Consideration and Adoption of Ordinance No. 2020-17: An ordinance of the City Council of the City of Flagstaff, relating to the financing of a certain project, specifically approving publication of notice of proposed lease of land and buildings from, and lease-purchase back of such land and buildings to, the City and request for bids in connection therewith; authorizing the acceptance of a bid with respect thereto; approving the sale and execution and delivery of Certificates of Participation in a lease-purchase agreement to provide the necessary financing therefor; approving the form and authorization the execution and delivery of necessary agreements, instruments and documents related to the sale and issuance of the certificates; delegating authority to the Management Services Director of the City to determine certain matters and terms with respect to the foregoing; and authorizing the taking of all other actions necessary to the consummation of the transactions contemplated by this ordinance and ratifying all actions taken to further this ordinance; providing for severability, authority for clerical corrections, and establishing an effective date (Certificate of Participation Debt Authorization - Pension COPS)

This ordinance allows for the issuance of Certificates of Participation and to enter into a lease-purchase agreement for the purpose of financing the Public Safety Personnel Retirement unfunded liability and establishing contingency reserve funds. An ordinance for this action is required by City Charter ARTICLE VI - FINANCE AND TAXATION, Section 5 - WHEN ACTIONS ARE TO BE TAKEN BY ORDINANCE.

Taxable Certificates of Participation Series 2020 A will be issued in an amount not to exceed $135,000,000 related to the funding of the City's Public Safety Personnel Retirement System plans, creating a Contingency Reserve Fund and paying cost of issuing debt.  The debt service payments will be made from General Fund and Airport Fund.  The City will reduce its annual employer contribution to PSPRS and utilize that funding to pay the debt service.  Debt service expenditures are budgeted in the Debt Service Fund with a transfer from General Fund and Airport Fund for their proportionate shares of the debt service payments. The Airport Fund is included because we have PSPRS employees who work at the Airport. 

The City will be issuing debt to fund our PSPRS plans for Police and Fire at or near 100%.  The City could choose issue debt and/or look to alternative ways to continue paying down our unfunded liabilities related to these plans. 

Strategic Plan for Team Flagstaff

• Foster a resilient and economically prosperous city: Enhance the organization's fiscal stability and resourcefulness. 

Key Community Results

• High Performing Governance: Enhance the organization's fiscal stability and increase efficiency and effectiveness
• High Performing Governance: Implement innovative local government programs, new ideas and pest practices; be recognized as a model for others to follow

On April 23, 2020, at the April Council Budget Retreat, staff presented for consideration the issuance of Certificate of Participation debt to address the unfunded actuarial accrued liability of the Police and Fire PSPRS plans.  Council provided direction to move forward with this debt issuance. 

• Approve the Ordinance as written allowing the City to move forward with the issuance of Certificates of Participation and the Lease-Purchase agreements. 
• Recommend changes to the Ordinance modifying the issuance of either the Certificates of Participation or Lease-Purchase agreements. 
• Do not approve the issuance of Certificates of Participation and the Lease-Purchase agreements.

The City of Flagstaff has two separate pension plans for the City’s public safety staff, one for Police and one for Fire. While all the PSPRS plans are managed by the State, each plan within PSPRS is separately funded by the employer and employee group. Both the City and the employees are responsible for contributions, but PSPRS employee contributions are capped by state law and the City is solely responsible for liabilities of these plans.
 
The City’s PSPRS plans currently are not fully funded to account for projected future liabilities. The financial health of each plan is updated annually in an actuarial report. The calculation of Unfunded Liability is calculated by taking the total Trust Asset and comparing that to the Accrued Pension Liability. If the Accrued Pension Liability is greater than the Trust Assets, it is called an Unfunded Liability. The most recent year that the plans were fully funded was June 30, 2002.  As of June 30, 2019 (the most recent actuarial report) the plans show a $112 million unfunded actuarial liability.
 
The growth in the Unfunded Liability cannot be contributed to one single event or policy. There are many issues that impacted these pension funds since 2000. Most notably is related to investment losses and reduced earnings as a result of the 2000 stock market downturn and then again during the Great Recession in 2007-2009. Other contributing factors are related to pension plan design, legislative attempts to change pensions, the number of retired versus active members, and changes to the actuarial assumptions. Actuarial assumption changes include items such as employee base, wage inflation, and investment returns. This list is not all-inclusive of the factors that impacted the City's unfunded liability.

In March, staff provided a PSPRS Talking Points document (copy attached to this staff summary) to help outline the current funding status of these plans, as well as to capture recent measures Council has taken to address the matter.  In June 2019, Council adopted the first PSPRS Pension Funding Policy.  This policy formalized the decision made by the Council.  These actions include: prepaying contributions in July based on budget, approve a Use Tax increase for additional funding to the plans, pay in at a higher rate even if the calculated rate declines, pay for the employer portion of the employees in the deferred retirement option plan, and make excess contributions to the Police plan to reduce the longer amortization period.  We estimated an additional $2 million in contributions of fiscal year 2019-20. 

