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AUTHORIZE THE STOCKTON PUBLIC FINANCING AUTHORITY (“SPFA”) TO SELL LOCAL AGENCY REVENUE BONDS (“REVENUE BONDS”) IN AN AMOUNT NOT TO EXCEED $42,000,000, THE PROCEEDS OF WHICH WILL BE USED TO REFUND 2005 REVENUE BONDS AND TO ACQUIRE THE RELATED TRANSFERRED LOCAL OBIGATIONS AND TO PURCHASE REFUNDING LOCAL OBLIGATIONS ISSUED BY THE CITY OF STOCKTON TO REFUND BONDS ISSUED FOR OTHER LAND SECURED DISTRICTS OF THE CITY.
AUTHORIZE THE CITY OF STOCKTON TO SELL REFUNDING ASSESSMENT AND SPECIAL TAX BONDS FOR CERTAIN SPECIAL DISTRICTS AND TO SELL THE REFUNDING BONDS TO THE SPFA AS DESCRIBED ABOVE.
recommended action
RECOMMENDATION
Adopt six resolutions of the Stockton City Council and one resolution for the Stockton Public Financing Authority (“SPFA”) approving the issuance of the Revenue Bonds in the aggregate principal amount not-to-exceed $42,000,000 and taking all necessary actions and approving all documents in connection with the refunding program for several land secured districts of the City of Stockton:
1) City Council: Adopt a resolution of intention to levy reassessments and to issue refunding bonds upon the security thereof for the City of Stockton Reassessment District No. 2016-1 (March Lane/Holman)
2) City Council: Adopt a resolution adopting reassessment report, confirming and ordering the reassessment pursuant to summary proceedings and directing actions with respect thereto for the City of Stockton Reassessment District No. 2016-1 (March Lane/Holman)
3) City Council: Adopt a resolution of intention to levy reassessments and to issue refunding bonds upon the security thereof for the City of Stockton Reassessment District No. 2016-2 (Waterford Estates East Phase II)
4) City Council: Adopt a resolution adopting reassessment report, confirming and ordering the reassessment pursuant to summary proceedings and directing actions with respect thereto for the City of Stockton Reassessment District No. 2016-2 (Waterford Estates East Phase II)
5) City Council: Adopt a resolution authorizing the issuance and sale of special tax refunding bonds for four community facilities districts, and approving and authorizing related documents and actions.
6) Stockton Public Financing Authority: Adopt a resolution of the Board of Directors of the Stockton Public Financing Authority authorizing the issuance and sale of its local agency revenue bonds in one or more series, and approving and authorizing related documents and actions.
7) City Council: Adopt a resolution authorizing the issuance and sale of Refunding Bonds, and directing the execution of Fiscal Agent Agreements and an Escrow Deposit and Trust Agreement, and approving and authorizing related documents and actions.
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SUMMARY
The proposed refunding of existing debt will result in reduced annual assessments or special taxes for property owners, and provide cash flow to fund future capital projects. The City Council in previous actions authorized bonds (“Prior Bonds”) issued for each of the following districts:
• Spanos Park West Community Facilities District No. 2001-1
• City of Stockton, Community Facilities District No. 2006-3 (Northbrook)
• City of Stockton, March Lane/Holman Assessment District 2003-01
• City of Stockton, Waterford Estates East Phase II Assessment District 2003-03
• City of Stockton, Camera Estates Community Facilities District No. 2003-1
• City of Stockton, Community Facilities District No. 2006-1 (Riverbend)
The City will acquire refunding and reassessment bonds at lower interest rates than those of the Prior Bonds. Property owners in each district will experience reduced annual assessments or special taxes on their property tax bills by an estimated $541,000 per year, ranging from approximately $884,000 per year from 2017 to 2019 to approximately $145,000 by 2037.
