City of Santa Cruz

Pension Obligation Bonds

Project Highlights

The City of Santa Cruz, like many other small and medium sized public agencies, had a special pension program through CalPERS known as a “side-fund.” The internal cost of funds for these side-fund programs is currently in excess of 7.00%. Many public agencies have taken advantage of lower market rates and have issued pension obligation bonds to prepay their side-fund obligations. NHA Advisors worked with the City in 2010 to analyze, structure, and issue a pension obligation bond. As part of our comprehensive strategy, NHA Advisors focused on the key policy questions and financial impacts. As with any pension obligation bond, the risk of CalPERS lowering its actuarial discount rate will significantly impact the “savings” generated by any pension obligation bond. Pension obligation bonds are considered refunding bonds, but NHA Advisors recommends that these obligations be viewed as a refunding of variable rate bonds given the uncertainty of future actuarial discount rates. Any change in the discount rate will either increase or decrease the effective savings of a fixed-rate pension obligation bond. This uncertainty surrounding the future discount rate requires that conservative and comprehensive assumptions be incorporated into any financing plan and policy decision.

To address this issue, NHA Advisors developed the incorporation of a minimum present value savings requirement as part of the authorizing resolution for the pension obligation bonds. Additional conservative requirements were included (e.g., assume that CalPERS actually lowered its discount rate significantly during the term of the bonds). As a result, City elected officials, staff, and the finance team were confident that the financing structure and pension obligation bonds would save the City money under most scenarios.

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