REPORT TO COUNCIL
SUBJECT
Title
Action on Resolutions Approving an Installment Sale Financing and Authorizing the Execution, Delivery and Sale of Wastewater Revenue Certificates of Participation and related Agreements in a Principal Amount not to Exceed $38 million to Finance and Refinance Capital Costs of the San José-Santa Clara Regional Wastewater Facility; and Approval of the Related Budget Amendment
Report
COUNCIL PILLAR
Deliver and Enhance High Quality Efficient Services and Infrastructure
BACKGROUND
The City of Santa Clara (“City”) is a co-owner of the San José-Santa Clara Regional Wastewater Facility (“RWF”), which is undergoing a major capital improvement program of nearly $1 billion over the next 10 years. Under the Sewage Plant Agreement dated March 30, 1959, as amended, the City is obligated to contribute its share of the capital costs of improvements to the RWF. The City’s planning forecasts assumed that a portion of these contributions, currently projected to total $98 million in Fiscal Years 2023/24 through 2027/28, would be financed through the sale of sewer system obligations, repaid over time from the net revenues of the sewer system (the “Net Revenues”), to spread the cost between current and future sewer ratepayers.
In 2020, the City and the City of Santa Clara Public Facilities Financing Corporation (the “Corporation”) entered into an Installment Sale Agreement (the “2020 Installment Sale Agreement”) for the purpose of providing financing for the City’s share of certain capital costs of improvements to the RWF (the “2020 Project”). The Corporation assigned its interests in the 2020 Installment Sale Agreement to JPMorgan Chase Bank, N.A., who provided the funding for the 2020 Project. The 2020 Installment Sale Agreement was structured as a draw-down financing facility in a maximum principal amount of $50 million, of which the City has drawn down $20 million.
The enclosed Resolutions authorize documents and actions related to the execution and delivery of Certificates of Participation to refinance the 2020 Installment Sale Agreement and raise funds for additional RWF capital costs, in a total amount not to exceed $38 million.
DISCUSSION
Staff developed a financing plan with the assistance of the City’s financing team, KNN Public Finance (municipal advisor) and Jones Hall (bond and discloser counsel).
Reflecting the common practice in California, the current financing will be structured as an installment sale agreement (the “Installment Sale Agreement”) between the City and the Corporation, which will assign its rights to payments thereunder to The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). The Trustee will execute and deliver Certificates of Participation (the “Certificates”), evidencing direct, undivided fractional interests in the installment payments made by the City to the Corporation. The Certificates will be sold to an investment bank, as underwriter, for subsequent sale to investors.
In 2016, the City and the Corporation entered into an Installment Sale Agreement (the “Trimble Road Installment Sale Agreement”) for the purpose of providing financing for the rehabilitation and replacement of the Trimble Road trunk sanitary sewer pipelines. The Corporation assigned its interests in the Trimble Road Installment Sale Agreement to JPMorgan Chase Bank, N.A., who provided the funding for the project. There is currently outstanding $6.5 million under the Trimble Road Installment Sale Agreement and debt service payments are due each February 1 and August 1 with a final maturity date of February 1, 2031. The City’s payments under the Installment Sale Agreement will be on a parity with payments under the Trimble Road Installment Sale Agreement.
The Trimble Road Installment Sale Agreement rate covenant requires the City to set Sewer rates at a level that are expected to generate Net Revenues (gross revenues minus operating and maintenance expenses) at a minimum of 110% of annual debt service. This rate covenant gives comfort to investors that revenue will be adequate to pay both operations and debt service expenses. The 110% covenant of the Trimble Road Installment Sale Agreement was proposed by JPMorgan Chase Bank, but is lower than the standard for the public bond market. Raising the covenant to the more common 125% level should result in a more favorable reception by investors and potentially lower borrowing costs. Given the City’s limited future borrowing plans for the Sewer system, the higher rate covenant is not expected to impact future Sewer rates. In addition, the current five-year Sewer forecast indicates that revenue coverage will average over 5-times estimated debt service over the forecast period.
Presented for your review and adoption are resolutions of the City and of the Corporation (the “Authorizing Resolutions”) authorizing and approving the following documents and actions relating to the proposed wastewater financing:
Authorizing Resolutions. There are two Authorizing Resolutions, one for the City Council and one for the City Council acting as the board of directors of the Corporation. The Authorizing Resolutions approve the financing and refinancing plan, authorize execution and delivery of the Certificates, and approve the other documents described below. The Authorizing Resolutions also authorize City staff to execute those documents, provided the final terms of the Certificates do not exceed a maximum principal amount of $38 million; and a maximum true interest cost of 5.50%. These amounts are conservatively set to provide the City with the flexibility to adjust the structuring of the Certificates as needed in the days leading up to the sale.
