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CONSIDERATION OF APPROVAL TO REFINANCE 2006 AND 2010 CERTIFICATES OF PARTICIPATION
A. RESOLUTION NO. 2016-098 OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA MODIFYING, IN PART, RESOLUTION NO. 2016-058 AND AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF THE CHULA VISTA MUNICIPAL FINANCING AUTHORITY 2016 LEASE REVENUE REFUNDING BONDS
B. RESOLUTION NO. 2016-099 OF THE CITY COUNCIL OF THE CITY OF CHULA VISTA MAKING REQUIRED FINDINGS, AUTHORIZING THE EXECUTION AND DELIVERY OF DOCUMENTS RELATING TO THE SALE AND DELIVERY OF NOT TO EXCEED $10,000,000 2016 REFUNDING CERTIFICATES OF PARTICIPATION, (CIVIC CENTER PROJECT), AND AUTHORIZING AND DIRECTING CERTAIN ACTIONS IN CONNECTION THEREWITH
C. RESOLUTION NO. 2016-003 OF THE BOARD OF DIRECTORS OF THE CHULA VISTA MUNICIPAL FINANCING AUTHORITY MODIFYING, IN PART, RESOLUTION NO. 2016-002 AND AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT IN CONNECTION WITH THE OFFERING AND SALE OF THE CHULA VISTA MUNICIPAL FINANCING AUTHORITY 2016 LEASE REVENUE REFUNDING BONDS
D. RESOLUTION NO. 2016-003 OF THE CHULA VISTA PUBLIC FINANCING AUTHORITY APPROVING THE EXECUTION AND DELIVERY OF DOCUMENTS IN CONNECTION WITH THE SALE AND DELIVERY OF THE CITY OF CHULA VISTA 2016 REFUNDING CERTIFICATES OF PARTICIPATION, (CIVIC CENTER PROJECT) IN A PRINCIPAL AMOUNT NOT TO EXCEED $10,000,000 AND AUTHORIZING AND DIRECTING CERTAIN ACTIONS IN CONNECTION THEREWITH.
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RECOMMENDED ACTION
Recommended Action
Council adopt Resolutions A and B, Municipal Financing Authority adopt Resolution C and Public Financing Authority adopt Resolution D.
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SUMMARY
In April 2016, the City approved a refinancing of its outstanding City of Chula Vista 2006 Certificates of Participation and City of Chula Vista 2010 Certificates of Participation to reduce annual debt service payments. The refinancing was expected to be accomplished by the issuance of one series of Lease Revenue Refunding Bonds issued by the Chula Vista Municipal Financing Authority (MFA). Subsequently, it was determined that the refinancing of the City of Chula Vista 2006 Certificates of Participation should be completed by issuing Certificates of Participation. The change in the financing structure requires approval of changes to the resolutions adopted in April as well as approval of additional resolutions.
ENVIRONMENTAL REVIEW
Environmental Notice
Environmental Notice
The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
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Environmental Determination
The Director of Development Services has reviewed the proposed activity for compliance with the California Environmental Quality Act (CEQA) and has determined that the activity is not a “Project” as defined under Section 15378 of the State CEQA Guidelines because it will not result in a physical change in the environment; therefore, pursuant to Section 15060(c)(3) of the State CEQA Guidelines, the activity is not subject to CEQA. Thus, no environmental review is required
BOARD/COMMISSION RECOMMENDATION
Not Applicable
DISCUSSION
Background
In 2006, the City delivered $20,235,000 2006 Certificates of Participation (2006 COPs) to finance the cost of the 2nd phase of the Civic Center construction and the Nature Center. The General Fund’s share of the annual debt service on the 2006 COPs is approximately 22%, with the balance paid from the Public Facilities Development Impact Fee (PFDIF) Fund. Market conditions in summer 2015 allowed the City to refinance a portion of the 2006 COPs and realize a debt service savings in years 2016-2026. The current balance outstanding is $8,755,000.
In 2010, the City delivered $29,355,000 2010 Certificates of Participation (2010 COPs) to reimburse the General Fund and PFDIF Fund for the construction cost of the 3rd phase of the Civic Center construction, and to refinance the original construction of the Corporation Yard improvements. The General Fund’s share of the annual debt service on the 2010 COPs is approximately 28%, with the balance paid from PFDIF. The current balance outstanding is $26.2 million.
As presented in April 2016, the City has the opportunity to refinance each series of COPs at today’s favorable interest rates, and reduce the annual payments payable from the General Fund and the PFDIF fund. Currently, staff expects that the remaining 2006 COPs maturing between 2027 and 2036 can be refinanced to produce a total net savings of approximately $790,000, or a 6.2% reduction in total payments over those years. The present value of the savings from refinancing is 5.9%, which is higher than the City’s debt policy 5% savings minimum requirement. This estimate is lower than the April 2016 estimate (which was 7.5%).
