04-13-2004 CC RPT 28 - Laserfiche WebLink

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People Serving People CITY OF RIVERSIDE CITY COUNCIL MEMORANDUM Riverside 1995 HONORABLE MAYOR AND CITY COUNCIL DATE: April 13, 2004 ITEM NO: 28 SUBJECT: PREPAYMENT OF 2004/05 PERS OBLIGATION BACKGROUND On March 2, 2004, the City Council approved the issuance of Pension Obligation Bonds ("POBs") to eliminate the Unfunded Accrued Actuarial Liability ("UAAL") associated with the California Public Employees Retirement System Safety Plan ("CalPERS Safety Plan"). As stated in the indicated Council Report, this action is anticipated to reduce the total payments to CalPERS by approximately $27.1 million. Unaffected by this transaction is the remaining ongoing cost of both the Safety and the Miscellaneous CalPERS retirement plans, known as the "normal" cost. For fiscal year 2005, the City is obligated to pay CalPERS a total of 15.966% of the compensation of the Safety employees and 11.033% of the compensation of the Miscellaneous employees as the employer portion and an additional 9% and 8%, respectively, for the employee share. It is estimated that the total "normal" cost to be paid to CalPERS for fiscal year 2005 is estimated to be $18,525,000. The same organization that sponsored the POB program, the California Statewide Communities Development Authority ("CSCDA"), has established a new program to prepay this "normal" cost and obtain a financial benefit. With the cooperation of CalPERS, the program offers a discount of 4.5% on the 2005 pension cost for a prepayment on July 1, 2004. The new program involves the issuance of Tax and Revenue Anticipation Notes ("TRANs") at a market rate of interest, currently 1.35%. The entire proceeds of the TRANs would be paid to CalPERS. The TRANs would be repaid at the end of fiscal year 2005 in one lump sum. All payments that otherwise would be paid to CalPERS on a bi-weekly basis will be instead invested throughout the year in the City's investment pool. The City's pool is currently earning 2.6%. Therefore, we will be paying 1.35% interest on the $18,525,000, obtaining over 2% interest earnings on the payments otherwise made to CalPERS and receiving a 4.5% reduction on the total required payment. In summary, the combination of the discount and the favorable arbitrage on the debt results in the City saving approximately $825,000 on the "normal" CalPERS cost for fiscal year 2005. FISCAL IMPACT: The savings to the City is projected to be approximately $825,000. Included in that amount is a savings to the General Fund of about $550,000. ALTERNATIVE: This prepayment opportunity could be rejected. 28-1