SUBJECT: Ordinance authorizing the issuance and sale of the City of Houston Pension Obligation Bonds, Series 2017 (Taxable); authorizing a Preliminary Official Statement, Official Statement and related agreements pertaining to such bonds.
RECOMMENDATION: Approve an Ordinance authorizing the issuance and sale of the City of Houston, Texas, Pension Obligation Bonds, Series 2017 (Taxable), in an aggregate principal amount not to exceed $1.01 billion; authorizing certain designated city officials to approve the principal amount, interest rates, prices, terms and sale thereof. Approving the use of a preliminary official statement and authorizing the preparation and distribution of an official statement in connection with such offering.
On May 31, 2017 the Texas Legislature adopted Senate Bill 2190 (the “Pension Reform Legislation”) to enact reforms and substantive changes to the funding and benefit structure of City’s the three Pension Systems – HMEPS, HPOPS and HFRRF. The Pension Reform Legislation became effective July 1, 2017 (the “Reform Effective Date”), the first day of Fiscal Year 2018. The Pension Reform Legislation is the culmination of an effort to reform the Pension Systems to control costs, reduce the unfunded liability and better manage future pension costs and liabilities.
The Pension Reform Legislation includes recognition of unrealized losses in the Pension Systems and reductions in both anticipated earnings and the discount rate used to calculate the City’s future payments to 7.00%, reduction of planned benefits, amortization of the unfunded liability as of the Reform Effective Date (the “Legacy Liability”) over a fixed maximum 30-year amortization period ending in 2047, and a limit on the maximum future City payments as a percentage of active employee payroll.
As part of the reform plan, the City also expects to issue approximately $1 billion of pension obligation bonds in Fiscal Year 2018 to fund a portion of the Legacy Liability relating to the Municipal System and the Police System. If the City fails to deliver $750 million of pension obligation bond proceeds to HPOPS and $250 million of pension obligation bond proceeds to HMEPS,certain benefit changes made effective under the Pension Reform Legislation will be impacted, including potential rescission. If the benefit changes were rescinded, the City would face increased annual contributions to the Pension Systems, which would adversely impact the City’s Fiscal Year budgets and would cause the City to take steps to develop an alternative approach for pension reform.
The Finance Working Group (the “FWG”) is recommending issuing the pension obligation bonds and financing all related costs of issuance.
Recommendation
This transaction was presented to the Budget and Fiscal Affairs Committee on June 6, 2017.
The Finance Working Group recommends the Pension Obligation Bonds, Series 2017 (Taxable) be issued through a negotiated financing with Barclays and Jefferies LLC serving as joint book running managers. Citigroup, JP Morgan and Ramirez & Co. are recommended as co-senior managers. Bank of America Merrill Lynch, Loop Capital Markets and Morgan Stanley are recommended as co-managers. Bracewell LLP and Law Offices of Francisco G. Medina are recommended as co-bond counsel along with Norton Rose Fulbright US LLP and Bates & Coleman, P.C. as co-disclosure counsel.