REPORT TO COUNCIL & PUBLIC FACILITIES FINANCING CORPORATION
SUBJECT
Title
Adoption of Resolutions Approving Financing for the City of Santa Clara’s (the “City”) portion of Capital Costs at the Regional Wastewater Facility (RWF) in an Amount Not-to-Exceed $50,000,000 [Council Pillar: Deliver and Enhance High Quality Efficient Services and Infrastructure]
Report
BACKGROUND
The City is a co-owner of the San José-Santa Clara Regional Wastewater Facility (“RWF”), which is undergoing over $1 billion of capital improvements in the next five years. Under the Sewage Treatment Plant Agreement between San José and Santa Clara 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 10-year financial plan utilized for budget and rate setting purposes assumes that a portion of the City’s contribution (currently projected to total $145.4 million in 2019-20 through 2023-24) will be paid from debt financing proceeds. Debt service on the financing would be repaid over time from net revenues of the sewer system that distributes the project costs across current and future sewer ratepayers.
To provide the City maximum flexibility to fund unpredictable construction drawdown requirements, staff determined that an interim credit facility financing instrument would be financially advantageous for the RWF project. Similar to a commercial line of credit, this form of financing allows the City to draw funds as needed over time, with the expectation that long-term, fixed rate financing would be secured within approximately four years, when project cash flows are better defined.
The enclosed Resolutions authorize documents and actions related to the execution of the interim financing outlined above in an amount not to exceed $50,000,000.
DISCUSSION
The Finance Department entered into an agreement with Brandis Tallman LLC to assist with the solicitation of offers for tax-exempt private placement interim financing for the Project. Brandis Tallman sent a request for proposals to 22 banks on March 5, 2020. During the intervening period, the capital markets were disrupted by the COVID-19 pandemic and the due date for proposals was extended for an additional week. On March 27, 2020, the City received proposals from two financial institutions to finance the Project.
Although the City only received two proposals from JPMorgan Chase and Wells Fargo, respectively, they are considered very desirable by the Finance Department and the City’s financial advisors. Currently, interest rates have dropped substantially due to the Federal Reserve reducing interest rates in reaction to the negative economic effects of the COVID-19 pandemic. Each bank proposed rates for terms of 2 - 4 years, as requested by the City. Following an analysis of the proposals, the Finance Department entered into contract negotiations with JPMorgan Chase (the “Lender”), as the proposer with the lowest financing cost and most advantageous financing terms.
Presented for your review and adoption are two Resolutions authorizing and approving the following documents and actions relating to the financing of the Project:
A Resolution of the City Council of the City of Santa Clara:
1. Approving entering into an installment sale financing arrangement in the aggregate principal amount of not to exceed $50,000,000 with the City of Santa Clara Public Facilities Financing Corporation (the “Financing Corporation”), whereby the Financing Corporation proposes to assign installment debt service payments received from the City to the Lender;
2. Authorization to execute associated “Financing Documents” including a) an Installment Sale Agreement between the City and the Financing Corporation; b) an Assignment Agreement among the City, the Financing Corporation and the Lender; and c) a Rate Lock Agreement in the event it is in the best interests of the City and the Lender to fix the interest rate on the financing more than two business days prior to the closing of the transaction;
3. Approving the engagement of professional services in connection with the financing;
4. Authorizing various officers of the City to execute all documents that may be necessary to close the transaction, make any minor non-substantive or routine changes, and certain other related actions.
A Resolution of the City of Santa Clara Public Facilities Financing Corporation:
1. Approving entering into an installment sale financing arrangement in the aggregate principal amount of not to exceed $50,000,000 with the City of Santa Clara, whereby the Financing Corporation proposes to assign the installment debt service payments received from the City to the Lender;
2. Authorization to execute associated “Financing Documents” including a) an Installment Sale Agreement between the City and the Financing Corporation; and b) an Assignment Agreement among the City, the Financing Corporation and the Lender;
3. Authorizing various officers of the Financing Corporation to execute all documents that may be necessary to close the transaction, make any minor non-substantive or routine changes, and certain other related actions.
The Installment Sale Agreement was created with input from the City, its outside legal counsel and consultants, as well as JP Morgan. Section 8.12 of the Agreement (“Waiver of Jury Trial; Agreement for Judicial Reference; No Sovereign Immunity”) was added by JP Morgan as a standard non-negotiable clause that they include in all similar agreements; however, this clause is not a standard one for general City contracts. In the event of a litigated dispute between the City and JP Morgan regarding this Agreement, the case would be referred to an arbitration-like process rather than Superior Court. This clause was included in a prior 2015 City financing agreement with JP Morgan. The City Attorney’s Office believes that any additional risks associated with including this clause in the Agreement to be fairly low, and therefore concurs with the recommendation. However, in the interest of clarity and transparency, the City Attorney’s Office believes that nonstandard contract provisions should be brought to the Council’s attention.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(a) as it has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment.
FISCAL IMPACT
The credit facility financing will bear a variable rate of interest. Based on current market conditions, initial annual debt service in FY 2021 is expected to be approximately $600,000. It is expected that amounts borrowed under the credit facility would ultimately be refinanced with proceeds of a future long-term, fixed rate issuance of sewer revenue certificates of participation (subject to future approval by Council). Based on a conservative estimate of future long-term borrowing costs (5%) and assuming a 30-year repayment period, annual debt service for such a fixed rate financing would be approximately $3.25 million. The anticipated repayment amount for FY 2020/21 has been factored into the Proposed Budget, and the payments for future years will be incorporated into the Sewer Utility funds as part of the next budget cycle.
Debt service payments would be made from net operating revenues of the Sewer Utility and have been contemplated in the Sewer Utility's long-range financial plan and rate structure.
COORDINATION
This report has been coordinated with the Finance Department and 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 .
RECOMMENDATION
Recommendation
That the Council:
1. Adopt the Resolution authorizing the Installment Sale Financing in an amount not to exceed $50,000,000 to provide interim financing for capital costs of the Regional Wastewater Facility, approving the final form and execution of financing documents and authorizing certain other related actions consistent with the financing; and
2. Authorize the City Manager, Director of Finance, City Attorney, and Assistant City Clerk 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.
That the Financing Corporation:
1. Adopt the Resolution authorizing the Installment Sale Financing in an amount not to exceed $50,000,000 to provide interim financing for capital costs of the Regional Wastewater Facility, approving the final form and execution of financing documents and authorizing certain other related actions consistent with the financing; and
2. Authorize the Executive Director, Director of Finance and other 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.
Staff
Reviewed by: Gary Welling, Director, Water and Sewer Utilities
Reviewed by: Kenn Lee, Director, Department of Finance
Approved by: Deanna J. Santana, City Manager & Executive Director of the Financing Corporation
ATTACHMENTS
1. City Resolution
2. Public Facilities Financing Corporation Resolution
3. Installment Sale Agreement
4. Assignment Agreement