Minutes 04/23/2013 - Laserfiche WebLink

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April 23, 2013 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. Instead, the issuance of the POBs should have a stabilizing affect on the City's credit ratings • At the February 26, 2013 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 POBs 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 is approximately $2 million per year. • The City plans to fund the Social Security Offset liability by including that cost in the POBs 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 a schedule to issue the POBs as quickly as possible in order to take advantage of the current low interest rate environment. • On March 26, 2013 Council adopted a motion scheduling a public hearing on the issuance of the POBs for Council's April 23, 2013 meeting. Discussion: • The schedule for issuing Pension Obligation Bonds includes a public hearing on April 23, 2013 when Council will also adopt an ordinance approving the terms of the bond issuance. • City personnel and Davenport will visit the bond rating agencies in early May. • We expect to sell the bonds on June 4, 2013 with a closing date of June 27, 2013. Financial Impact: • We project issuing the bonds at a 4.5% interest rate, and they will be taxable. The Ordinance authorizes a maximum interest rate of 5.5%. • 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 an ordinance authorizing the issuance and sale of General Obligation Pension Obligation Bonds in an aggregate principal amount not to exceed $175,000,000. Vision Principle: Efficient, Responsive Government. Next Steps Following Council Action: • Finance will complete the financial aspects of this transaction. 1. Dr. Alexandra Peck Berger, 50 Sandie Point Lane, spoke in support of this item.