Installment Sale Agreement. Under the Installment Sale Agreement, the Corporation provides financing for the RWF costs through the sale of the RWF projects being financed and refinanced to the City in exchange for semiannual installment payments to be made by the City to the Corporation. These installment payments will be made from and secured by a pledge of the Net Revenues of the City’s wastewater enterprise. Under the Installment Sale Agreement, the City will pledge to set rates, fees, and charges for the services and facilities furnished by the wastewater system during each fiscal year that are sufficient to yield Net Revenues at least equal to 125% of the aggregate amount of debt service due and payable on the Certificates, the Trimble Road Installment Sale Agreement, and any future debt issued on a parity with the Certificates. In addition, as a condition to incurring additional parity debt, Net Revenues in the prior fiscal year or latest 12-month period must equal at least 125% of projected maximum annual debt service on the Certificates and the Trimble Road Installment Sale Agreement. The Installment Sale Agreement contains covenants and provisions designed to mirror similar provisions in the Trimble Road Installment Sale Agreement, since the Certificates will be payable on a parity basis with that agreement.
Trust Agreement. The Trust Agreement establishes the relationship between the City, the Corporation and the Trustee, which will serve as trustee on behalf of the owners of the Certificates. This agreement sets forth key terms and conditions of the Certificates, including the allocation of the financing proceeds, prepayment provisions, covenants, the role of the Trustee, and the form of the Certificates. Under the Trust Agreement, the Corporation assigns and transfers to the Trustee its rights to receive installment payments from the City. The Trustee will use those installment payments to make interest and principal payments to the owners of the Certificates.
Preliminary Official Statement. This is the primary disclosure document for the Certificates and provides potential investors with information about the City and the wastewater enterprise, the security and sources of payment for the Certificates, financial and operational information regarding the wastewater enterprise, and outlines key risk factors for potential investors to consider.
Continuing Disclosure Certificate. This is attached as an appendix to the Preliminary Official Statement and sets out the City’s obligation to provide ongoing reporting to the owners of the Certificates and the larger municipal securities marketplace regarding the status of the Certificates and the City’s wastewater enterprise and finances.
Official Notice of Sale. This document will be distributed to potential underwriting banks in a competitive sale process by which underwriting banks will provide bids to purchase the Certificates at the lowest interest cost to the City.
Purchase Contract. This agreement will be used if market conditions at the time the Certificates are sold are such that a competitive sale is determined by the City and the City’s municipal advisor to be inadvisable and that a negotiated sale to an underwriter would produce a more favorable financing. If this occurs, the City will solicit proposals from investment banks to underwrite the bonds on a negotiated based, and the purchase contract will set forth the terms and conditions under which the underwriter will purchase the Certificates on the closing date for subsequent sale to investors.
All of these documents have been presented for approval as to form and will contain certain blanks related to the terms that will be completed when the Certificates are priced (such as principal amount, interest rates, amortization, and redemption terms) because those amounts will be a function of market conditions on the day the Certificates are priced.
Securities Laws. The attached Preliminary Official Statement has been reviewed and approved for transmittal to the City Council by the City’s financing team. The distribution of the Preliminary Official Statement by the City is subject to the federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the Preliminary Official Statement to include all facts that would be material to an investor in the Certificates. Information is “material information” if there is a substantial likelihood it would have actual significance in the deliberations of a reasonable investor when deciding whether to buy or sell securities. The City’s Authorizing Resolution approves the Preliminary Official Statement, and delegates to staff (a) the ability to make additional changes if needed, and (b) to sign a certificate on behalf of the City that deems the Preliminary Official Statement substantially final for purposes of the federal securities laws.
The Securities and Exchange Commission (SEC), the federal agency with regulatory authority over compliance with the federal securities laws, has indicated that, if a member of a legislative body like the City Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in securities like the Certificates, whether relating to the City, the wastewater enterprise and its financial status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the Preliminary Official Statement. The steps that a member of the City Council could take to fulfill this obligation include becoming familiar with the Preliminary Official Statement and questioning staff and other members of the financing team about the disclosure of such facts.
