CALPERS AND
PENSION OBLIGATION BONDS
City Council Workshop
July 13, 2005
Recap
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April 6, 2005 – Council approves the issuance of Pension
Obligation Bonds, Court Validation Action and supporting
documentation
April 14, 2005 – Validation Proceedings commenced
May 31, 2005 – Response period ends for validation
complaint
June 15, 2005 – Council requests workshop to better
understand retirement system and pension obligation bonds
June 16, 2005 – Judgment received on validation. Appeal
period commences with expected July 18, 2005 completion
July 13 – Council workshop and approval of resolutions
August 1-5, 2005 – Sale of Bonds
Presentation Summary
Overview of City pension program
 Explanation of Unfunded Accrued
Actuarial Liability
 Overview of Pension Obligation
Bonds
 Request approval of resolution for
official statement and continuing
disclosure agreement
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Key Questions
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Is it okay for the City to have an Unfunded
Accrued Actuarial Liability?
Is something wrong with having an Unfunded
Accrued Actuarial Liability?
Does the issuance of pension obligation
bonds create new debt for the City?
Does the issuance of pension obligation
bonds add additional benefits to employees?
What are the advantages and disadvantages
of issuing pension obligation bonds?
CalPERS - General Information
City contracts with California Public
Employees Retirement System
(CalPERS) to provide retirement
benefits for employees
 City has two separate plans
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Safety Plan for full-time sworn safety
personnel
 Miscellaneous Plan for full-time nonsworn personnel
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CalPERS - General Information
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Current retirement benefit for active
employees
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Safety Plan is 3% at 60
Miscellaneous Plan 2% at 55
City pays both Employer share and
Employee share of retirement cost
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Safety Plan Employee share is 9% of payroll
Miscellaneous Plan Employee Share is 7% of
payroll
CalPERS - General Information
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Employer Share of retirement cost, or
Normal Annual Contribution, is
determined by CalPERS on an annual
basis, based on actuarial assumptions that
include, but are not limited to,
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Retirement Age
Salary and Merit Increases
Mortality Rates
Valuation of Current Plan Assets
Investment Returns
Unfunded Accrued Actuarial Liability
(UAAL)
The UAAL is determined by CalPERS
actuaries to be the amount that
CalPERS is short, without further
payments from the City, to pay
benefits already earned by current
and former employees covered by
the pension system.
 City is required to pay CalPERS the
UAAL
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Unfunded Accrued Actuarial Liability
(UAAL)
The UAAL is amortized over a period
of 20-years according to an
agreement with CalPERS
 The assigned interest rate is
equivalent to the assumed rate of
investment return on pension fund
asset
 Current Actuarial Rate = 7.75%
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Unfunded Accrued Actuarial Liability
(UAAL)
Asset investment gains or losses are
currently smoothed by CalPERS over
a three-year period to help avoid
market valuation volatility
 New CalPERS Employer Rate
Stabilization policy to go into effect
FY 06-07
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30-year rolling amortization period
 15-year smoothing calculation
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City’s Projected UAAL
Safety Plan
Miscellaneous Plan
Projected UAAL Balance Projected UAAL Balance
as of June 30, 2005
as of June 30, 2005
$32,668,442
$3,357,952
Estimated Payment for FY Estimated Payment for FY
05/06
05/06
$3,261,154
$487,425
Projected 05-06 City Pension Costs
Safety Plan
Miscellaneous Plan
(As a % of Payroll)
(As a % of Payroll)
Employer Cost
Employer Cost
Normal Rate
Unfunded Rate
Total
18.10% Normal Rate
12.82% Unfunded Rate
30.92%
Total
8.42%
1.48%
9.90%
Employee Cost
9.00% Employee Cost
7.00%
Estimated CalPERS Cost FY 05-06
$13,775,115
UAAL Funding Alternatives
 Use
Reserves to make full UAAL
payment
 Decrease plan benefits
 Issue Pension Obligation Bonds
Issuing Pension Bonds
The issuance of POBs refinances the
unfunded liability with CalPERS
 Savings based on the difference
between actuarial rate (7.75%) and
All-in True Interest Cost (All-in TIC) of
bonds issued (currently estimated at
5.35%)
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How Do Pension Bonds Work?