In February 2020, City staff began discussions with Stifel, Nicolaus & Company, Incorporated (Stifel) the consideration of issuing pension bonds to assist in reducing our unfunded actuarial liability.  We were considering a General Obligation Bond, which would require voter approval, and/or Certificates of Participation debt.  In March, City staff, Councilmember McCarthy and Council member Odegaard met with the Public Safety Personnel Retirement System Administrator, Mr. Mike Townsend, and his staff to learn more about the Cities pension plans.  We also discussed the option of issuing pension bonds to fund our plans.  They were very receptive of the option and continue to be a part of this process.  The same city team met with the Stifel team to discuss pension bonds and the opportunities we may have to address our pension plans.  That meeting was well-received by all and began the process of developing recommendations to Council. 

At the April Council Budget Retreat, staff presented the consideration of issuing Certificates of Participation debt to fund our PSPRS unfunded actuarial liability with the goal of having our plans 100% funded.  The presentation included presentations by staff, PSPRS, and Stifel.  Stifel and staff presented information on maintaining the status quo, assessing risk, mitigating risk, and the Pension COP structure and value.  We proposed a Pension COP to bring our pension to a 100% funded plan.  Data in the presentation demonstrated that the City could see a cost-savings of approximately $94 million (net present value of $45 million) by issuing debt to the 100% funding level as opposed to remaining on our current course.  In addition to savings, the city will be able to level out the amount of annual payments as well as save between $1.2-$1.8 million annually based on current budget levels.  Council unanimously provided direction to staff to bring back an authorization to issue Pension COP debt.  

A great amount of effort has been expended by City staff and the Stifel team since the April meeting.  We developed a timeline that will allow us the best positioning when the investment market is right.  Stifel has been discussing the Pension COP proposal with several investors and has received great interest in our bonds.  Stifel prepared, with staff assistance, presentations for the rating agencies.  City staff, Stifel, and PSPRS presented to Standards and Poor as well as Fitch Ratings the week of June 1, 2020. In addition, we are developing the legal documents for this debt authorization as well as the Contingency Reserve Fund Policy to assist in mitigating risk associated with pension plans.  

Upon working with several potential investors, we are determining that the City will pledge several properties to back our commitment to pay back our debt.  These properties currently include Fire Stations 1,2,3,5 and 6, City Hall, Main Library, and Aquaplex.  Additional properties may be added for the final adoption.   The estimated insurance value for these properties identified is $51.1 million and includes estimated land value.  This commitment is approximately 40% of the Pension COP we anticipate issuing.  The City is not required to provide properties that equal the value of debt because the properties being considered are highly essential to our organization and are extremely unlikely that we would forgo our debt requirements.  In addition, the City maintains a high credit rating, which also bolsters the confidence of the investors.  Since the draft agenda, staff has identified additional properties for consideration with the Pension COP.  We are now including the Police Warehouse, Jay Lively Activity Center, Visitor Center and the Milligan House.  Without the land values for these additional properties, this increase the total value to approximately $58.3 million, 45% versus the Pension COP issuance. 

Certificates of Participation (the “Certificates”) involve a lease-purchase financing mechanism that allows the City to borrow for projects. The Certificates represent undivided proportionate interests in lease payments (the “Lease Payments”) to be made by the City under a Lease-Purchase Agreement, expected to be dated as of August 1, 2020, by and between a trustee bank, as lessor (the “Trustee”), and the City, as lessee. The properties which will be the subject of the Lease-Purchase Agreement (the “Leased Property”) will be provided for by a Ground Lease, expected to be dated as of August 1, 2020, by and between the City, as lessor, and the Trustee, as lessee. The Certificates are expected to be executed by the Trustee, in its separate capacity as trustee, pursuant to a Trust Agreement, to be dated as of August 1, 2020, between the City and the Trustee. Under the Trust Agreement, the right to receive the Lease Payments will be assigned to the Trustee.
 
The Certificates will be payable solely from the Lease Payments. The City’s obligation to pay the Lease Payments will be subject to annual appropriation – no funds or revenues of the City will be pledged to make the Lease Payments. If the City fails to appropriate for the Lease Payments, the Trustee may take possession of the Leased Property and exercise remedies provided in the Trust Agreement, including re-leasing or selling its leasehold interest in the Leased Property and applying any proceeds from such re-leasing or selling to payments due on the Certificates. Under such circumstances, possession of the Leased Property would be returned to the City at the expiration of the term of the Ground Lease, currently set for August 1, 2039.
 
The Trust Agreement allows for the issuance of additional certificates of participation under certain circumstances to expand or improve the Leased Property or to refund the Certificates.

City staff and Stifel are currently sizing the amount of Pension COP to be issued.  Our goal is to become as close to 100% funded PSPRS plans as possible.  The issuance will cover the payment to PSPRS, Contingency Reserve Funds, and issuance costs.  

By issuing Pension COP debt, the City is not only able to level out future pension liability payments, but we will see the saving of approximately $94 million (net present value of $45 million) as well as shortening the amortization period.  By creating a level debt service payment schedule, we will mitigate future increases in annual payments.  Currently, and on our present course, we estimate that the City's fund payment in the fiscal year 2035-36 could be $8 million higher than today's contribution.    

An added financial advantage is that the General Fund would have a potential $1.2 to $1.8 million in reduced cost based on the current level of contributions for the unfunded liability payment versus the debt service payments.  

The community will benefit from this Pension COP financing as there will be a reduced cost to the taxpayers.  The City will be paying the annual debt service based on current revenues and will not be seeking a sales tax or property tax ballot measure.