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AUTHORIZE THE ISSUANCE AND SALE OF STOCKTON PUBLIC FINANCING AUTHORITY WASTEWATER REVENUE REFUNDING BONDS (WASTEWATER REFUNDING PROJECT), SERIES 2024 (THE “2024 BONDS”) TO ACHIEVE SAVINGS BY REFUNDING THE OUTSTANDING WASTEWATER REVENUE REFUNDING BONDS, SERIES 2014
recommended action
RECOMMENDATION
Staff recommends the City of Stockton and the Stockton Public Financing Authority authorize the issuance and sale of the 2024 Bonds, in a principal amount not-to-exceed $32,000,000, to refund the remaining Wastewater Revenue Refunding Bonds, Series 2014 (the “2014 Bonds”), of which $34,710,000 is currently outstanding and $29,620,000 will be outstanding after September 1, 2024.
Resolution of the City of Stockton: This Resolution authorizes the form of and the execution and delivery of an Installment Purchase Contract, Bond Purchase Contract, Continuing Disclosure Certificate and Official Statement all relating to the issuance of the 2024 Bonds and approving certain actions in connection therewith.
Resolution of the Stockton Public Financing Authority: This Resolution authorizes the issuance and sale of the 2024 Bonds in an aggregate principal amount not to exceed $32,000,000; approves the form of and authorizes the execution and delivery of an Indenture, an Installment Purchase Contract, a Bond Purchase Contract, and an Official Statement all relating to the issuance of the 2024 Bonds and approving certain actions in connection therewith.
The Resolutions also approve the execution of all documents and other actions related to the issuance of the 2024 bonds and that the Chair of the Authority (Mayor), Executive Director of the Authority (City Manager), Treasurer of the Authority (Chief Financial Officer) or their designee be authorized to take appropriate and necessary actions to carry out the purpose and intent of the Resolutions (Exhibits 1-5 to both resolutions).
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Summary
In October 2014, the Stockton Public Financing Authority issued Wastewater Revenue Refunding Bonds, Series 2014 (the “2014 Bonds”) in the original amount of $69,440,000 of which $34,710,000 is currently outstanding and $29,620,000 will be outstanding after September 1, 2024. The 2014 Bonds refunded two previously outstanding issues from 1998 and 2003.
The purpose of the refunding is to generate significant annual debt service savings for the City’s wastewater system. The savings are currently estimated at $227,225 per year from fiscal year 2026 to fiscal year 2030 for an estimated 3.56% in net present value savings.
Staff is further seeking a potential waiver of the City’s Capital Financing and Debt Management Policy Chapter 17.01.040 (the “Policy”). The refunding currently meets the net present value savings threshold under the Policy; however, since this is most likely the last opportunity to refund the 2014 Bonds, staff would prefer to set a minimum cash flow savings target of $150,000 per year from fiscal year 2026 to fiscal year 2030. However, this lower minimum cash flow target equates to an estimated 2.38% in net present value savings, which is below the minimum established under the Policy.
DISCUSSION
Background
In October 2014, the Stockton Public Financing Authority issued Wastewater Revenue Refunding Bonds, Series 2014 (the “2014 Bonds”) in the original amount of $69,440,000, of which $34,710,000 is currently outstanding and $29,620,000 will be outstanding after September 1, 2024. The 2014 Bonds have a final maturity of September 1, 2029 (FY 2030), and are first callable on September 1, 2024, and any date thereafter, without prepayment penalty. The 2014 Bonds refunded the following outstanding issues:
(1) City of Stockton, Revenue Certificates of Participation, 1998 Series A (Wastewater System Project)
(2) City of Stockton Refunding Certificates of Participation, 2003 Series A (Wastewater System Project)
Staff seeks approval of the City Council and the Board of the Stockton Public Financing Authority (“Authority”) to issue the 2024 Bonds to refund the 2014 Bonds. The purpose of the refunding is to generate significant annual debt service savings for the City’s wastewater system. Total savings are currently estimated to be $1.17 million with average annual savings estimated at $227,225 per year from fiscal year 2026 to 2030 for an estimated 3.56% in net present value savings.
