|
DISCUSSION
<br /> The rate of interest (7.75%) being charged by CaIPERS is significantly above the City's
<br /> true cost of capital. Two simple methods to determine the cost of capital are: (1) how
<br /> much interest could the City earn if it invested the $7,840,285 over a 10 year period,
<br /> and (2) what is the City's current estimated cost of borrowing? As it happens, both of
<br /> these approaches yield a true interest cost of approximately 4.5%; therefore, 4.5% is
<br /> assumed for purposes of the analysis. It should be noted that the City is currently
<br /> earning a rate of return on the investment of its idle funds of 1.8%; the 4.23% used in
<br /> Table 2 for analysis is the ten year Treasury Rate. Table 2 presents the analysis of the
<br /> savings that the City could realize if the Side Fund Loan was paid off in its entirety:
<br /> Table 2
<br /> FYE Prin Balance Payment Eff Yield Inv rate Inv Revenue
<br /> 6/30/2010 8,189,551 947,911 7.49% 4.23% 332,451
<br /> 1 6/30/2011 7,840,285 978,718 7.50% 4.23% 316,687
<br /> 2 6/30/2012 7,431,971 1,010,526 7.50% 4.23% 298,351
<br /> 3 6/30/2013 6,958,995 1,043,368 7.50% 4.23% 277,201
<br /> 4 6/30/2014 6,415,273 1,077,277 7.50% 4.23% 252,973
<br /> 5 6/30/2015 5,794,212 1,112,289 7.37% 4.23% 225,381
<br /> 6 6/30/2016 5,080,677 1,148,438 7.69% 4.23% 193,772
<br /> 7 6/30/2017 4,290,939 1,185,762 7.53% 4.23% 158,846
<br /> 8 6/30/2018 3,392,633 1,224,299 7.55% 4.23% 119,207
<br /> 9 6/30/2019 2,384,705 1,264,089 7.59% 4.23% 74,807
<br /> 10 6/30/2020 1,257,360 1,305,172 7.83% 4.23% 25,224
<br /> 11 6/30/2021 -
<br /> 11,349,938 7.55% 4.23% Pry - ' ,_ 0111
<br /> Payoff Amt 7,840,285
<br /> Interest Pmt 3,509,653
<br /> wy
<br /> Investment
<br /> Savings 1,567,205
<br /> NPV of Savings 1,325,385
<br /> The total gross savings to the City over the 10 year period would be $3,509,653 in
<br /> interest savings from not paying the remaining interest owed to CaIPERS Side Fund
<br /> Loan. Assuming that the City pays off the Loan to CaIPERS and pays back the internal
<br /> loan at an assumed rate of 4.23%, the City could save $1,567,205. The best measure
<br /> of overall financial benefit to the City is the net present value (NPV), a calculation that
<br /> states the savings in current dollars. By applying the true interest cost of 4.50% as our
<br /> factor, the net present value savings is $1,325,385. The rule of thumb is that anytime
<br /> Page 3 of 4
<br />
|