This article was originally published in California Special Districts Magazine, January-February 2023 issue.
In June 2022, the San Miguel Consolidated Fire Protection District closed a $25.9 million lease financing with First Foundation Bank at an interest rate of 3.99%. The proceeds of the loan were used to pay off roughly 60% of the District’s Unfunded Accrued Liability (UAL) with CalPERS and established a new debt repayment shape that was more predictable and smooth, and at a lower level than the previous CalPERS schedule. While the refinancing is expected to generate savings to the district’s budget and enhance long-term resiliency and sustainability, it was just one part of a multipronged recession planning strategy for the district.
Fire Chief @Criss Brainard and Administrative Officer/Finance Officer (AO/FO) @Leah Harris began discussions with the Board in 2018 so the district could make decisions related to budget, labor, and capital planning with eyes wide open.
“Part of this process included development of a more dynamic long-term forecasting model so that I could better demonstrate to our board members the impact of various decisions under different types of economic environments,” said Ms. Harris. “In late 2021, we also invited NHA Advisors to help manage part of a day-long financial planning workshop that we hosted with staff and board members, which was also open to the public.”
According to @Mike Meyer, a VP in NHA’s San Diego office and manager of the firm’s pension group, they spent a few hours talking about the CalPERS pension situation and various tools the district could use to address the rising pension costs. They also discussed the key components of fiscal sustainability and resiliency, especially as it relates to maintenance of a strong credit rating, reserve levels, financial policies and practices, and risk mitigation techniques.
Given the complexity and risks involved for a UAL restructuring, AO/ FO Harris and NHA continued to educate the Board over the course of six months to ensure the final strategy was based on stakeholder input and all risks were quantified through comprehensive analysis.
Fire Chief Brainard and AO/FO Harris rounded out the financing team by hiring Oppenheimer & Co. to serve as underwriter for the transaction given their track record of serving CSDA members (including the district’s prior lease in 2016), as well as their extensive experience with pension restructurings. While AO/FO Harris and the team were preparing to issue a pension obligation bond and obtain a public credit rating, 46 the bond market began to rapidly deteriorate, with interest rates spiking to more than 5%. Oppenheimer quickly recommended pivoting to a direct placement and securing the transaction via a lease structure using CSDA Finance Corporation as the Counterparty. Oppenheimer rapidly canvassed interest from more than 25 banks and the district expeditiously locked an interest rate in April from First Foundation Bank for 3.99%, complete with prepayment flexibility. The district also negotiated a greater than 60-day closing to the end of June to minimize the impact of the CalPERS -6.1% returns by delaying
when they sent the money to CalPERS. According to Oppenheimer Managing Director @Nicki Tallman, this was the last UAL restructuring in California that they know of to secure a sub-4% interest rate. The work the district and the Administrative/Finance Division had done to prepare for the credit rating was instrumental in garnering strong interest from banks.
“By smoothing out the peak in payments, we expect the refinancing will generate more than $10 million in lower expenses through 2036. While that number is large, it is important to remember we are not out of the woods and are still exposed to future CalPERS investment underperformance and economic downturns,” stated AO/FO Harris. For this reason, the district adopted a new pension funding policy, which will earmark the savings from the UAL restructuring to be put into an internally held pension reserve. Over time, the district will use these funds to make strategic Additional Discretionary Payments (ADPs) to CalPERS to continue paying down any new UAL and optimizing the payment shape.
“We were extremely impressed by the district’s robust reserve policies, having six distinct reserves with their own minimum thresholds,” said Meyer. “Adding the new pension reserve serves as another shock absorber to further mitigate any future CalPERS volatility. Strong board engagement and the district’s long-term planning strategies, along with continued analysis completed by AO/FO Harris and Administrative Ananlyst Diana Herron, should serve as a good roadmap to follow for other agencies across the state.”#Finance