City of Piedmont Pension Debt Refinance Bonds, Measure A (February 2014)
|Voting on Local|
|Local Ballot Measures|
|February 28, 2014|
|Original Case study|
|San Jose & San Diego|
Currently, the city of Piedmont owes CalPERS $7.8 million in unfunded liabilities belonging to a side fund alone, which is separate from and in addition to the full PERS plans and liabilities covered by the city. The city was on track to pay this debt off over nine years paying an interest on the nearly 8 million dollars at a rate that amounts to 7.5%. This measure allowed the city to borrow $8 million dollars to refinance this debt at a lower interest rate. City officials estimated that refinancing will save the city between $600,000 and $700,000 over the projected nine year life of the loan.
Piedmont, CA, is a fairly small city, having a population of under 11,000 in 2012.
As of 4:06 PM PST February 5, 2014, the election results for Measure A were:
- Election results from Alameda County Elections office
Text of measure
The question on the ballot:
|Shall the City of Piedmont, at City Council discretion, issue bonds or otherwise incur debt in a principal amount not to exceed $8,000,000 to refinance a portion of the City’s existing obligation to the California Public Employees Retirement System for the purpose of achieving debt service savings, as more specifically set forth in Ord. 711 N.S. which is on file with the Piedmont City Clerk?|
ORDINANCE NO. 711 N.S.
AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF PIEDMONT AUTHORIZING THE ISSUANCE OF BONDS OR THE INCURRENCE OF DEBT TO REFINANCE CERTAIN EXISTING DEBT OBLIGATIONS TO THE CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM AND RELATED MATTERS
The City Council of the City of Piedmont hereby ordains as follows:
SECTION 1 RECITALS
The City Council hereby finds and determines the following recitals are true and correct:
a. The City of Piedmont (the “City”) entered into a contract with the California Public Employees’ Retirement System (“PERS”) dated October 16, 1974, as amended (the “PERS Contract”), pursuant to which the City is obligated to make payments to PERS relating to pension benefits accruing to members of the City’s miscellaneous and safety plans in accordance with the provisions of Sections 20000 et seq. of the Government Code (the “PERS Retirement Law”).
b. In 2003, the PERS Retirement Law was amended to provide that PERS establish criteria under which contracting members, such as the City, would be required to participate in risk pools (i.e., pools containing multiple employers), and PERS established such criteria for participation in risk pools, including mandated participation for rate plans with less than 100 active members.
c. Because each of the City’s miscellaneous plan and safety plan had less than 100 active members, PERS assigned the City’s plans to risk pools and established “side funds” separate from the risk pools for each plan as of June 30, 2003 (individually, a “Side Fund” and together, the “Side Funds”). The amount of each Side Fund equals the amount of the unfunded accrued actuarial liability of the City in connection with each plan. PERS amortizes the obligations related to the Side Funds over a fixed period of time and charges the City an interest rate on such amounts at a rate equal to the PERS actuarial rate of return, which is currently 7.50%. For the Fiscal Year ended June 30, 2013, the payment for the miscellaneous plan Side Fund was $314,103 and the payment for the safety plan Side Fund was $928,164. The City’s obligations to PERS related to the Side Funds as evidenced by the PERS Contracts is referred to herein as the “PERS Side Fund Obligations.”
d. As of June 30, 2013, PERS projected the amount of the PERS Side Fund Obligations as $2,311,901 for the miscellaneous plan and as $5,532,124 for the safety plan. This amount changes from time to time based on actuarial determinations prepared by PERS.
e. The PERS Side Fund Obligations are debt obligations of the City imposed by law.
Agenda Report Page 22 f. The City is authorized pursuant to Articles 10 and 11 (commencing with Section 53570) of Chapter 3 of Division 2 of Title 5 of the Government Code of the State of California or under the Charter of the City to issue refunding bonds or otherwise incur indebtedness for the purpose of refunding any evidence of indebtedness of the City.
g. For the purpose of refunding all or any portion of the PERS Side Fund Obligations, the City has determined to authorize the issuance of bonds or the incurrence of other debt in order to achieve debt service savings, subject to satisfying the requirements of Section 4.14 of the Charter of the City.
h. Section 4.14 of the Charter of the City provides, in part, that: “No bonded indebtedness which shall constitute a general obligation of the City may be created unless authorized by the affirmative votes of a majority of the electors voting on such proposition at any election at which the question is submitted to the electors and unless in full compliance with the provisions of the State Constitution, other State laws and this Charter.”
i. The City will hold its regular municipal election on February 4, 2014 (the “Election”).
j. This Council desires to submit to the registered voters of the City at the Election the question of whether bonds of the City may be issued and sold or debt otherwise incurred for the purpose of refinancing all or any portion of the PERS Side Fund Obligations as required by the Section 4.14 of the Charter of the City.
SECTION 2 ISSUANCE OF BONDS OR INCURRENCE OF DEBT AUTHORIZED
The City is hereby authorized, at City Council discretion, to issue bonds or otherwise incur debt in a principal amount not to exceed $8,000,000 to refinance all or any portion of the PERS Side Fund Obligations for the purpose of achieving debt service savings.
SECTION 3 EFFECTIVENESS OF ORDINANCE
Pursuant to Section 4.14 of the Charter of the City, this Ordinance shall not become effective unless approved by a majority of the voters voting on the proposition associated with this Ordinance at an election to be held on Tuesday, February 4, 2014. This Ordinance shall be posted at City Hall after its second reading by the City Council for at least 30 days.
