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City of OaklandPolice and Fire Retirement System

*Plan Funding Analysis Pension Obligation Bonds

Prepared by Aon HewittRetirement ConsultingPresentation to C ity of Oakland Finance Comm itteeFebruary 22, 2011


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oa


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Purpose of the ReportE n g a g e d by-the Ci ty Audi tor condu ct an a na lys is of the P F R S p lan funding opt ions- Prov id e context and backg round to s takeh olders

- De scr ibe var ious use s for P O B s- Exa min e past dec is io n to issue P O B s- Illustrate var ious selec t funding opt ions inc luding issuing new P O B s- Exa min e broad range of potentia l outcom es- Ben chm ark current P F R S situat ion to peer group

Object ive is not to- State an op in ion on the use of P O B s- Ste er the City in any on e direct ion with respect to plan funding

Ao n Hewitt | R etire me nt C on su ltin g 3 M r m ^ ^ ^ W l " J c V V i II


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Section 2: Current Situation

Hewitt


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Current SituationCurrent funding position (based on draft 2010 valuation report provided by Bartel & As socia tes)- Liability: $79 0M

- Market Va lue of Assets: $290M- Unfunde d Liability: $50 0M

Plan is "closed" to new entrants- A ll but one plan participant as of Ju ly 1, 2010 is receiving benefit pa ym ents

Only growth in benefits due to negotiated cost of living increasesPlan expected to p ay $67 M in benefits to p ensioners for FY E 2011

- Paid out of the pension trust- Rough ly % of total assets

Plan required to be fully funded by 2026 according to the City Charter

A on .H ew it t | R etire me nt C on sultin g 5 ^ ^ l i % ^ B w H c w l I t


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Section 3: Background on POBs

Hewitt


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Background on POBsP e n s i o n Obl igat ion Bo nds ( "PO Bs ") are bonds is sue d by a sta te or loca l government as a mean s tomeet i ts obl igation to fund a pens ion sys tem that benef i ts i ts employees.First P O B s ever issued were by the Ci ty o f Oakland in 1985

- Ove r 300 s ince then inc lud ing 100 in Cal i fo rn iaPo ten t ia l Advan tage s - R e a s o n s to Issue P O B s

- Budget Re l ie f- Investment Return- Negot ia ted Disco unts

Po ten t i a l D i sadvan tages- Investment Return- Deferr ing the Inevi table- Bond Issuance Cos ts

Ao n Hewitt | Retirement Consulting 7 . ^ ^ i W ^ V v I r l e w K lON


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Background on 1997 Bond IssuanceIn 1997 the City issued approximately $435 mil l ion in P e n s i o n Obl iga t ion BondsP r o c e e d s were depo s i ted into the plan trust in exchange for a contr ibut ion hol iday until t he 2011/2012f i sca l yearThe debt was ini t ial ly scheduled to be ful ly paid of f in 2010 but was restructured in 2001

- Rest ruc tured debt sched uled to be fu lly paid off in 2023$710 mil l ion left to be repaid, PV of appro x $51 0 mi l lion at 6.50%

A o n H ew itt | R etire me nt C on su ltin g 9 ^ ^ H ^ ^ v W I r l c V V l I I


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Expected vs. Actual Investment ReturnsReturn on Market Value of ftssets

ExpectedActual

1997- 19931-1398 200O 2CI01 Z002 2003 200d 0053DD^ 8.DD1& S.OD 8DD% 8 DOTS- BDO% 8.00%

12.60% 8.801& -0.20% -2.63% 4D1% 13.44% 7.96%

2006 2007 2O08 2003 20108.00% 8.00% 8.00% 7.50% 7.00%7.20% 13.70% -6.10% -20.70% 16.50%

CumulartiueAnnualReturn7.92%4.31%

Cum ulative returns over the contribution holiday period were below e xpec ted returns resulting inactuarial loss es over that periodIn addition, the interest rates charged to service the debt range from approximately 6.1% to 7.3% peryear. Sin ce these rates are higher than the cumulative annu al return on the pension trust the amountof money that the City has paid (and is sche duled to pay) to service the debt has to date outweighedthe amount these funds have earned in the pension trust.