Amendment to Trimble Road Installment Sale Agreement. Also presented for approval is an amendment to the Trimble Road Installment Sale Agreement to modify the rate covenant to require Net Revenues to be at least equal 125% of aggregate debt service. This change is needed in order to make the Trimble Road Installment Sale Agreement consistent with the rate covenant proposed for the Installment Sale Agreement for the Certificates, which is in keeping with current credit standards for publicly offered debt.
ENVIRONMENTAL REVIEW
The actions being considered do not constitute a “project” within the meaning of the California Environmental Quality Act pursuant to section 15378(b)(4) of Title 14 of the California Code of Regulations as they are fiscal activities which do not involve any commitment to a specific project that may result in a potentially significant physical impact on the environment.
FISCAL IMPACT
The recommended actions, if taken by the City Council, both in its role as the City’s governing body and as the governing board of the Corporation ensure that a portion of RWF-related CIP costs are, ultimately, financed by the issued debt. Financing these costs is a part of the ongoing strategy of the City to maintain reasonable and equitable sewer rates. Based on a debt issuance with net proceeds of $35 million, the current estimate of 5% as the cost of long-term borrowing, and assuming a 25-year repayment period, annual debt service on this fixed rate issuance is projected to be approximately $2.5 million, an increase of roughly $0.5 million over the estimate factored into the Sewer Utility’s latest 10-year financial forecast.
The requested authorization par value of not-to-exceed $38 million is higher than the expected amount of bonds to accommodate various options regarding the bond structure. It allows the bonds to be sold at a discount, pending interest rate structure based on market condition at the time of issuance, while ensuring the City receives net proceeds of $35 million. In some markets, underwriters will ask to buy bonds at a discount in exchange for lower nominal interest rates. Discount bonds require a larger par amount to generate the same proceeds as bonds sold at par (100%). While a discount requires a larger par amount to generate the same proceeds, to the extent the lower nominal rate results in a lower all-in rate (cost) for the bonds, it would be in the City’s best interest to accommodate a discount. In addition, the higher authorization amount also takes into consideration all external costs of issuing the bonds.
The FY 2023/24 and FY 2024/25 Biennial Operating Budget, adopted by the City Council on June 27, 2023, assumed net proceeds of $30 million to refinance $20 million principal outstanding of 2020 Installment Sale Agreement and borrow an additional $10 million to support the RWF. The net bond proceeds amount is recommended to be revised to $35 million and would provide additional RWF project funding. The debt repayment calculations in the Adopted Budget were based on the lower debt issuance amount and also reflected an annualized debt service amount. However, due to the timing of debt issuance, only a partial payment will be due in FY 2023/24, resulting in a lower debt repayment amount in the current fiscal year. On an ongoing basis, the debt service payment is projected to total approximately $2.5 million, which is approximately $0.5 million above the $2 million assumed in the budget. This higher amount will be factored into future budgets.
A budget amendment is recommended to reflect the $5 million increase in the net bond proceeds (from $30 million to $35 million) and to reduce the debt repayment amount due to the partial year payment in FY 2023/24. The additional debt proceeds are recommended to remain in the Sewer Utility Debt Service Fund. As RWF project funding is needed, the Department may appropriate this funding through future City Council action.
Budget Amendment
FY 2023/24
|
|
Current |
Increase/ (Decrease) |
Revised |
|
Sewer Utility Debt Service Fund |
|
|
|
|
Revenue |
|
|
|
|
Bond Proceeds |
$30,000,000 |
$5,000,000 |
$35,000,000 |
|
|
|
|
|
|
Expenditure |
|
|
|
|
Debt Repayment |
$24,041,553 |
($1,506,135) |
$22,535,418 |
|
|
|
|
|
|
Fund Balance |
|
|
|
|
Unrestricted Ending Fund Balance |
$1,963,704 |
$6,506,135 |
$8,469,839 |
Debt service payments would be made from Net Revenues, with the original repayments amounts included in the Sewer Utility’s 10-year financial forecast. The debt repayments will be updated in the subsequent fiscal years’ budget during the next budget cycle.
COORDINATION
This report was coordinated with the Department of Finance and the City Attorney’s Office
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov <mailto:clerk@santaclaraca.gov> or at the public information desk at any City of Santa Clara public library.
