Loading...
HomeMy WebLinkAboutResolutions - 20-15 - 10/05/2020 - Pension Bond Policy RESOLUTION NO 20-15 Resolution of the City of McHenry, Illinois Authorizing and Approving a Pension Obligation Bond Policy WHEREAS, the City of McHenry, McHenry County, Illinois, is a home rule municipality as contemplated under Article VII, Section 6, of the Constitution of the State of Illinois, and the passage of this Ordinance constitutes an exercise of the City's home rule powers and functions as granted in the Constitution of the State of Illinois; and WHEREAS, the City is considering the issuance of general obligation bonds to fund the City's unfunded pension liabilities; and WHEREAS, the City recognizes the potential benefits and risks associated with pension obligation bonds; and WHEREAS, in an effort to mitigate the risks, the City desires to implement the Pension Obligation Bond Policy attached hereto as Exhibit A and incorporated herein; and WHEREAS, the City finds it to be in the best interest of the health, safety, morals and general welfare of its citizens to adopt said policy. NOW THEREFORE, BE IT RESOLVED BY THE MAYOR AND CITY COUNCIL OF THE CITY OF MCHENRY OF MCHENRY COUNTY, ILLINOIS AS FOLLOWS: Section 1. The foregoing recitals shall be and are hereby incorporated as findings of fact as if said recitals were fully set forth herein. Section 2. The City Council hereby authorizes and approves the Pension Obligation Bond Policy attached hereto as Exhibit A, or one in substantially similar form. Section 3. If any section, paragraph, clause or provision of this Resolution shall be held invalid, said invalidity shall not affect any other provision of this Resolution. Section 4. This Resolution shall be in full force and effect upon its passage and approval in the manner provided by law. Section 5. This Resolution is being passed pursuant to the Home Rule Authority of the City of McHenry as given by Section 6 of Article VII of the Illinois Constitution of 1970, as amended. Passed this 5th day of October, 2020. Ayes Nays Absent Abstain Alderman Devine X Alderman Glab •i' Alderman Harding X _ Alderman Mihevc Alderwoman Miller Alderman Santi Alderman Schaefer .1 Wayne t, eyor Trisha Ramel, City Clerk J7 c)c K Exhibit A City of McHenry Pension Obligation Bond Policy In conjunction with the issuance of the City's Taxable General Obligation Bonds, Series 2020B to fund the Police Pension Plan's (Pension Plan) unfunded actuarial accrued liability, the City is adopting this Pension Obligation Bond Policy to set forth the following: 1. The City's commitment to diligently funding its unfunded pension liabilities in the most efficient and cost effective manner possible. 2. The City's recognition of the potential benefits and risks associated with Pension Obligation Bonds (POBs); and 3. Procedures the City will follow in order to mitigate these risks. Therefore, the City hereby adopts the following Pension Obligation Bond Policy: I. The City has determined that issuing POBs assures a more rapid funding of the Pension Plan with significant expected savings while recognizing that it will incur certain risks by doing so. II. The principal risk the City will incur is that bond proceeds are expected to be invested by the Pension Plan at an overall return higher than the interest rates on the POBs and that rate of return may not be realized. A. The City has determined that it is likely that the Pension Plan will achieve an average return on the investment of POB proceeds over the life of the POBs at the plan's actuarial rate of 7.00%. Further,the City believes the plan should at least achieve a return above the expected rate on the POBs of approximately 2.85% which is the City's break-even point (final breakeven will be determined at pricing). B. Should the overall return on the investment of bond proceeds be less than the POB interest rate, the POBs would cost the City more than the plan's current funding methodology. In addition, the investment of bond proceeds could result in adverse market timing. C. Over the past 10 years, the City has achieved an approximate rate of return of 7.34% in its Pension Plan. III. In order to mitigate these risks the City has determined to adopt the following policies and procedures, recognizing that these procedures will not eliminate all risks: A. The City will not use any POB proceeds to fund annual "normal" costs nor will it fund any capitalized interest with bond proceeds with a view to reducing current cost in exchange for higher long-term costs. B. The City, as a home rule government, will use all legally available funds and a tax levy, unlimited as to rate or amount, to fully pay debt service on the POBs. C. The City will not extend the POBs beyond the current plan's amortization period nor will it defer principal repayments versus the current payment methodology. D. The City will not use any other financing technique which will have the effect of enhancing early year savings at the expense of higher long-term costs. E. The City will further limit its risk by not using guaranteed investment contracts, swaps or other derivative products in conjunction with the POBs, thus avoiding counter-party risk, credit risk and related interest rate risk. F. Since the City is home rule, it does not have any debt capacity limitations. Further, because the pension liability is already a debt of the City, the issuance of POBs will not increase the City's overall debt burden. Finally, the POBs are expected to be issued with no longer than a ten-year optional par call allowing for refunding or restructuring of the POBs in the future. G. The City recognizes that the current actuarial based funding methodology uses a constant percent of payroll factor resulting in estimated future payments to amortize the current unfunded liabilities that are higher than the current payment amount. In order to address this unsustainable practice, the City's POBs will be issued with a debt service payment structure that will limit early year expected savings to the City in order to allow for level debt service on the POBs as soon as is practicable in the future. H. The City will create a linkage between its unfunded pension liabilities and its POBs in its annual budget so that future City leaders will recognize that the City has chosen to issue POBs to fund a pension liability.This will assure that the proper understanding of the Pension Plan's funding status must include recognizing the POBs as a pension liability. I. The City will create a Budget Stabilization Fund not-to-exceed $1 million, funded initially with POB proceeds, that may be utilized to offset short-term smoothed losses due to any annual investment performance below the actuarial rate of 7.00%.