TO:
Honorable Mayor Powell and Members of the City Council
THROUGH:
David N. Carmany, City Manager
FROM:
Bruce Moe, Finance Director
SUBJECT:Title
Refunding of Series 2004 Police & Fire Facility Project Certificates of Participation with an Estimated Present Value Savings of $1.8 million, and Approval of Bank of America Merrill Lynch as Underwriter and Stradling Yocca Carlson & Rauth as Bond and Disclosure Counsel
APPROVE
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Recommended Action
RECOMMENDATION:
The City Council Finance Subcommittee and City staff recommend that the City Council approve the debt refunding plan for the Series 2004 Police & Fire Facility Project Certificates of Participation (COPs). Further, staff recommends that the City Council approve Bank of America Merrill Lynch as Underwriter, and Stradling Yocca Carlson & Rauth as Bond and Disclosure Counsel, for this transaction.
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FISCAL IMPLICATIONS:
By taking advantage of the current interest rate environment, the City can achieve present value savings of approximately $1.8 million through refunding the existing Series 2004 Police & Fire Facility Project Certificates of Participation. The annual debt service payments for the Police/Fire COPs total approximately $810,000. If the refunding plan is approved, the overall debt service would be reduced by approximately $111,000 annually. The amortization period would no longer than the current term of 2036.
As an alternative, the City could opt to retain the existing debt service ($810,000) and shorten the amortization period by several years depending upon the interest rate achieved through the refunding. A final recommendation will be presented to the City Council when this item returns for final approval at the January 15, 2013 or February 5, 2013 City Council meeting.
BACKGROUND:
In line with the City Council Strategic Plan goals, staff reviewed the City's outstanding debt for refunding (refinancing) opportunities. The historically low interest rate environment has created the opportunity to reduce overall borrowing costs. Earlier this year, the City refunded the Metlox and Water/Wastewater COPs which resulted in net present value savings of $2.8 million.
The Police/Fire Facility was completed in 2006 at a cost of $41 million. The facility was funded through a combination of accumulated cash of $28 million and $12.98 million in bonds (certificates of participation or COPs). The current net interest rate for this issue is 4.6%. These COPs cannot be called until January 2014. As a result, any refunding plan would include a defeasance of the existing bonds through the establishment of an escrow fund into which the equivalent of the future debt service payments would be placed until prepayment can be made in January 2014. While those funds earn interest, it will be less than the rate being paid, resulting in negative arbitrage of approximately $275,300. That negative arbitrage erodes savings from the refunding. When staff last analyzed this issue during the earlier 2012 refunding of Metlox and Water/Wastewater, these COPs were not included because the negative arbitrage resulted in net present value savings of just .62%. However, with current interest rates and a shorter escrow period, and therefore less negative arbitrage, the savings is now estimated to be 16.4%. As a result, staff recommends refunding these COPs.
DISCUSSION:
In order to refund the City's debt, a new series of Certificates of Participation (COP's) will be issued as a General Fund lease.
This debt issuance will be a negotiated sale by the underwriter. The negotiated sale approach provides flexibility to change structure, terms and timing of sale during the offering process to adapt to market conditions. It also allows for active pre-sale marketing efforts including outreach within the community. As has been the case for the past several debt issues, the underwriter will place a heavy emphasis on retail sales to the local community to provide our residents an opportunity to support their hometown.
Staff recommends that the City retain the same underwriting firm utilized for the recent Metlox/Water-Wastewater refunding: Bank of America Merrill Lynch (BAML). BAML did an excellent job marketing those COPs which resulted in significant savings to the City. Additionally, BAML has its own retail and institutional marketing channels, which ensures a successful sale of the proposed COPs. The contract for underwriter services (e.g., the Purchase Agreement) will be presented for City Council approval at a future meeting as part of the overall bond documentation. The estimated cost of underwriter services is $61,991, which includes the underwriter discount (the fee paid to the underwriter for purchasing the bonds), Underwriter's Counsel, marketing expenses and other transaction related costs.
The City has an existing Bond & Disclosure Counsel agreement with the firm of Stradling Yocca Carlson & Rauth, which was approved by the City Council in April 2007. Mr. Civale has served in this capacity since the Police/Fire Facility debt issuance in 2004, and has consistently provided reliable and sound legal advice. Additionally, he has provided as-needed bond and disclosure counsel services, without additional cost, outside of the bond issuance process. This counselor's fees remain unchanged from those originally established in 2007. These fees are $40,000 for serving as Bond Counsel and $20,000 for serving as Disclosure Counsel.
In order to market the refunding COPs, the City will need to obtain a credit rating. The Underwriter has recommended that the City obtain the rating from Standard and Poor's since they recently rated the Metlox/Water-Wastewater refunding, and are current on the City's financial position. The estimated cost for the rating is $12,600.
Fees for these services (with the exception of the rating agency) are contingent upon the successful completion of the refunding. Additionally, there will be other costs associated with the issuance including the Trustee, verification agent, local advertising, and publishing and posting of the Official Statement. A property appraisal may also be required. All of these fees (with the exception of the appraisal) will be paid with bond proceeds, and are expected to total approximately $160,000, which has been factored into the present value savings noted earlier.
Staff believes that a Financial Advisor is not necessary to successfully complete this sale of COPs. BAML is well versed in the City's needs and has agreed to assist the City with the bond structuring and the credit rating request. Further, the refunding size of approximately $10.4 million is small, the City's credit rating was recently reaffirmed and will not require the services of a Financial Advisor to assist with that process, and no formal presentation to the rating agencies will be necessary. Performing this refunding in close proximity to the Metlox/Water-Wastewater refunding allows us to leverage that effort and save an estimated $25,000 by not retaining a Financial Advisor. Finally, Mark Young of Loop Capital Markets, the Financial Advisor retained by the City for transactions over the past twelve years, concurs and supports this assessment.
CONCLUSION:
Refunding the Police/Fire COPs is expected to result in present value savings of $1.8 million, while maintaining a similar amortization schedule. As an alternative, the City could opt to retain the existing debt service and reduce the amortization period by several years depending upon the interest rate achieved through the refunding. A final recommendation will be presented to the City Council when this item returns for final approval at the January 15, 2013 or February 5, 2013 City Council meeting.
Staff expects the refunding to be completed within 45-60 days.