Staff expects that 2010 COPs can be refinanced to save $250,000 annually for 15 years, reducing net debt service payments by 9.5% in those years. Some of these savings result from being able to eliminate a reserve fund for the bonds because of the City’s AA- credit rating. The reserve fund that currently exists would have offset the final payment on the 2010 COPs, but now the savings that would have been realized only in the final year will be realized over time through lower annual debt service instead of at final maturity. Based on today’s rates the present value of the savings from this refinancing is 7%, higher than the April 2016 estimate (which was 5.6%).
The savings from the refinancing will be shared between the General Fund and the PFDIF Fund in the same ratio as the current funding. The total General Fund share of the annual savings is estimated at $70,000 for 15 years, with an additional $20,000 of savings each year between 2027 and 2036, for a total $1.25 million over 20 years. The balance of the savings will accrue to the PFDIF Fund.
No extension of existing maturity of either series of COPs is contemplated.
Financing Structure
The 2006 COPs are currently secured by lease payments payable to the Chula Vista Public Financing Authority (PFA) with respect to a lease of the Civic Center Property, Fire Station No. 7 and Montevalle Park. The 2010 COPs are currently secured by lease payments payable to the PFA with respect to a lease of the Corporation Yard and Fire Stations 4, 6 and 8. The April approvals contemplated that the refinancing of the 2006 COPs would be combined with the refinancing of the 2010 COPs and secured by a lease of the properties currently securing the 2010 Certificates. After further analysis, combining the 2006 COPs and the 2010 COPs would require the City to encumber additional city facilities to do a single refinancing.
Staff has concluded that the financial benefits of combining the 2006 COPs refinancing with the 2010 COPs refinancing (a reduction in the costs of issuance) do not outweigh the disadvantage of encumbering additional city facilities. The 2006 COPs can be refinanced on a stand-alone basis through the issuance of Refunding Certificates of Participation (2016 COPs) secured by the same property currently securing the 2006 COPs. The Council, the MFA Board and the PFA Board are required to adopt resolutions to provide for this revised financing structure.
Separating the refinancings into two transactions does increase the expected costs of issuance somewhat; however, the increased costs will not have a material impact on the debt service savings estimates. Based on a bond size of $36,000,000 to refinance both the 2006 COPs and the 2010 COPs, costs of issuance were estimated at approximately $400,000. With two separate series of approximately $28 million and $8 million, costs of issuance will increase by approximately $45,000. The largest component of this relates to the separate rating fees that will be charged by Moody’s and S&P (increase of $17,000), since there is a minimum fee each issue. The Financial Advisor fee increases by $7,500 for preparation of a second official statement, the trustee fee increases by $4,200 for the administration of a separate series of 2016 COPs and the bond and disclosure counsel fee increases by $7,000 for the separate documentation required for the second series of 2016 COPs. There are other minor cost increases. The costs of issuance are contingent and paid only from proceeds of the MFA Bonds and the 2016 COPs.
Modification to April Approvals for MFA Bonds. In April, after conducting a public hearing, the Council and the MFA Board adopted resolutions approving the refinancing of both the 2006 COPs and the 2010 COPs through the issuance of Lease Revenue Refunding Bonds (MFA Bonds), after conducting a public hearing. Changes to the resolutions adopted by the Council and the MFA are necessary to reflect that only the 2010 COPs will be refinanced by the MFA Bonds. These changes reduce the maximum bond amount, which is lower due to the exclusion of the 2006 COPs, and approve a new draft preliminary official statement. The MFA Bonds will be secured by a lease which includes only the Corporate Yard and the three fire stations included in the current lease securing the 2010 COPs.
Approvals for 2016 COPs. Staff is recommending that the 2006 COPs be refinanced on parity with the outstanding 2015 Certificates of Participation that were issued last year to refund a portion of the 2006 COPs. This will be accomplished through resolutions to be adopted by the Council and the PFA Board authorizing certain amendments to the existing documents for the 2006 COPs and the 2015 COPs, the sale of the 2016 COPs in an amount not-to-exceed $10,000,000 and approving the form of the preliminary official statement. The 2016 COPs will be secured by a lease of the same City assets currently securing the 2006 COPs and the 2015 COPs.
Authorization and Sale
In order to amend the authorization for the issuance of the MFA Bonds and to authorize the 2016 COPs, the Council, the MFA Board and the PFA Board have been presented with resolutions for their consideration.
