Benefit Changes for Current & Future Beneficiaries

1. Benefit Changes for Current & Future Beneficiaries Risks & Benefits of Pension Obligation Bonds Trustees School January 29, 2013 Jose Fernandez

2. Current Environment • Pension plan unfunded actuarial accrued liability major issue for municipalities, plan members, taxpayers and bond credit rating agencies • New GASB accounting rules will require cities to disclose unfunded liability on balance sheet • Cities consider issuing pension obligation bond (POB) to pay off a portion or all of unfunded pension plan liabilities

3. How It Works • Proceeds of pension obligation bonds deposited in the assets of the pension plan to reduce or eliminate the plan’s unfunded liabilities • Reduces city’s contribution towards the unfunded liabilities • City obligated to pay principal and interest on POBs to bond holders • Municipality trading one obligation (UAAL) for another (POB)

4. So, Why Do It? • If rate of return on POB proceeds deposited in pension plan exceeds interest rate paid on bonds, the city saves money • Illustration: POB proceeds of $100 million deposited into pension plan to eliminate unfunded liability

5. What Can Go Wrong? • Pension plan investment return on bond proceeds is less than interest cost of bonds • Pension plan investment losses resulting in higher city contributions • City still obligated to pay bond holders • Increased debt burden for municipality may result in loss of future financing flexibility for the city and pressure on credit ratings