The City of Chula Vista priced $350 million of Pension Obligation Bonds (POBs) on Thursday, February 11, 2021. The proceeds from the issuance are being used to pay off the City’s Unfunded Accrued Liability (UAL) with CalPERS on the closing date of February 23, 2021.
The POBs were issued with a Standard and Poor’s Global Ratings extremely strong ‘AA’ credit rating and sold primarily to institutional investors, along with some other municipalities. NHA Advisors, the City’s municipal advisor assisted with the bond issuance. The Bonds were underwritten by Stifel, Nicolaus & Company with the Stradling Yocca Carlsen and Rauth law firm serving as bond and disclosure counsel to the City.
The all-in (inclusive of financing costs) interest rates set on the 24-year POB were 2.54%, the lowest rate set on any pension bond in recent years, including those of shorter maturities and higher ratings. In addition to converting the 7% UAL debt with CalPERS to 2.54% debt on the POB, the City utilized the restructuring to achieve several objectives including: (1) developing a more manageable repayment schedule for this large pension liability that will enhance budget predictability and enhance City’s ability to maintain service levels; (2) Additionally, the City will prioritize projected savings towards adequately funding various City reserves, including setting aside a portion into a new Section 115 Trust and Bond Call Fund to mitigate future impacts from pension and OPEB cost increases. Ideally, this strategy will enable the City to potentially pay off (redeem) the POBs early.
According to the City’s Director of Finance, David Bilby, “over $175 million of interest rate savings is projected on the refinancing and over $14 million annually on average for the next 15 years. While those savings assume CalPERS earns 7% returns in the future, the City is conservatively planning for below average performance by CalPERS and has put into place strategies, through the POB, and new Pension Funding Policy, to mitigate that risk to ensure the City’s long term fiscal sustainability.”
The City had been targeting an interest rate of about 3.55%, but was a beneficiary of extremely good market timing, and tremendous demand by investors to purchase bonds from the City of Chula Vista. “The Council was presented with savings estimates just last month of about 3.55%,” said Mayor Mary Casillas Salas. “We are beyond excited to hear that the actual rates obtained were over 1.00% lower, and that we were able to lock in these historically low rates for one of the City’s largest liabilities.”
Maria Kachadoorian, the City Manager, stated of the transaction, “We are extremely pleased with the results of this financing. The City Council directed staff and the finance team to lock in the lowest possible interest rates, while putting in place prudent financial and reserve policies that will allow the City to continue to flourish and deliver the services that our residents deserve. Through a team effort of City staff, financial advisor, bond counsel and underwriter, we were able to efficiently bring this transaction to market to lock in the lowest interest rate of any POB in recent times, and likely ever.”
