Minutes 03/26/2013 - Laserfiche WebLink

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March 26, 2013 • There are essentially two problems affecting the fiscal viability of the plans: insufficient cash flow and assets that have deteriorated to the point where one bad year of investment losses could jeopardize the solvency of the plans. It will take $150 million just to get the plans to 80 cents of assets per dollar of liability, but that would be a significant improvement and would bring the funded status of the plans to an acceptable level. The quickest way to get us to that 80 cent level is through the issuance of Pension Obligation Bonds (POBs). • If properly structured and undertaken for the right reasons, the issuance of POBs should not have a negative impact on the City's credit ratings. • At the February 26 Council Work Session, City staff, along with representatives from Davenport, the City's Financial Advisor, provided Council with a comprehensive briefing on the issuance of Pension Obligation Bonds. • At that same Work Session, City staff also briefed Council on the cost of eliminating the Social Security Offset for the Portsmouth Supplemental Retirement Plan, and how Pension Obligation Bonds could be structured to include this cost. The Pension Plan's Actuary, New York Life, estimates the liability for eliminating that offset, in today's dollars, is approximately $21 million. The increased ARC needed to pay for that cost will be approximately $2 million per year. • The City plans to fund the Social Security Offset liability by including that cost in Pension Obligation Bonds with an interest only period. Budgetary savings would be dedicated to funding the liability over a roughly four year time period. In doing so, the City would save interest costs by paying down the liability in a relatively short time period. • City staff and Davenport are moving forward on an accelerated schedule to issue the Pension Obligation Bonds as quickly as possible in order to take advantage of the current low interest rate environment. • The first formal step in the process is to hold a Public Hearing, which is scheduled for Council's April 23, 2013 meeting. Discussion: • The accelerated schedule for issuing Pension Obligation Bonds includes a Public Hearing on April 23, when Council will also approve the terms of the bond issuance. • The Mayor, City staff, and Davenport will visit the bond rating agencies in early May • The bonds are expected to be sold on June 4, with a closing date of June 27. Financial Impact: • The bonds are projected to be issued at a 4.5% interest rate, and will be taxable. • The debt service on the portion of the bonds needed to immediately boost the funded level of the plans to 80% will be paid by the Annual Required Contribution (ARC) for FY 2013-14 of $19 million. • The debt service on the portion of the bonds that will cover the cost of eliminating the Social Security Offset is expected to be $2 million per year, beginning in FY 2014- 15. If interest rates end up lower than 4.5%, the cost will be less. The FY 2014-15 Budget will include this additional cost. • Based on a borrowing rate of 4.5%, the PSRS Plan would need to earn at least 6.2% and the Fire and Police Plan would need to earn at least 5.6% over the 24 year bond amortization period in order for the estimated payments to be sufficient to cover the cost of Plan benefits. • There is a risk that if the Plans earn less than these "hurdle rates" over time, the ARC will need to increase. However, that same risk exists if the City does not issue the bonds. Recommended Action: • Adoption of a motion to set the April 23, 2013 Public Hearing Date. Vision Principle: Efficient, Responsive Government. 1. Mark Geduldig-Yatrofsky, P. O. Box 50141, spoke in support of the public hearing but voiced his concerns with the intent and management of the bonds.