A on Hewit t ] Retirement Consul t ing 10 Hewia


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HypotheticalComparison

mC o n t r i b u t i o n to P e n s i o n T r u s t( $ in ' 0 0 0 s ) Per:' .-Hi-V T" ; ^ .... J - "'^Sf}) "A c t u a l - P a y m e n t s to P O B D e b t 2 9 0 , 0 0 0 5 0 0 , 0 0 0 5 1 0 , 0 0 0 1,010,000Hy po th e t i c a l - P a y m e n t s to the Pe n s io nTru s t 3 0 , 0 0 0 7 6 0 , 0 0 0 0 760,000

A c tu a l Sc ena r i o - 1997 Bond s i s sued , City contr ibut ions during hol iday period used to serv ice deb tHypothe ti ca l Scen ar io - 1997 B onds a re not i s sued , City contr ibut ions are instead paid into the plantrustBoth scenar ios have ass um e iden ti ca l C it y cash flow equa l to the amount of the "ac tual " debt serv icepayments

Cont r ibut ions under hypothet ica l sce nar io not made accord ing to ac tuaria ll y recom men dedcos t A l lows for ap p l es to app les compar ison

- Outs tand ing debt colum n is the present value of al l debt serv ice payments remain ing according toAt tachment A of t he May 11 , 2010 F i nanc e and M anagem en t A gen c y A ge nda R ep o r t 6 .5% d iscount rate a s s u m e d

A on Hewitt | Retirement Consulting 11 I lewili


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Section 4: Potential POB Program for 2011

Hewitt


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Baseline Situation - Contribute Actuarially Recommended CostC o n t r i b u te A c t u a r i a l C o s t

^ ^ cf^ ^ ^ # cf^Fiscal Yea r Ending

^ Debt ServiceActiarial Cost

'A /a lable Ta x OverrideRevenue

No additional bonds issuedContribute cost recommended by actuary every year until full funding In 2026Large contributions in exce ss of tax override revenue required until current debt service paymentsexpire 2024

A on Hewitt | Retirement Consu lting 13 AON llewill


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General ProgramFrameworkIssue P O B s dur ing 2011 in exc ha ng e for a f ive yea r cont r ibut ion hol iday- Am ount o f P O B s i ssue d equ al to the p resent value of the f ive yea rs of ac tuar ia l ly rec om me nde dcontr ibut ions

$21 4 mi l lion ba sed on the draft July 1, 2010 valuat ion repor t p rov ided by Bar te l & Assoc iatesR e p a y al l o f the deb t over a three ye ar per iod 202 4-20 26

- Cur ren t Debt Se rv ice Pay me nts sche du led to exp i re in 2024- F ree s up Tax Over r ide Re ven ue to use to f i nance debt- C i ty Ch ar ter s tates p lan must be fu lly funded by 202 6

Th is i s a hypothet ica l scen ar io base d on what a new P O B program might pos s ib ly look like and do esnot ref lect any f inal stages of p lanning by the City with respec t t o a new P O B p rogram

Ao n Hewit t | Ret i rement Consul t ing 14 Hewilt


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City Cash FlowPattern

300 ,000250 ,000200 ,000

oP 150.000c 100,000

50 ,000

Total City Outlays By Scenario

0 I I . I .

uo'^' O^^ O^"" O^^


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Potential Financial Outcome - Trust Earns 7% Per Year During Holiday PeriodTotal City Oiillay

Issue POBs, Earn 7% ForAIIYears3 0 0 . 0 0 0

#


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Potential Financial Outcome - Varying Investment ReturnsTotalCityOiitl jS Ry Sc iniin

3DO.0OO T^ U . U U U -2 0 0 . 0 0 0

Qe 10U.UUU -100.000 5 0 . 0 0 0 -

0 ^ 1^^?^ ^ ^^ -1? V V T "V

hiscai rea - t n d i n g

- 1 0 % ReturnU% Keturn

7 % Return15'^^ Return' A v e il b i c T a x C v c ri id cRevenLe

Total outlays sensitive to investment return in the trustEven if strong investment returns are real ized, size ab le contributions will be due 2024-202 6

A o n Hewit t | Retirement Consui l ing 17 401 1ewiU,

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