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HomeMy WebLinkAboutItem 12e - Underwriter for Pension Obligation Bonds DATE: September 15, 2020 TO: Honorable Mayor and City Council FROM: Dominic Lazzaretto, City Manager Hue Quach, Administrative Services Director SUBJECT: SELECTION OF STIFEL NICOLAUS & COMPANY TO SERVE AS UNDERWITER FOR THE PROPOSED PENSION OBLIGATION BOND ISSUANCE Recommendation: Approve SUMMARY In February 2020, the City Council adopted a Comprehensive Pension Management Plan to address the City’s unfunded pension liability. One of the six strategies was for the City to consider the issuance of Pension Obligation Bonds. Ensuing with this consideration, City Council also adopted a pension funding policy and provided direction to move forward with the validation proceeding, the initial step toward issuing pension obligation bonds. In August, staff received communication that the court provided judgment for the validation review, allowing the City to continue with the process of issuance. Recently, a competitive request for proposal (“RFP”) process was initiated for underwriting services. The City received 11 proposals showing interest for the City’s POBs. The selection process utilized two parts: 1) Written Proposal, and 2) Interview & presentation by the firm. Three firms were invited to the interview: Bank of America, Raymond James, and Stifel, Nicolaus & Company (“Stifel”). Stifel was the consensus choice of the reviewing team. It is recommended that the City Council authorize staff to engage Stifel to provide underwriting services to the City’s proposed Pension Obligation Bond issuance. BACKGROUND City Staff has taken several steps to study and address its unfunded accrued liability (“UAL”). The City Council approved a contract with UFI to provide pension advisory services to assist the Citizen’s Financial Advisory Committee (“Committee”) with developing recommendations to address the City’s rising pension costs and its UAL with the California Public Employees’ Retirement System (“CalPERS”). The result of multiple meetings over a six-month period formed the City’s Comprehensive Pension Approval of Underwriter for Pension Obligation Bonds September 15, 2020 Page 2 of 4 Management Plan. In February 2020, the City Council adopted the Comprehensive Pension Management Plan, a detailed pension funding strategy with six specific recommendations, to address the City’s unfunded liability. In addition, the City Council adopted a pension funding policy and provided direction to move forward with the validation proceeding, as the initial step toward issuing pension obligation bonds (“POBs”). After City Council’s approval, Bond Counsel filed the Validation Action with the Los Angeles County Superior Court in March. However, due to delays caused by COVID, the Court did not consider the request until mid-June. August 17, 2020, was the deadline to file an answer to challenge the validation action. There were no challenges filed. The appeal period lapses 30 days after the date of entry of the judgement, after which the City can then issue POBs (mid-October). DISCUSSION The City is expected to finalize the validation process in mid-October, which will provide the legal authority to issue POBs. Historically, the capital markets have typically experienced volatility in the dates around an election. Concerns regarding the potential impacts of COVID increase the uncertainty regarding interest rates and stock market values. Based on feedback from various underwriters, our financial advisor UFI, suggested that we proceed with the selection of an underwriter to position ourselves to be able to sell bonds prior to the election. Bond underwriting firms basically remove the risk of selling the bonds by guaranteeing to purchase the bonds and oversee the process of placing them with private banks and/or the public. At the start of September, UFI, with City approval, conducted a competitive request for proposal (“RFP”) effort to solicit proposals and fee quotes from underwriting firms. The City received a total of 11 proposals showing interest for underwriting the City’s POBs. The selection process utilized two parts: 1) Written Proposal, and 2) Interview & presentation by the firm. Three firms were invited to the interview: Bank of America, Raymond James, and Stifel, Nicolaus & Company (“Stifel”). The proposals received for underwriting services were reviewed by UFI, the City Manager, and Finance staff. Firms were evaluated based on firm and team experience with POB issuance and debt financing, issuer knowledge, pricing/placement execution, credit analysis, and marketing and distribution capabilities. Approval of Underwriter for Pension Obligation Bonds September 15, 2020 Page 3 of 4 The following bids were provided by the three underwriting firms: Underwriting Firms Takedown ($/bond) * Expenses Total Gross Spread ($/bond) @ $75mil Bank of America $ 2.679 $ 35,762 $2.679/Bond - $200,915 Raymond James $ 2.654 $ 30,293 $2.654/Bond - $199,043 Stifel, Nicolaus & Company $ 3.000 $ 37,500 $3.00/Bond - $225,000 * Expenses: Underwriter Counsel, Disclosure fees, & other fees relating to bond setup. The process concluded with unanimous concurrence of the evaluation team that Stifel was the firm that would best serve Arcadia for this bond financing. All three firms provided very thorough analysis and good ideas in their responses, and they ranked highly on the evaluation criteria. While their costs are the highest, Stifel ultimately provided a better understanding and approach to the City’s needs. Stifel is very familiar with the San Gabriel Valley region and would provide a competitive advantage when working with the rating agencies to obtain a favorable credit rating for the City. Stifel worked with the City of Pasadena and City of Glendora on their recent POB issuances. Both cities received AAA rating from Standard & Poor’s. Additionally, among recent POBs issued statewide, Stifel was able to attain the lowest True Interest Cost (“TIC”) for Pasadena and Glendora issuances, with Pasadena’s TIC at 3.06% and Glendora at 2.85%. ENVIRONMENTAL ANALYSIS The proposed actions do not constitute a project under the California Environmental Quality Act (“CEQA”), and it can be seen with certainty that it will have no impact on the environment. Thus, this matter is exempt from CEQA. FISCAL IMPACT Total cost will depend on the overall determined bond issuance amount. Based on the assumption of a $75 million bond issuance, Stifel’s total gross is $225,000. The underwriter’s fees, known as the Underwriter’s Discount, are netted from the proceeds of the sale and do not have a direct impact on the City’s budget. A successful bond sale is measured by the all-in cost of borrowing: the bond offered interest rate, Underwriter’s discount, and all other fees relating to the cost of issuance. Approval of Underwriter for Pension Obligation Bonds September 15, 2020 Page 4 of 4 RECOMMENDATION It is recommended that the City Council authorize staff to engage the service of Stifel Nicolaus & Company to serve as underwriter for the proposed Pension Obligation Bond issuance.