PENSION DEBT BOS PRESENTATION JANUARY 10 2022 UPDATED 1-6-22.PDF
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Pension Debt Funding Strategy and Recommendations Pension Funding Formula Employee Contributions + Employer Contributions + Investment Income = Benefits and Expenses Rate Calculation Assumptions • Future Investment Return • Payroll Growth • Pension Outflows (Longevity/Benefit Payments) Unfunded Actuarial Accrued Liability (UAAL) Retirement Plan FY 2023 Employer Contribution Rate Funded Ratio at 6/30/21 Unfunded Actuarial Accrued Liability (UAAL) – Maricopa County at 6/30/21 MCSO Detention (CORP) 31.06% 56.70% $283,867,368 MCSO Law Enforcement (PSPRS) 76.77% 47.00% $360,047,815 Employer Contributions Requirements: Normal Cost vs. UAAL Employer Contributions Requirements: Normal Cost vs. UAAL Contribution Impact Plan Contribution Change to Employer Contribution Rate Payroll Basis Annual Operating Budget Retirement Savings MCSO Detention (CORP) $10,000,000 -1.00% $95,896,235 $958,962 MCSO Law Enforcement (PSPRS) $10,000,000 -1.97% $51,803,781 $1,020,534 Why Do Something Now • Disproportionate increase in contribution rates vs. increase in resources • Expenditure Limitation concerns • Utilize one-time resources and get an ongoing operating return on investment Why Issue Debt? • Expenditure Limitation • Interest Rates • One-time Resources Opportunities Related to Issuing Debt • Attractive interest rates • Ability to borrow short-term • Debt excluded from Expenditure Limitation Strategy Elements • Plan Related Elements • Target Funded Ratio • Timeframe to Achieve Target Funded Ratio • Timing of Contributions • Utilization of Proceeds • Section 115 Trust • Bond Issuance Elements • Amount of Issuance • Timing of Issuance • Amortization Period • Form of Issuance and Security Pledge • Debt Repayment Strategy Plan Related Elements • Target Funded Ratio • Recommend 75% • Timeframe to Achieve Target Funded Ratio • March 2022 to July 2023 • Timing of Contributions • Dollar cost average based on budget and available funding • $50M in FY 2022/ $87M in July 2022/$87M in January 2023/$86M in July 2023 • Utilization of Proceeds • Recommend direct contributions to Plan to achieve 75% funded ratio • Balance to Section 115 Trust for pension reserves Plan Related Elements •Section 115 Trust • Vehicle to segregate and manage pension reserves • Provides the ability to diversify investments and leverage against fluctuations in pension plan investment returns • Disbursements limited to defined benefit pension plans • Provides a tool to smooth spikes in contribution rates and stabilize operating budget • Could be used for annual operating retirement contributions • Section 115 Administrative Team (Trust Administrator, Trustee, Investment Advisor) Bond Issuance Elements • Amount of Issuance • Recommended amount: $500M • $310M to achieve 75% funded status • $190M for Section 115 Trust Reserve • Timing of Issuance • Same capital COP issuance in February/March 2022 • Amortization Period • Recommend 2.5 Years Bond Issuance Elements • Form of Issuance and Security Pledge • Pledged Revenue Obligations (PRO) • Secured by State Shared Sales Tax, VLT and PILT revenues • More attractive to investors because repayment is not subject to annual appropriation • Trustee leasehold interest in real property may be needed as part of financing structure* *Leasehold interest is not a security pledge and is not collateral. The trustee does not have claim or recourse to it under any scenario and is merely a legal mechanism associated with PRO financing. Debt Repayment Strategy • Reserve funding for repayment of issuance upfront • FY 2023 Budget Impact • Address in Current and Future Budget Guidelines • Potential Sources: • Reserves from FY 2022 Budget $114.2M • Anticipated FY 2023 Budget Resources • FY 2021 General and Detention Fund Balance Net of Known Issues $146.4M • FY 2022 Unspent Contingency $103.0M • 2018 COPS Reserves $ 35.4M • FY 2022 Revenue to FY 2021 Actual Level $ 78.6M • FY 2022 Revenue to Pessimistic Forecast above FY 21 Actual $ 31.9M • FY 2023 Sales/Jail/VLT Revenue $ 47.0M • Future Year Budget: • 2018 COPS Operating Capacity (after FY 2024) $ 17.8M • Reduction Employer Retirement Contribution in FY 2024 and FY 2025 $ 67.6M • FY 2024 and FY 2025 Non Recurring Resources TBD Risks • Actuarial Risk • Timing Risk (Interest Rates) • Market/Investment Risk • State Budget/Legislation Summary of Strategy Element Recommendations • Plan Related Elements • Target Funded Ratio: 75% • Timeframe to Achieve Target Funded Ratio: FY22- FY24 • Timing of Contributions: Series of payment to Dollar Cost Average from May 2022 to July 2024 • Utilization of Proceeds: $310M Direct to Plan and $190M to Section 115 Trust • Section 115 Trust: For rate stabilization and future pension contributions • Bond Issuance Elements • Amount of Issuance: $500M • Timing of Issuance: February/March 2022 • Amortization Period: 2.5 Years • Security Pledge: Pledged Revenue • Debt Repayment Strategy • Reserve funding in FY 2023 from available non recurring resources Pension Debt: Timeline of Events Pledged Revenue Obligations & PSPRS Funding Timeline Date Event January 2022 Board to Approve Resolution to Issue Taxable Pledged Revenue Obligations (PRO) January 2022 Present Bond Package to Bond Rating Agencies for Credit Rating February 2022 Bond Issuance and Funding March 2022 PSPRS Contribution of $50M $260M set aside for timed contribution to PSPRS to achieve 75% funded status $190M deposited into Section 115 Trust for pension funding reserves July 2022 PSPRS Contribution of $150M August 2022 Initial PRO Debt Payment Due of $201M January 2023 PSPRS Contribution of $60M February 2023 PRO Interest Payment of $1M June(July?) 2023 PSPRS Contribution of $50M August 2023 PRO Debt Payment Due of $202M February 2024 PRO Interest Payment of $0.5M August 2024 PRO Debt Payment Due of $101M Path Forward • Include funding the debt service to repay the bond issuance in the FY 2023 Budget Priorities and Guidelines • Board Action/Resolutions • Evaluate Section 115 Trust Options Questions?