Boardwalk concept for California Public Finance

California Case Study 01

Riverside County
Pension Bonds

During its 2019 fiscal year, Riverside County was reviewing its options for managing it annual CalPERS pension costs. The County retained C.M. de Crinis & Co., Inc., the County’s financial advisor since 1998, which merged with Columbia Capital at the end of 2018, to assist in evaluating the benefits and costs of issuing a series of pension obligation bonds (POBs). The County had previously issued POBs in 2005.

As part of the review process, the County engaged its pension actuary to prepare a model to analyze the probability of the reinvestment return of POB proceeds being greater than the borrowing cost of the POBs over a 30-year period. The analysis predicted that this probability was lower than 70%. Columbia Capital and the County’s Debt Advisory Committee recommended that the County not proceed with a POB issue at that time.

Subsequently, taxable interest rates declined materially from the prior fiscal year and the County assembled a finance team including Columbia Capital to assess the likelihood of a higher probability of the investment returns by CalPERS being greater than the all-in cost of the POBs. Taxable interest rates continued to decline in 2020 and, as a result, the County’s pension actuary advised the likelihood of success approached 80%. As a result, the County Board of Supervisors approved the financing on March 17, 2020. The finance team constructed a detailed credit presentation addressing the actuarial review, evaluation and approval process for the financing and the County’s detailed plans for dealing with COVID-19 in anticipation of rating agency concern about the impact of the COVID-19 crisis on the County’s General Fund.

At pricing during the week of April 20th, Riverside County was the first large issuer of taxable bonds to have entered the bond market since the onset of the COVID-19 crisis in mid-March. Due to significant market volatility in the weeks leading up to the pricing, many municipal market transactions were on day-to-day status waiting for price discovery. The County’s index-eligible term bond structure was well-received by investors with orders exceeding par offered by a 6-to-1 margin. The final TIC for the bonds was 3.512%, meeting the County’s goals and allowing the transaction to close at an optimum time to reduce the County’s pension funding costs. Columbia further recommended to the finance team that it shorten the time between pricing and closing, a change that saved the County several hundred thousand dollars due to the way CalPERS discounts the cost of prepaying unfunded liabilities.

Despite the uncertainty in the bond market due to COVID-19 pandemic and the uncertainty of market access for a large offering of taxable bonds, Columbia Capital was able to assist the County in meeting its goal of saving $15 million over the subsequent 11 years. The County has the option of taking the savings and transferring it to its pension trust to be used as a rate stabilization fund in the future or to make additional payments against its UAAL.