ALTERNATIVES
1. That the City Council by Resolution and Motion Takes the Actions set forth in Items 1-3 in the Below List for City Council Action (five affirmative Council votes required as action involves the appropriation of additional revenue) and that the City Council, Acting as Board of Directors of the Corporation, by Resolution and Motion Takes the Actions set forth in Items 1-3 in the Below List for Corporation Action
2. Do Not Adopt City or Public Facilities Financing Corporation Resolutions and Direct Staff to Return with Alternate Financing Strategies and Necessary Budget Amendments
RECOMMENDATION
Recommendation
Alternative 1
City Council Actions
1. That the City Council by Resolution:
a) Authorize the financing and refinancing plan for capital costs of the San José-Santa Clara Regional Wastewater Facility set forth in the Resolution;
b) Authorize and approve (i) the Installment Sale Agreement between the City and the Corporation; (ii) the Trust Agreement among the City, Corporation, and the Trustee, in substantially the form attached hereto;
c) Approve the execution and delivery of the Certificates, subject to the maximum principal amount, true interest cost and underwriting discount set forth in the Resolution;
d) Approve the sale of the Certificates by competitive sale pursuant to the Official Notice of Sale relating to the Certificates in substantially attached hereto, or, by negotiated sale pursuant to the Purchase Contract in substantially the form attached hereto;
e) Approve the Preliminary Official Statement, in substantially the form attached hereto, with such changes as may be approved by an authorized officer, and approve the execution and delivery of the Continuing Disclosure Certificate in the form attached as an appendix to the Preliminary Official Statement;
f) Authorize the designated authorized officers to execute all required agreements necessary to consummate any of the transactions contemplated by the agreements and documents approved under the Resolution and to make any minor non-substantive or routine changes to complete the financing transaction; and
g) Authorize certain other related actions in support of or related to the financing set forth in the Resolution;
2. That the City Council by Separate Resolution: Authorize and approve the Amendment to the Trimble Road Installment Sale Agreement between the City and the Corporation in substantially the form attached hereto with such changes as may be approved by an authorized officer; and
3. That the City Council by Motion: (a) Approve the FY 2023/24 budget amendment in the Sewer Utility Debt Service Fund to increase the bond proceeds estimate in the amount of $5,000,000, decrease the debt repayment in the amount of $1,506,135, and increase the unrestricted ending fund balance in the amount of $6,506,135; and (b) Require any and all of the above agreements approved by resolution be subject to the review and approval as to form by the City Attorney.
City of Santa Clara Public Facilities Financing Corporation Actions
1. That the City Council, Acting as Board of Directors of the Corporation, by Resolution:
a) Authorize the financing and refinancing plan for capital costs of the San José-Santa Clara Regional Wastewater Facility as set forth in the Resolution;
b) Authorize and approve (i) the Installment Sale Agreement between the City and the Corporation; (ii) the Trust Agreement among the City, Corporation, and the Trustee, in substantially the form attached hereto;
c) Approve the execution and delivery of the Certificates, subject to the maximum principal amount, true interest cost and underwriting discount set forth in the Resolution;
d) Authorize the designated authorized officers to execute all required agreements necessary to consummate any of the transactions contemplated by the agreements and documents approved under the Resolution and to make any minor non-substantive or routine changes to complete the financing transaction; and
e) Authorize certain other related actions consistent with the financing as set forth in the Corporation’s Authorizing Resolution;
2. That the City Council, Acting as Board of Directors of the Corporation, by Separate Resolution authorize and approve the Amendment to the Trimble Road Installment Sale Agreement between the City and the Corporation in substantially the form attached hereto with such changes as may be approved by an authorized officer; and
3. That the City Council, Acting as Board of Directors of the Corporation, by Motion require any and all of the above agreements approved by resolution be subject to the review and approval as to form by the City Attorney.
Staff
Reviewed by: Gary Welling, Director, Water & Sewer Utilities
Reviewed by: Kenn Lee, Finance Director
Approved by: Jōvan D. Grogan, City Manager
ATTACHMENTS
1. City Resolution Approving Financing
2. Public Facilities Financing Corporation Resolution Approving Financing
3. Installment Sale Agreement
4. Trust Agreement
5. Preliminary Official Statement
6. Official Notice of Sale
7. Purchase Contract
8. City Resolution approving Amendment to Trimble Road Installment Sale Agreement
9. Public Facilities Financing Corporation Resolution Approving Amendment to Trimble Road Installment Sale Agreement
10. Amendment to Trimble Road Installment Sale Agreement