1. Pension Obligation Restructuring
Presented to:
Stockton City Council
March 20, 2007
Item 8.01

2. Background
The City provides retirement benefits to all permanent employees thru CalPERS
Contributions consist of:
cost of funding current benefits as they are earned
cost of amortizing any accrued, but unfunded, benefits

3. Background (cont)
The City’s annual contribution has increased from $13.6 to $35 million over the past five fiscal years due to:
Under performance of investments by CalPERS
Enhanced benefits to Public Safety employees
Currently the City has an Unfunded Actuarial Accrued Liability of $158.5 million
Safety Plan is $109.5 million
Miscellaneous Plan is $49 million

4. Background (cont)
Introduced to Budget, Finance & Economic Development Committee 7/13/06
Full Council Study Session 8/31/06
Council approved proceeding with Judicial Validation on 9/26/06
Validation process completed 2/16/07
Budget, Finance & Economic Development Committee presentation 2/8/07
In order to have the option to restructure the Pension Obligations, the City has gone through satisfying the prerequisite legal requirements.
The City received a favorable judgment from the Superior Court on January 3, 2007
The judicial validation process concluded on February 16, 2007
the validation was written to cover not only the existing UAAL, but any future bonds issued in relation to future UAALs that arise

5. Financing the Unfunded Actuarial Accrued Liability
Staff has explored options to finance the Unfunded Actuarial Accrued Liability through the use of Pension Obligation Bonds
The City can issue Pension Obligation Bonds to substantially reduce the Unfunded Actuarial Accrued Liability at an estimated interest rate of 5.79% as compared with the 7.75% actuarial assumed earnings rate used by CalPERS

6. Pension Obligation Bond Issuance
The financing team analyzed various structures and Unfunded Actuarial Accrued Liability financing levels
The consensus of the team, based on market conditions as of March 1, is to issue fixed-rate Pension Obligation Bonds for 85% of the Unfunded Actuarial Accrued Liability and to fix the amortization of the remaining 15% of Unfunded Actuarial Accrued Liability to a 30-year time frame
Save in excess of $2.6 million over the first 6 years

7. Pension Obligation Bond Benefits
The combination of issuing Pension Obligation Bonds and fixing the amortization of the remaining 15% of the Unfunded Actuarial Accrued Liability will extinguish the Unfunded Actuarial Accrued Liability balance over the next 30 years
In the absence of such action, the Unfunded Actuarial Accrued Liability is projected to grow to $244.5 million under current actuarial assumptions

8. Economic Advantage
The present value cost of issuing Pension Obligation Bond and amortizing 15% of the Unfunded Actuarial Accrued Liability balance over 30 years is $137.2 million while the present value cost of following CalPERS methodology is $158.5 million
The expected economic advantage to the City from the proposed transaction exceeds $21 million in current dollars

9. Financial Summary
The aggregate maximum amount of the Pension Obligation Bonds is $140 million
The estimated Unfunded Actuarial Accrued Liability payment to CalPERS is expected to be approximately $134,700,304
Due to the nature of selling bonds, it is not unusual for the actual proceeds to differ from the maximum amount

10. Financial Summary (cont)
Bond Proceeds
$137,215,000
Underwriter’s Discount
($950,595)
Cost of Issuance
($350,000)
Bond Insurance (40 bps)
($1,213,453)
Net Proceeds
$134,700,952

11. Financing Team Bond Counsel: Jones Hall
Disclosure Counsel: Lofton & Jennings
Underwriter: Lehman Brothers
Financial / Pricing Advisor: First Southwest Company

12. Recommended Action Adopt a Resolution authorizing…
the sale of Pension Obligation Bonds in an aggregate principal amount not-to-exceed $140 million
approving the final form of related financing documents and approving official actions