SECTION 4 OTHER MATTERS
Should this Ordinance be approved by the voters as required by the Charter of the City, and should the City Council thereafter elect to issue said bonds or otherwise incur debt, (1) the approval of the terms and conditions of the bonds and the sale thereof or the incurrence of debt and other matters related thereto shall be approved by City Council by ordinance, in furtherance of the authority granted by this Ordinance; and (2) the members of the City Council and other officers of the City are hereby authorized and directed, individually and collectively, to do any and all things that they deem necessary or advisable in order to effectuate the purposes of this Ordinance.
The following analysis of Measure A was provided by the acting city attorney Michelle Marchetta Kenyon:
Measure A would authorize the City Council to approve the issuance of bonds or other debt to refinance the City of Piedmont's Side Fund obligations to the California Public Employees' Retirement System (PERS).
The City has participated in PERS since 1974. In 2003, PERS adopted a requirement that all pension plans with fewer than 100 active members be assigned to risk sharing pools with other agencies having similar benefits. Because the City's miscellaneous and safety plans each had fewer than 100 members, PERS assigned the City 's plans to risk pools. Because the various plans joining these risk pools had different levels of unfunded liability at the time they joined,PERS established a separate "Side Fund" for each plan to address its outstanding unfunded liability at the time it joined the pool.
The Side Funds are distinct from the City's other PERS plans and liabilities and are currently scheduled to be retired over fixed terms (seven years remaining for the miscellaneous plan and nine years remaining for the safety plan) under a fixed amortization schedule. The total current amount of the City's Side Fund obligations is approximately $7,800,000. PERS charges the City an interest rate on the Side Fund obligations at a rate equal to the PERS actuarial rate of return, which is currently 7.5%.
Measure A would allow the City Council to authorize the refinancing of the City's PERS Side Fund obligations at a lower interest rate through the issuance of new bonds or other indebtedness in an amount up to $8,000,000 (i.e.,the current outstanding obligation plus transaction costs of the refinancing). Current projections estimate that such a refinancing could save the City between $600,000 and $700,000 over the next nine years. Section 4.14 of the Charter of the City of Piedmont requires that the voters must give majority (50% + 1) approval prior to the issuance of any bonds that would constitute a general obligation of the City.
A "Yes" vote on Measure A means the voter is in favor of authorizing the City Council to issue bonds or otherwise incur debt to refinance the City's Side Fund obligations to PERS.
A "No" vote on Measure A means the voter is opposed to authorizing the City Council to issue bonds or otherwise incur debt to refinance the City's PERS Side Fund obligations.
Should a majority of qualified voters approve Measure A, the City Council would then have the authority required under the Charter to approve the terms and conditions of a bond refinancing of the PERS Side Fund obligations.If a majority of the voters do not approve Measure A, the City would not be able to issue bonds to refinance the PERS Side Fund obligations. The City would continue to be required to meet its PERS Side Fund obligations.
The following list of people signed the official arguments in favor of Measure A:
- John Chiang, Mayor
- Margaret Fujioka, Vice Mayor
- Jeff Wieler, Councilmember
- Dean Barbieri, Former Mayor
- Bill Hosler, Chair, Budget Advisory and Financial Planning Committee
Arguments in favor
The following was submitted as the official argument in favor of Measure A:
This ballot measure is seeking voter approval to refinance approximately $7.8 million in "side fund" pension obligations to CalPERS. The City of Piedmont's underwriters for this transaction currently estimate that the City could save between $600,000 and $700,000 over the next 9 years by refinancing at a lower interest rate. The City of Piedmont currently owes approximately $7.8 million in side fund obligations to CalPERS as evidenced by the CalPERS contracts referred to as "PERS Side Fund Obligations", which are debt obligations of the City imposed by law. Currently, these obligations are scheduled to be paid off over the next 9 years and the City is being charged an effective rate of interest of 7.5%. The City is fully obligated to pay the PERS Side Fund Obligations with interest, regardless of any other steps taken concerning future pensions and benefits for City employees. Section 4.14 of the Piedmont City Charter requires voter approval for any new bonded indebtedness, even if such indebtedness merely refinances an existing obligation such as the PERS Side Fund Obligations.
The Budget Advisory and Financial Planning Committee recommended and each of its five members individually supports the refinancing of the City's side fund obligations. The City Council voted unanimously to ask for voter approval to refinance this debt at today's lower interest rates, just as wise homeowners do when they refinance their mortgage with a lower interest rate, and endorses this measure. As of the time of writing this argument, all the announced candidates for City Council have endorsed measure A. Approval of this measure does not require the City Council to proceed with the refinancing. In the event conditions, such as interest rates or expected savings, are not favorable, the City Council would not be required to go forward with the refinancing.
Path to the ballot
In 2003 PERS began requiring all pension plans with fewer than 100 active members to pool their assets and capital with other agencies to share the risk. Each plan sharing in a pooled fund had separate side funds to which the city's unfunded liabilities were assigned. Currently that side fund was $7.8 million and was being charged interest at a rate that amounts to 7.5%. The city council was advised by the Budget Advisory Committee and Financial Planing Committee to refinance these debts through borrowing money at potentially lower interest rates. Because the Piedmont City Charter requires voter approval for all issuing of bonds or incurring of debt, the city council referred Measure A to the February 4, 2014 election ballot.