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

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

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

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

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

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

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

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

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

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

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

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