The City’s “Capital Financing and Debt Management Policy Chapter 17.01.040 Section VII Refinancing Outstanding Debt” sets a minimum net present value savings threshold goal of percent (3%) of the refunded bonds principal amount, net of all costs related to the refunding. As bonds get paid every year and the remaining term is shortened, the less the potential cash flow savings and the potential net present value benefit of doing a refunding. Given the short remaining term of the 2014 bonds, September 1, 2029 (FY 2030), it is unlikely the City will have another opportunity to refund the 2014 Bonds again, unless it does so as part of this action.
Staff would like to take advantage of this final opportunity and set a minimum annual savings target of $150,000 per year from fiscal year 2026 to fiscal year 2030. The total savings under this scenario would be $791,810 with an estimated net present value savings of 2.38%. While the current net present value savings are estimated to be 3.56% (within the range of the current policy) and cash flow savings are estimated at $227,225 per year from fiscal year 2026 to 2030, staff would still like to take advantage of this opportunity with $150,000 cash flow savings per year seen as minimally significant to the City’s wastewater fund.
Therefore, staff recommends approval of the resolutions as proposed and a waiver from the Policy should the net present value savings percentage drop below 3.00%, by implementing “Section XVI: Exceptions To These Policies”:
“The City may find in limited and exceptional instances that a waiver to any of the above stated policies is warranted given identified special City benefits to be derived from such waiver. Such waivers may be granted by the City Manager or CFO with the approval of the City Attorney, if provisions waived are not material, and shall be granted only by action of the City Council if as to material provisions and shall be based upon stated policies as warranted given identified special City benefits to be derived from such specific public purpose, economic and/or health and safety findings.”
Present Situation
The 2024 Bonds, after the refunding, will be on parity (have equal rights to the system net revenue) with the other outstanding obligations of the City’s wastewater fund:
Water Infrastructure Finance and Innovation Act (“WIFIA”) (Loan Number: N18126CA)
Principal Payments: September 1, 2030 to September 1, 2051
Remaining Amount: $108,000,000
Interest Rate: 1.20%
Purpose: Repaid Bond Anticipation Notes sold to fund a portion of the Regional Wastewater Control Facilities Modification Project
California Department of Water Resources (SRF Loan Number: D2001045)
Principal Payments: December 31, 2024 to December 31, 2051
Remaining Amount: $46,800,000
Interest Rates: 0.90%
Purpose: Used to pay project costs associated with the Regional Wastewater Control Facilities Modification Project
Assuming market interest rates as of May 14, 2024, staff estimates the proposed refunding will result in the following estimated savings assuming the acquisition of bond insurance and a surety for the reserve fund:
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Outstanding 2014 Bonds (1) |
$29,620,000 |
|
Principal Amount of the 2024 Bonds |
$28,615,000 |
|
2014 Bonds Total Debt Service |
$34,211,250 |
|
2024 Bonds Total Debt Service |
$33,038,077 |
|
Total Savings |
$1,173,173 |
|
Average Annual Savings (2) |
$227,225 |
|
Net Present Value (“NPV”) Savings |
$1,055,707 |
|
NPV Savings Percentage (3) |
3.56% |
|
Final Maturity (4) |
September 1, 2029 (FY 2030) |
Notes
(1) Amount Outstanding After September 1, 2024
(2) From Fiscal Year 2026 to Fiscal Year 2030
(3) As a Percentage of the Principal Amount of Bonds Refunded
(4) Same Final Maturity as the 2014 Bonds (No Extension of Term)
Financing Team
Along with City staff, the financing team (the “Financing Team”) includes Hawkins Delafield & Wood LLP as Bond and Disclosure Counsel as a member of the authorized Bond Counsel Pool, and Hilltop Securities and Oppenheimer & Co. Inc. as the Underwriters, both as members of the authorized Underwriter Pool. Other members of the Financing Team include Del Rio Advisors, LLC, Municipal Advisor to the City and Authority as a member of the authorized Municipal Advisor Pool, and U.S. Bank Trust Company, National Association as Trustee / Paying Agent.
