People Serving
<br />People
<br />
<br /> CITY OF RIVERSIDE
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<br />CITY COUNCIL MEMORANDUM
<br />
<br />Riverside
<br />
<br />ilI-An~rioa I~
<br />
<br />1998
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<br />HONORABLE MAYOR AND CITY COUNCIL
<br />
<br />DATE: March 2, 2004
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<br />ITEM NO: 28
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<br />SUBJECT: PENSION OBLIGATION BONDS
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<br />BACKGROUND
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<br />During the past two years all pension plans have been negatively impacted by significant reductions in the
<br />equity markets. In addition, many governmental units in the State of California have increased pension
<br />benefits to employees. As a result, a number of pension plans reflect an Unfunded Accrued Actuarial Liability
<br />(UAAL"). Therefore, in addition to the "normal cost", i.e., the required annual contribution to the pension
<br />plan to fund expected future pension system requirements, an additional contribution is required to eliminate
<br />the UAAL. In the case of the City ofRiverside's CalPERS Safety Plan, the UAAL is projected by CalPERS
<br />to be $67,343,907 as of June 30, 2004. For th,: fiscal year beginning July 1, 2004, the contribution rate (based
<br />on compensation to employees) is projected to be 15.966% for "normal cost" and 15.282% to amortize the
<br />UAAL. An alternative to paying the 15.282% for the amortization of the UAAL is to pay CalPERS the
<br />$67,343,907. This is accomplished using Pension Obligation Bonds. The advantage of paying with the Bonds
<br />is the ability to issue them at a low interest rate with the anticipation that CalPERS will be able to invest the
<br />proceeds at a higher rate. Since 1988 CalPERS has earned an average return of 9.34%; this includes the
<br />negative returns realized during the past three (3) years. In the current market, the City would be able to issue
<br />Pension Obligation Bonds at 5.33%. Based on CalPERS earning 8.25% on their portfolio and the Citypaying
<br />5.33% on the Bonds, over a 19-year period (the period CalPERS would otherwise amortize the UAAL) the
<br />savings to the City would be $27.1 million or in the next fiscal year, $1,003,557; on a present value basis the
<br />savings would be $17.4 million.
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<br />Since this is a problem common to many governmental units in Califomia, the League of California Cities and
<br />the California State Association of Counties have sponsored a program through the California Statewide
<br />Community Development Authority to issue Pension Obligation Bonds. The advantage of this program is a
<br />significant savings in the cost of issuance, since many jurisdictions will be involved and billions of dollars of
<br />bonds will be issued. It is also possible that some reduction in the interest rate maybe realized. At this time,
<br />the following counties and cities are reviewing documents and analyses, as is the City of Riverside: the
<br />Counties of Butte, Riverside, and Kings, and the Cities of San Bemardino, Burbank, Clovis, Daly City,
<br />Fairfield, La Mesa, Merced, Millbrae, Monterey Park, Napa, and Pacific Grove. In addition, the following are
<br />reviewing financial analyses, but have not yet received documents: Placer County and the Cities of
<br />Bakersfield, E1 Cenito, Inglewood, Monterey, Placentia, Redondo Beach, Santa Barbara, Santa Clara, Santa
<br />Cruz, Southgate, Stockton, Vallejo, and Ventura. Other governmental entities that have issued Pension
<br />Obligation Bonds in prior years include the Counties of San Diego, Imperial, Ventura, Los Angeles and
<br />Sacramento and the Cities of Fresno, Pasadena, Oakland and Long Beach.
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<br />28-1
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