Title
A RESOLUTION WITH CITIBANK PERTAINING TO AN INTEREST RATE SWAP TRANSACTION RELATING TO THE CITY'S TAXABLE PENSION OBLIGATION REVENUE BONDS, SERIES 2003A (EMPLOYEES' PLAN) AND TAXABLE PENSION OBLIGATION REVENUE BONDS, SERIES 2003B (CONSOLIDATED PLAN). (B)
Explanation
In March of 2003 the City issued the Series 2003A & B Taxable Pension Obligation Bonds in the combined amount of approximately $89,895,000. The proceeds of the issue were deposited into the City's defined benefit pension plans to discharge the Unfunded Actuarial Accrued Liabilities (UAAL) in each plan. The 5.61% true interest cost on the bonds was significantly lower than the UAAL interest rate of 9.25% for the General Employees' Pension Plan and 8.5% for the Consolidated Police Officers' and Firefighters' Pension Plan. The debt issuance is projected to generate gross savings of approximately $78 million dollars and present value savings of approximately $34 million dollars over the life of the bond issue.
These debt proceeds were invested in the same manner as all other pension plan assets. The current asset allocation in each plan is approximately 70% equities and 30% fixed income instruments. One of the potential risks associated with a pension bond issuance is that the investment earnings on the fixed income portion of the pension investment portfolio will be generated at a rate less than the interest rate paid on the debt. While on an overall blended basis, staff is confident that the earnings rate on the proceeds will continue to exceed the interest rate on the debt going forward, this risk is highest on fixed income instruments.
Market conditions currently provide us with the opportunity to hedge or mitigate this risk by implementing a fixed-to-floating interest rate swap agreement. Under the provisions of a swap agreement the City would enter into a contract with a counterparty to swap out a variable interest rate payment to the counterparty in exchange for receiving a f...
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