Documents for Review
There are several documents to be approved as part of the Resolutions to authorize the issuance and sale of the 2024 Bonds:
2024 Indenture: An agreement between the Authority and U.S. Bank Trust Company, National Association (“U.S. Bank”) as Trustee. This document governs all the terms and conditions of the 2024 Bonds including the role of U.S. Bank as Trustee, the principal payments along with the interest rates on the individual maturities, the redemption provisions of the 2024 Bonds, establishes the funds and accounts for the 2024 Bonds, establishes the City obligations for continuing disclosure reporting, arbitrage rebate and annual CDIAC reporting, and remedies for bondholders in an event of default.
2024 Installment Purchase Contract: An agreement between the Authority (seller) and the City (purchaser) whereby the City will purchase from the Authority the Wastewater System improvements funded with proceeds of the 2014 Bonds. In exchange, the City agrees to make installment payments to the Authority. The installment payments are equal to the debt service on the 2024 Bonds.
Official Statement (Including the Continuing Disclosure Certificate): The Official Statement is the primary document used by the Underwriter to market the 2024 Bonds to investors. The official statement describes the 2024 Bonds in detail and all the information used by investors to make an informed purchase decision. The official statement, in the preliminary form presented, is deemed final pursuant to Rule 15c-2-12 under the Securities Exchange Act of 1934.
The Resolution permits staff to make updates as needed for a final version, which will primarily be to reflect actual interest rates when they are finally determined, and the final version will be made publicly available. The Continuing Disclosure Certificate, included as an attachment to the Official Statement, describes covenants of the City to provide required ongoing disclosure to investors in the form of an annual report due by the end of March each year and posted to the electronic platform known as the Electronic Municipal Market Access system (“EMMA”). In addition, the City covenants, when they occur, will provide notices of certain events as listed therein.
A final Official Statement will be made available shortly after the 2024 Bonds are sold; it will be identical to the preliminary Official Statement except that it will reflect the final bond sale information. A table of contents of the preliminary official statement identifies critical topics such as the plan of finance, security for the bonds, the continuing disclosure requirements, form of the 2024 Indenture and the 2024 Installment Purchase Contract and the opinion of Bond Counsel.
The distribution of the preliminary Official Statement and the final Official Statement is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that the Official Statement include all facts that would be material to an investor purchasing the 2024 Bonds. Material information exists where there is a substantial likelihood that the information would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell securities. The Securities and Exchange Commission (SEC), the 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 material facts or circumstances that an investor would want to know prior to investing in securities, similar to the 2024 Bonds, whether relating to their repayment, tax-exempt 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 City staff and other members of the Financing Team about it.
Bond Purchase Contract: An agreement between the City, the Authority and the Underwriter, pursuant to which the Underwriter agrees to purchase the 2024 Bonds from the Authority, on the terms and conditions set forth therein. It provides certain conditions for closing that must be met prior to the closing and funding of the 2024 Bonds and will be executed on the date of pricing.
Financing Schedule
If the refunding is approved tonight, the Financing Team expects the following schedule to sell and close the 2024 Bonds:
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Date |
Action |
|
Tuesday July 9th |
City Council / Authority Board Meeting |
|
Week of July 29th |
Print and Post the Preliminary Official Statement |
|
Wednesday August 14th |
Sell the Bonds |
|
Weeks of August 19th and August 26th |
Print and Post Final Official Statement Documents Executed |
|
Wednesday September 4th |
Transaction Closes |
FINANCIAL SUMMARY
There is no impact on the City’s General Fund or any other unrestricted fund because of taking the recommended action.
The total estimated costs of issuance of $503,936 includes estimated fixed costs of $178,763, estimated underwriter’s discount in the amount of $140,214, the estimated cost of a bond insurance policy of $99,114 and the estimated cost to purchase a surety bond for the reserve fund of $85,845.
The refunding will free up approximately $227,225 per year from fiscal year 2026 to fiscal year 2030. These are dollars that the wastewater utility can use to meet operational needs.