,683 Savings $9,324,895 Reserve Fund Credit $3,837,911 Net Savings $13,162,806 Prepay Budgetary Savings $1,848,192 Total Savings $15,010,998

Note: Prepay Budgetary Savings represents the estimated savings of refinancing the projected additional UAL for 2019-20 (not included in the ‘Total Debt Payments’ for comparison purposes)

21 Rate Sensitivity

Current Interest Rates +50 BPS +25 BPS Market -25 BPS -50 BPS Total CalPERS UAL Payments $84,735,578 $84,735,578 $84,735,578 $84,735,578 $84,735,578 Total Debt Service $79,190,905 $77,286,171 $75,410,683 $73,563,204 $71,741,973 Savings $5,544,673 $7,449,407 $9,324,895 $11,172,374 $12,993,605 Reserve Fund Credit $4,030,299 $3,933,361 $3,837,911 $3,743,886 $3,651,197 Net Savings $9,574,972 $11,382,768 $13,162,806 $14,916,260 $16,644,802 Savings % 11.30% 13.40% 15.50% 17.60% 19.60%

22 PARS Pension Section 115 Trust

23 PARS Pension Section 115 Trust

• Used by local governments to fund essential governmental functions (i.e., retiree healthcare, pension) • Any income derived from a Section 115 Trust is tax exempt • Prefund employee benefit plan obligations • Once contributions are placed into the Trust, assets from the Trust can be used for specific benefit plan purposes • Staff recommends the establishment of a Trust with PARS using a portion of the pension liability LRB savings to offset future pension liability

24 PARS Pension Section 115 Trust

25 PARS Pension Section 115 Trust Potential Portfolio Returns As of May 31, 2020 Strategy 1 Year 3 Years 5 Years 10 Years

Capital Appreciation 5.56% 5.69% 5.74% 8.48%

Balanced 5.79% 5.48% 5.31% 7.70%

Moderate 5.75% 5.19% 5.00% 7.02%

Moderately Conservative 5.91% 4.71% 4.33% 5.70%

Conservative 6.30% 4.48% 3.91% 4.59%

Local Agency Investment Fund (LAIF) - Average 1.93% 1.87% 1.36% .86%

3-Year Certificate of Deposit N/A 1%+/- N/A N/A

26 PARS Pension Section 115 Trust Potential PARS Portfolio Returns

Strategy 1 Year 3 Years 5 Years 10 Years

Capital Appreciation $266,575 $853,919 $1,521,726 $3,619,377

Balanced 265,275 845,440 1,498,668 3,514,651

Moderate 264,325 839,280 1,482,013 3,440,151

Moderately Conservative 262,175 825,451 1,44,925 3,277,669

Conservative 260,200 812,882 1,411,582 3,135,603

Asset figures shown above assume annual City contributions of $250,000 over 10 years using HighMark Capital Management’s expected net investment returns (30 year horizon) of selected investment strategy

27 Final Comprehensive Financing Structure

Debt Debt Structure Issuance Portion or all savings are Long-term Generates redirected to 115 financial stability significant Trust during economic annual savings 115 Trust uncertainty

28 Tentative Estimated Schedule

WEEK OF ACTION September 28 Financing Advisory Team finalizes documents October 19 Council consideration of the approval of LRB issue October 26 Bond Sale November 17 Bond Closing

29 Questions?

30