The SPFA in previous actions authorized the issuance of the following revenue bonds (“Prior Revenue Bonds”):
• Stockton Public Financing Authority Refunding Revenue Bonds (2005 Assessment Districts Refinancing)(*)
(*) The Prior Revenue Bonds were sold to acquire five (5) local obligations which refunded prior bonds of the following districts:
o Blossom Ranch Assessment District No. 93-1
o La Morada Assessment District No. 96-4
o Morada North Assessment District No. 2002-01
o Morada Ranch Assessment District No. 2000-01
o Waterford Estates Assessment District No. 2002-03
By refunding the Prior Bonds and the Prior Revenue Bonds, the SPFA will receive a projected annual cash flow available to fund capital projects currently estimated at an average of $206,000 per year through 2037 ranging from $188,000 per year from 2017 to 2019, increasing to over $377,000 per year by 2026, and declining in the final years as districts mature. It is anticipated that the SPFA savings will be programmed as part of the City’s overall 5-Year Capital Improvement Program to provide resources for unfunded capital projects. These projects may be within or outside of the respective districts.
The schedule to complete the transaction once approved by the City Council and SPFA is as follows:
|
Timeline |
Task |
|
Week of June 27th |
Seek Bond Rating |
|
Tuesday June 28st |
City Council / SPFA Consideration |
|
Week of July 11th |
Secure Bond Insurance |
|
Week of July 11th |
Print Preliminary Official Statement |
|
July 27th and July 28th |
Pre-Price and Price Bonds |
|
August 17th |
Closing and Transfer of Funds |
The proposed team used to complete the transaction is as follows:
|
TaskParty |
|
|
Underwriters |
Hilltop Securities / RBC Capital Markets |
|
Bond Counsel |
Jones Hall |
|
Disclosure Counsel |
Quint & Thimmig |
|
Municipal Advisor |
Del Rio Advisors, LLC |
|
Special Tax Consultant / Reassessment Engineer |
Willdan Financial Services |
|
Trustee / Fiscal Agent / Escrow Agent |
Wells Fargo Bank, N.A. |
DISCUSSION
Background
City Council has authorized the issuance of the following bonds:
City of Stockton, Spanos Park West Community Facilities District No. 2001-1: Pursuant to an Official Statement dated February 16, 2006, the City of Stockton (the “City”) issued $21,635,000 Special Tax Refunding Bonds, Series 2006 (the “Spanos Park Bonds”). The proceeds of the Spanos Park Bonds were used to advance refund the City’s Spanos Park West Community Facilities District No. 2001-1 Special Tax Bonds, Series 2002 and pay the costs of issuance of the Bonds including the premium on a debt service reserve insurance policy.
City of Stockton, Community Facilities District No. 2006-3 (Northbrook): Pursuant to an Official Statement dated November 27, 2007, the City issued $6,100,000 Woodside Improvement Area 1, Special Tax Bonds, Series 2007 (the “Northbrook Bonds”). The proceeds of the Northbrook Bonds were used to finance various public improvements related to the development of the District, fund a reserve fund for the Bonds and pay the costs of issuance of the Bonds.
City of Stockton, March Lane/Holman Assessment District 2003-01: Pursuant to an Official Statement dated February 18, 2004, the City issued $3,100,000 Limited Obligation Improvement Bonds (the “March Lane/Holman Bonds”). The proceeds of the March Lane/Holman were used to finance various public improvements related to the development of the District, fund capitalized interest on the Bonds, partially fund a reserve fund for the Bonds and pay the costs of issuance of the Bonds.
City of Stockton, Waterford Estates East Phase II Assessment District 2003-03: Pursuant to an Official Statement dated January 22, 2004, the City issued $3,360,000 Limited Obligation Improvement Bonds (the “Waterford II Bonds”). The proceeds of the Waterford II Bonds were used to finance various public improvements related to the development of the District, fund capitalized interest on the Bonds, fund a reserve fund for the Bonds and pay the costs of issuance of the Bonds.
City of Stockton, Camera Estates Community Facilities District No. 2003-1: Pursuant to an Official Statement dated November 6, 2003, the City issued $3,250,000 Special Tax Bonds, Series 2003 (the “Camera Bonds”). The proceeds of the Camera Bonds were used to finance various public improvements related to the development of the District, fund capitalized interest on the Bonds, fund a reserve fund for the Bonds and pay the costs of issuance of the Bonds.
City of Stockton, Community Facilities District No. 2006-1 (Riverbend): Pursuant to an Official Statement dated April 11, 2006, the City issued $4,090,000 Special Tax Bonds, Series 2006 (the “Riverbend Bonds”). The proceeds of the Riverbend Bonds were used to finance various public improvements related to the development of the District, fund capitalized interest on the Bonds, fund a reserve fund for the Bonds and pay the costs of issuance of the Bonds.
