1. CALPERS AND PENSION OBLIGATION BONDS City Council Workshop July 13, 2005

2. 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 Recap

3. 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

4. Key Questions 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?

5. CalPERS - General Information City contracts with California Public Employees Retirement System (CalPERS) to provide retirement benefits for employees City has two separate plans Safety Plan for full-time sworn safety personnel Miscellaneous Plan for full-time non- sworn personnel

6. CalPERS - General Information Current retirement benefit for active employees Safety Plan is 3% at 60 Miscellaneous Plan 2% at 55 City pays both Employer share and Employee share of retirement cost Safety Plan Employee share is 9% of payroll Miscellaneous Plan Employee Share is 7% of payroll

7. CalPERS - General Information 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, Retirement Age Salary and Merit Increases Mortality Rates Valuation of Current Plan Assets Investment Returns

8. 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

9. 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%

10. 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 30-year rolling amortization period 15-year smoothing calculation

11. City’s Projected UAAL Safety PlanMiscellaneous Plan Projected UAAL Balance as of June 30, 2005 $32,668,442 Estimated Payment for FY 05/06 $3,261,154 Projected UAAL Balance as of June 30, 2005 $3,357,952 Estimated Payment for FY 05/06 $487,425

12. Projected 05-06 City Pension Costs Safety PlanMiscellaneous Plan (As a % of Payroll) Employer Cost Normal Rate18.10% Unfunded Rate12.82% Total30.92% Employee Cost 9.00% (As a % of Payroll) Employer Cost Normal Rate8.42% Unfunded Rate1.48% Total9.90% Employee Cost7.00% Estimated CalPERS Cost FY 05-06 $13,775,115

13. UAAL Funding Alternatives Use Reserves to make full UAAL payment Decrease plan benefits Issue Pension Obligation Bonds

14. 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%)

15. How Do Pension Bonds Work? l Bonds are issued to refinance all or a portion of the Pension Plans’ UAAL l Proceeds of bonds are deposited in Pension Funds: funds will be invested according to pension fund policy l City’s periodic UAAL amortization payments replaced with principal and interest payments to bondholders l Net effect is to lower and restructure the City’s annual budgetary payments l Projected “Reduction” = Difference between actuarial requirement (current payments) and bond payments Oceanside Pension Funds Annual UAAL Amortization Payment at 7.75% $ Current Plan Proceeds POB Oceanside Pension Funds One-Time Deposit to Pension Funds $ Investors POB Transaction Semi-Annual Debt Service Payments at 5.35%

16. Benefits of Issuing POBs Interest Rate Savings Assigned CalPERS interest rate at 7.75% versus bond rate of 5.35% produces cash flow savings Interest Arbitrage 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.

17. 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

18. City Pension Obligation Bonds 20-year Taxable Pension Obligation Bonds 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

19. POB Issuance by Cities Since 1995 Sale DateIssuerIssue Description Par Amount ($ mils) 7/28/1995Santa Rosa-CaliforniaPension Oblig Refunding Bonds 8.67 10/25/1995Long Beach City-CaliforniaPension Obligation Ref Bonds 108.64 2/14/1997Oakland-CaliforniaTaxable Pension Oblig Bonds 436.29 5/19/1998Berkeley-CaliforniaPension Refunding Bonds 12.42 7/29/1999Pasadena-CaliforniaTaxable Pension Funding Bonds 50.74 7/29/1999Pasadena-CaliforniaTaxable Pension Funding Bonds 51.21 11/3/1999Richmond City-CaliforniaTaxable Ltd Oblig Pension Bonds 36.28 7/11/2000Fresno-CaliforniaTaxable Pension Obligation Bonds 211.30 6/13/2001South Gate City-CaliforniaTaxable Certs of Participation 8.50 10/3/2001Oakland-CaliforniaTaxable Pension Obligation Bonds 195.64 1/23/2002Fresno-CaliforniaTaxable Pension Oblig Bonds 205.34

20. POB Issuance by Cities Since 1995 Sale DateIssuerIssue Description Par Amount ($ mils) 8/9/2002Long Beach City-CaliforniaTaxable Pension Oblig Ref Bonds 43.95 8/9/2002Long Beach City-CaliforniaTaxable Pension Oblig Ref Bonds 44.00 7/9/2003Santa Rosa-CaliforniaPension Obligation Ref Bonds 20.50 7/9/2003Santa Rosa-CaliforniaPension Obligation Ref Bonds 30.17 6/17/2004Union City-CaliforniaPension Obligation Bonds 23.00 6/29/2004Pomona City-CaliforniaPension Obligation Ref Bonds 38.00 1/20/2005Fairfield City-CaliforniaPension Obligation Ref Bonds 8.92 1/20/2005Fairfield City-CaliforniaPension Obligation Ref Bonds 21.00 3/1/2005South Gate City-CaliforniaPension Obligation Ref Bonds 24.40 4/13/2005Fairfield City-CaliforniaPension Obligation Ref Bonds 11.83 6/13/2005Huntington Park City-CaliforniaPension Obligation Ref Bonds 23.05 Source: SDC Thomson Financial

21. Historical PERS Rates of Return 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 31.8% High Certainty 12% 20 year Avg Rtn 7.75% Assumed Earnings Rate -7.8% Low Certainty

22. Projected 05-06 City Pension Costs with Pension Obligation Bonds Safety PlanMiscellaneous Plan (As a % of Payroll) Employer Cost Normal Rate18.10% Employee Cost 9.00% (As a % of Payroll) Employer Cost Normal Rate8.42% Employee Cost7.00% Estimated CalPERS Cost FY 05-06 $11,432,156