MFA Lease Revenue Bonds. With respect to the MFA Bonds, the City and MFA resolutions modify the April resolutions, in part, to limit the MFA Bonds to the refinancing of the 2010 COPs and reduce the not-to-exceed par amount that can be issued to $30,000,000 (from the previously approved $40,000,000) and approve the form of the Preliminary Official Statement for the MFA Bonds.
2016 Refunding Certificates of Participation. The City and PFA resolutions for the 2016 COPs approve the form of the following documents to be used in connection with the refinancing:
• Second Supplement to Amended and Restated Trust Agreement between the City, the PFA and the Trustee;
• Third Amendment to Lease/Purchase Agreement between the City and the PFA;
• Third Amendment to Assignment Agreement between the PFA and the Trustee;
• Purchase Contract between the City, the PFA and Stifel Nicolaus & Company, Incorporated
• 2006 Escrow Agreement between the City, the PFA and the U.S. Bank (as Escrow Bank);
• Preliminary Official Statement; and
• Continuing Disclosure Agreement
The resolutions for the 2016 COPs also approve the distribution of the preliminary official statement relating to the 2016 COPs and authorize the execution of the Purchase Contract by the City Manager ,Deputy City Manager or Director of Finance and the PFA Executive Director or Chief Financial Officer, as well as provide certain sale parameters. These parameters are: (1) the par amount of the 2016 COPs cannot exceed $10,000,000, (2) the present value savings for the 2016 COPs must be at least 5% of the principal amount of the 2006 COPs being refunded, and (3) the underwriter’s discount cannot exceed 0.6% of the par amount of the 2016 COPs.
Preliminary Official Statements. The preliminary official statements were prepared by staff and the financial advisor, with input from the City’s bond and disclosure counsel. The Council’s review of the description of the City and the City’s Financial Information contained in the preliminary official statements is requested to be made in accordance with the City’s Disclosure Policies and any requested changes will be incorporated prior to posting the preliminary official statements in advance of the sale of the MFA Bonds and the 2016 COPs on or about June 7, 2016. The preliminary official statements will continue to be updated until then, including for the Fiscal Year 2016/17 budget information presented to the City Council, prior to use in marketing the MFA Bonds and the 2016 COPs to investors.
Financing Team
The City consulted with the following consultants to facilitate this proposed refunding: Financial Advisor - Suzanne Harrell of Harrell & Associates; Bond Counsel - Robert J. Whalen of Stradling Yocca Carlson & Rauth, P.C.; and Underwriter - Sara Oberlies Brown and Holly Vocal of Stifel.
DECISION-MAKER CONFLICT
Staff has reviewed the decision contemplated by this action and has determined that it is not site-specific and consequently, the 500-foot rule found in California Code of Regulations Title 2, section 18702.2(a)(11), is not applicable to this decision for purposes of determining a disqualifying real property-related financial conflict of interest under the Political Reform Act (Cal. Gov't Code § 87100, et seq.).
Staff is not independently aware, and has not been informed by any City Council/Board Member, of any other fact that may constitute a basis for a decision maker conflict of interest in this matter.
LINK TO STRATEGIC GOALS
The City’s Strategic Plan has five major goals: Operational Excellence, Economic Vitality, Healthy Community, Strong and Secure Neighborhoods and a Connected Community. Refunding these Certificates of Participation promotes Operational Excellence, Economic Vitality by reducing debt service payments in future years.
CURRENT YEAR FISCAL IMPACT
There is no fiscal impact in the current Fiscal Year 2015/16.
ONGOING FISCAL IMPACT
The on-going fiscal impact to the General Fund and the PFDIF Fund will be to reduce annual lease payments by approximately $250,000 for 15 years and another $90,000 for a 9 year period beginning in 2027. Based on the payment ratios, the General Fund savings is estimated at $70,000 annually for 15 years together with $20,000 annually for 9 years beginning in 2027. The PFDIF Fund savings is estimated at $180,000 annually for 15 years together with $70,000 annually for 9 years beginning in 2027.
ATTACHMENTS
1. Preliminary Official Statement ( MFA Bonds)
2. Second Supplement to Amended and Restated Trust Agreement (2016 COPs)
3. Third Amendment to Lease/Purchase Agreement (2016 COPs)
4. 2006 Escrow Agreement (2016 COPs)
5. Third Amendment to Assignment Agreement (2016 COPs)
6. Purchase Contract (2016 COPs)
7. Continuing Disclosure Agreement (2016 COPs)
8. Preliminary Official Statement (2016 COPs)
Staff Contact: Mike Sylvia, MBA CPFO, Finance & Purchasing Manager