October 28, 2021
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City Council acts on unfunded liability

By: Cassandra May Albaugh
September 17, 2021

After a contentious special meeting discussing homeless shelter issues, the Rohnert Park City Council held their regular meeting on September 14. The main agenda item was a discussion concerning the city’s Outstanding CalPERS Unfunded Accrued Liability (UAL). The staff report was presented by Nishil Bali, Finance Director and Darrin Jenkins, City Manager. “As part of the City’s strategic goal to maintain financial stability and fiscal sustainability, the City of Rohnert Park has identified its pension liability as an area of long-term risk” according to the staff report.

Like many cities, Rohnert Park contributes to two CalPERS benefit plans. As of June 30, 2020, the city had a projected UAL of $53.8 million. The report said, “As higher pension costs arising from UAL continue to take a larger share of the City’s future budgets, they can compromise or reduce the city’s ability to provide future services to its residents.” Although better than many cities in the state, the UAL shortfall “was approximately 24 percent of its total pension obligations” as of that June date. This represents Rohnert Park’s most expensive debt at an interest rate of 7 percent charged by CalPERS each year for UAL. Bali presented the council various options to reduce “the risk of long-term pension obligations arising from growing UAL payments.” 

Two possible options not recommended were changing the Amortization Schedule or seeking new revenue sources. Changing the Amortization Schedule from 30 years to 20 years would save the city on “total cumulative interest costs” but require higher yearly payments. The analogy used was changing from a 30-year home mortgage to a 15-year mortgage. The debt is paid off quicker through higher payments over a shorter period. New revenue sources would mean higher taxes and the staff didn’t want to increase the tax burden on residents to fund pension obligations. Four other strategies were recommended, however. 

First, the city maintains a Pension Trust fund for pre-funding pension benefits. They previously made a $11.6 million transfer from this fund to CalPERS in FY19-20. They still have $6.6 million available in this fund. Whereas the UAL currently has a 7% interest rate, the trust fund isn’t expected to “reach or exceed 7 percent.”

Next, the Capital Reserve maintained by the city is used to fund capital projects. Currently it has approximately $10 million set aside to fund projects on a “pay-as-you-go” basis. Using that money to reduce UAL would mean funding future capital projects by borrowing funds through either private financing or tax-exempt bonds. Those methods have current interest rates at 3 percent or lower. This means using those funds to reduce UAL would save the city approximately $650,000 per year because of the difference between seven and three percent interest. 

Also, the city maintains other assigned reserves in its General Fund. Many exceed the minimum target reserve policy of 5 percent. These funds are “invested per government code” and are earning less than 1 percent while having to pay 7 percent on UAL. The staff recommended using $24.3 millions of these funds to pay down the UAL. Using the first three strategies ($40.9 million) would fall short of the 53.8 million UAL liability. For that reason, the fourth strategy is “Debt Refinancing through Pension Obligation Bonds (POBs). These bonds pay off the 7 percent UAL debt to CalPERS and reduces debt because they cost approximately 3 percent in interest.

The staff recommended two options. The first option was to pay off the UAL entirely through Pension Obligation Bonds. This would mean savings of “upwards of $800,000 until year 2034, and project undiscounted savings of $17.5 million until 2043.” Option two was to use a combination of all four strategies with only $12.9 million through Pension Obligation Bonds. That option could achieve estimated annual savings upwards of $2.4 million until 2035 and a total undiscounted savings of approximately $50 million. The council directed the staff to pursue this second option. Staff will come back with a formal resolution at a future council meeting.

In other council news, a Mayor’s Proclamation was read declaring September 15 to October 15 as Hispanic American Heritage Month in Rohnert Park. Representing the Rohnert Park Latinx community, Latino Alliance accepted the proclamation. Council member Willy Linares said, “things like this matter” that it sends a message to our Latinx community that “we hear them, we see them, we value them.” Mayor Gerard Giudice also recognized the city’s Finance Department for “Receiving Certificate for Excellence in Financial Reporting.” Awarded by the Government Finance Officers Association of the United States, and Canada, Giudice said it’s “the highest form of recognition” and was based on the comprehensive annual financial report for the fiscal year that ended on June 30, 2020.