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Bonds are issued to refinance all or a
portion of the Pension Plans’ UAAL
Proceeds of bonds are deposited in
Pension Funds: funds will be invested
according to pension fund policy
City’s periodic UAAL amortization
payments replaced with principal and
interest payments to bondholders
Current Plan
Oceanside
Annual UAAL
Amortization
Payment at 7.75%
Pension
Funds
POB Transaction
$
Oceanside
Net effect is to lower and restructure
the City’s annual budgetary payments
Projected “Reduction” = Difference
between actuarial requirement (current
payments) and bond payments
$
POB
Proceeds
One-Time
Deposit to
Pension
Funds
Semi-Annual
Debt Service
Payments at 5.35%
Investors
Pension
Funds
Benefits of Issuing POBs
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Interest Rate Savings
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Assigned CalPERS interest rate at 7.75%
versus bond rate of 5.35% produces
cash flow savings
Interest Arbitrage
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Proceeds from POBs will be invested by
CalPERS at higher rate of return than
the interest cost on the bonds. Benefit
of higher return credited to City in lower
normal annual contributions.
Possible Disadvantages of Issuing POBs
Possibility of the assigned interest
rate by CalPERS will drop below the
bond interest rate or CalPERS will
have negative earnings for a
sustained period of time
 Lump sum payment to CalPERS is
invested at one time versus over a
period of time which could
concentrate market timing risks
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City Pension Obligation Bonds
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20-year Taxable Pension Obligation
Bonds
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Fixed Rate with 10-year Call Option
Par Value $36,880,000
 All-in Total Interest Cost 5.35%
 Net Present Value Savings
$8,763,037 (23%)
 Estimated annual savings $735,000
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POB Issuance by Cities Since 1995
Sale
Date
Par Amount
($ mils)
Issuer
Issue Description
Santa Rosa-California
Pension Oblig Refunding Bonds
Long Beach City-California
Pension Obligation Ref Bonds
108.64
2/14/1997
Oakland-California
Taxable Pension Oblig Bonds
436.29
5/19/1998
Berkeley-California
Pension Refunding Bonds
12.42
7/29/1999
Pasadena-California
Taxable Pension Funding Bonds
50.74
7/29/1999
Pasadena-California
Taxable Pension Funding Bonds
51.21
11/3/1999
Richmond City-California
Taxable Ltd Oblig Pension Bonds
36.28
7/11/2000
Fresno-California
Taxable Pension Obligation Bonds
6/13/2001
South Gate City-California
Taxable Certs of Participation
10/3/2001
Oakland-California
Taxable Pension Obligation Bonds
195.64
1/23/2002
Fresno-California
Taxable Pension Oblig Bonds
205.34
7/28/1995
10/25/1995
8.67
211.30
8.50
POB Issuance by Cities Since 1995
Sale
Date
Par Amount
($ mils)
Issuer
Issue Description
8/9/2002
Long Beach City-California
Taxable Pension Oblig Ref Bonds
43.95
8/9/2002
Long Beach City-California
Taxable Pension Oblig Ref Bonds
44.00
7/9/2003
Santa Rosa-California
Pension Obligation Ref Bonds
20.50
7/9/2003
Santa Rosa-California
Pension Obligation Ref Bonds
30.17
6/17/2004
Union City-California
Pension Obligation Bonds
23.00
6/29/2004
Pomona City-California
Pension Obligation Ref Bonds
38.00
1/20/2005
Fairfield City-California
Pension Obligation Ref Bonds
8.92
1/20/2005
Fairfield City-California
Pension Obligation Ref Bonds
21.00
South Gate City-California
Pension Obligation Ref Bonds
24.40
4/13/2005
Fairfield City-California
Pension Obligation Ref Bonds
11.83
6/13/2005
Huntington Park City-California
Pension Obligation Ref Bonds
23.05
3/1/2005
Source: SDC Thomson Financial
Historical PERS Rates of Return
CalPERs Annual Returns (%)
40.0%
35.0%
31.8% High Certainty
30.0%
25.0%
20.0%
15.0%
12% 20 year Avg Rtn
10.0%
5.0%
7.75% Assumed Earnings Rate
0.0%
-5.0%
-7.8% Low Certainty
-10.0%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Annual Return(1)
7.75% Assumed Earnings Rate
31.8% High at 95% Certainty
12.0% 20 Year Avg. Return
-7.8% Low at 95% Certainty
Notes:
(1) Year end 6/30/85-6/30/04 as reported by CalPERs: beginning 6/30/02 performance figures are reported as gross of fees
Projected 05-06 City Pension Costs with
Pension Obligation Bonds
Safety Plan
Miscellaneous Plan
(As a % of Payroll)
(As a % of Payroll)
Employer Cost
Normal Rate
Employee Cost
Employer Cost
18.10% Normal Rate
9.00% Employee Cost
Estimated CalPERS Cost FY 05-06
$11,432,156
8.42%
7.00%