BOARD MEETING DATE: April 2, 2004
AGENDA NO. 11

Approve Preparation of Legal and Disclosure Documents Necessary to Permit AQMD to Participate in the County of San Bernardino Pension Obligation Bond Financing and Authorize the Executive Officer to Enter into Agreements with Bond Counsel, Disclosure/Special Counsel and Financial Advisor

SYNOPSIS:

Staff is proposing that AQMD join with the County of San Bernardino in issuing Pension Obligation Bonds to retire the Unfunded Actuarial Accrued Liability due to the San Bernardino County Employee Retirement Association.

COMMITTEE:

Administrative, March 12, 2004, referred by Chair to Finance Committee, Finance, March 19, 2004, Recommended for Approval

RECOMMENDED ACTIONS:

1. Authorize staff to proceed with the preparation of legal and disclosure documents to permit AQMD to participate in County of San Bernardino Pension Obligation Bond financing expected to be sold in May or June of 2004. Authorize the Executive Officer to enter into an agreement with the firm selected as Bond Counsel by the County, Orrick, Herrington & Sutcliffe LLP, for a professional fee in an amount not to exceed $50,000, plus costs, with payment contingent upon the sale of the Bonds.
    
2. Authorize the Executive Officer to enter into an agreement with Stradling Yocca Carlson & Rauth to act as Disclosure/Special Counsel to AQMD regarding the issuance of Pension Obligation Bonds for a professional fee in an amount not to exceed $35,000, plus costs, with payment contingent upon the sale of the Bonds.
    
3. Authorize the Executive Officer to enter into an agreement with Sperry Capital, Inc. to act as Financial Advisor to AQMD regarding the issuance of Pension Obligation Bonds for a professional fee in an amount not to exceed $27,500, plus costs, with payment contingent upon the sale of the Bonds.

Barry R. Wallerstein, D.Env.
Executive Officer

Background

Over the past several months staff has been in contact with the San Bernardino County Employee Retirement Association (SBCERA) regarding the growing retirement system costs and has participated in two meetings with representatives of SBCERA and the County of San Bernardino regarding the Unfunded Actuarial Accrued Liability (UAAL) of the retirement system and the County’s decision to go forward with the issuance of Pension Obligation Bonds (POB) to retire a substantial portion of the County’s UAAL to the Retirement Association. In 1995 AQMD joined with the County to issue approximately $420.5 million in POBs of which $34.3 million were associated with AQMD. These are taxable, non-callable bonds that for AQMD have a level debt service schedule of $3.1 million annually to 2022.

The principal from the sale of these POBs was transmitted to SBCERA to fully fund the UAAL that existed in 1995. SBCERA invested the proceeds from the 1995 POBs and AQMD and County benefited from excess earnings created by the exponential market growth that followed. SBCERA chose to use the excess earnings to reduce AQMD and County contribution rates during the 1997 to 2003 period.

The impacts of benefit increases from the Ventura I and Ventura II litigation settlements and changes to the actuarial assumptions to reflect the changing demographics of the retirement members has resulted in a new UAAL for AQMD of over $46 million. This new UAAL has had a dramatic impact on AQMD’s contribution rates and budget beginning in FY 2003-04.

Due to the five-year smoothing process employed by SBCERA, which recognizes only 20% of the investment losses (or gains) incurred in any one year over each of the next five years, the full impact of recent losses is only just beginning to show. AQMD’s portion of the current unrecognized losses is between $40 and $50 million. This unrecognized loss is in addition to the UAAL.

Proposal

The options for funding the UAAL are limited. AQMD is obligated under statute to amortize the UAAL over the currently agreed 20-year period as market losses begin to be recognized through the five-year smoothing process. Since SBCERA’s assumed investment rate of 8.16% is several hundred basis points higher than current market interest rates, AQMD could save money by issuing POBs. Under current market conditions, AQMD could realize annual savings in the $600 to $900 thousand range over the 20-year bond term, depending on the amount financed.

Staff is recommending that the Board authorize staff to proceed with the preparation of legal and disclosure documents, including Bond Resolutions, loan documents, the contract of purchase, the preliminary Official Statement and other necessary documents to permit AQMD to participate in the County of San Bernardino Pension Obligation Bond financing expected to be sold in May or June of 2004. All documents will be submitted to the Administrative Committee and the Board for approval at a subsequent meeting.

In addition, staff is recommending that the Board authorize the Executive Officer to enter into agreements with the firm already selected by the County, Orrick, Herrington & Sutcliffe LLP Bond Counsel and to authorize agreements with Sperry Capital, Inc. as Financial Advisor and Stradling Yocca Carlson & Rauth as Disclosure/Special Counsel to AQMD.

Sole Source Justification

Section VIII.B.2 of the Procurement Policy and Procedure identifies four major provisions under which a sole source award may be justified. This request is to approve one sole source award, to the firm selected by the County, authorized under provision B.2.d.(5) Performance of AQMD work concurrent with local government official duties; and. two sole source awards, for financial and legal services, authorized under provision B.2.d.(4) level-of-effort expert consultation services.

The firm of Orrick, Herrington & Sutcliffe LLP, Bond Counsel, has been selected for this project by the County of San Bernardino. AQMD is proposing to join the County in this effort thereby minimizing its cost of issuance (by sharing costs) and increasing the marketing exposure for AQMD bonds by being part of a much larger bond issue.

Due to the requirements of this type of bond issue and the likelihood that interest rates may begin to rise in the third quarter of 2004, the County is on the fast track to complete this issue in the May/June time period. Staff proposes to retain the services of Sperry Capital, Inc. as Financial Advisor and Stradling Yocca Carlson & Rauth as Disclosure/Special Counsel to AQMD for this issuance. Both Sperry Capital and Stradling Yocca Carlson & Rauth have considerable experience in the bond market and a strong understanding of AQMD financial operations and legal structure.

Sperry Capital has served as financial advisor to AQMD for the early redemption of $6.4 million of Refunding Series 1992 SCAQMD Building Corporation bonds and the issuance of $26.8 million of Refunding Series 2002 SCAQMD Building Corporation Bonds. In addition to work with AQMD, Sperry Capital has served as financial advisor for the issuance of $10.28 billion of bonds and notes for California issuers since January 2002. Some of Sperry Capital’s clients were the County of Orange (general fund debt and Pension Obligation Bonds), the Los Angeles Unified School District, the Orange County Transportation Authority, Contra Costa County (COPs and Pension Obligation Bonds), the State of California (CalTrans and the State Controller) and the City and County of San Francisco.

Stradling Yocca Carlson & Rauth has represented AQMD in connection with most of its significant borrowings including its 1995 pension obligation revenue bonds. During each of the past five years, the firm has ranked among the top public finance firms in terms of the number of bond issues closed or their dollar volume. In 2003, for example, the firm was the second largest bond counsel firm in the state in terms of dollar volume, having acted as bond counsel on more than 246 financings totaling approximately $6.8 billion.

Resource Impacts

The cost to AQMD for these professional services, which are contingent upon the sale of the bonds, will be paid out from the proceeds of the sale.

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