In 2005, the SPFA authorized the issuance of the following bonds:
Stockton Public Financing Authority Refunding Revenue Bonds (2005 Assessment Districts Refinancing): Pursuant to an Official Statement dated August 18, 2005, the Stockton Public Financing Authority (the “Authority”) issued $16,680,000 Series A Senior Lien Bonds and $1,355,000 Series B Subordinate Lien Bonds, collectively the (“2005 Revenue Bonds”). The proceeds of the 2005 Revenue Bonds were used to acquire five separate series of limited obligation reassessment and refunding bonds issued by the City of Stockton, fund a reserve fund with respect to the Senior Bonds, fund a reserve fund with respect to the subordinate bonds and pay certain costs off issuance.
The proceeds of the 2005 Assessment Districts Refinancing were used to acquire bonds issued to refund prior bonds of the following districts:
Blossom Ranch Assessment District No. 93-1(1)
La Morada Assessment District No. 96-4(1)
Morada North Assessment District No. 2002-01
Morada Ranch Assessment District No. 2000-01
Waterford Estates Assessment District No. 2002-03
(1) Local Obligation Bonds for these districts are anticipated to be paid off with existing resources and are not part of the refunding.
Present Situation
In the current low interest rate environment, many jurisdictions have pursued refunding existing debt to lower interest rates and generate annual savings through reduced annual payments. Now that the City has emerged from bankruptcy, it can take advantage of available opportunities afforded by current market conditions. Not only can the City take advantage of this market, but local property owners can also realize significant benefits.
Prior Bonds and Prior Revenue Bonds have been identified as having excellent potential for refunding. In addition to the savings from lower interest rates, all planned improvements to be financed with the original bonds have been completed and any remaining unused project funds can be used toward reducing assessments and special taxes, further benefiting the property owners.
The final interest rates and structure will be determined when the bonds are priced and sold. The pricing date is targeted for July 12 with the bond closing expected to occur on July 26. Prior Bonds and Prior Revenue Bonds will be redeemed on either September 1 or September 2. Although the Revenue Bonds have not yet been rated by Standard & Poor’s, given the number of parcels, the high value-to-lien ratio, low delinquency rates, and nearly complete development, the bonds are anticipated to receive an investment grade rating and qualify for bond insurance which further enhances the credit and helps to lower the interest rates.
Structure of the Refunding Program
The proposed refunding will be accomplished through the issuance of Local Agency Revenue Bonds (the “Revenue Bonds”) by the SPFA into the public market. Concurrently, the City will issue and sell to the SPFA six bonds (the “Refunding Local Obligations”) used to refund bonds originally issued for the districts listed in the table below. The Refunding Local Obligations are secured solely from the assessments and special taxes on properties within those districts:
|
Refunding Local Obligation |
Original Principal |
Remaining Principal |
Interest Rates |
Final Maturity |
Call Date / Premium |
|
Spanos Park Bonds |
$21,635,000 |
$15,900,000 |
4.00-4.625% |
2031 |
9/1/16 @ 100% |
|
Northbrook Bonds |
$6,100,000 |
$5,925,000 |
5.30-6.25% |
2037 |
9/1/16 @ 101% |
|
March Lane/Holman Bonds |
$3,100,000 |
$2,435,000 |
5.00-5.80% |
2034 |
9/2/16 @ 100% |
|
Waterford II Bonds |
$3,360,000 |
$2,585,000 |
4.875-5.75% |
2033 |
9/2/16 @ 100% |
|
Camera Bonds |
$3,250,000 |
$2,520,000 |
5.05-5.90% |
2033 |
9/1/16 @ 100% |
|
Riverbend Bonds |
$4,090,000 |
$3,380,000 |
4.60-5.00% |
2036 |
9/1/16 @ 100% |
The proceeds from the sale of the Refunding Local Obligations to the SPFA will be placed in escrow and used to pay off/redeem the higher interest rate Prior Bonds.
Concurrently with the sale of the Revenue Bonds, the SPFA will issue additional revenue bonds to refund the two outstanding series of 2005 Revenue Bonds (the “Prior Revenue Bonds”):
|
Prior Revenue Bonds |
Original Principal |
Remaining Principal |
Interest Rates |
Final Maturity |
Call Date / Premium |
|
2005 Series A Senior Lien |
$16,680,000 |
$10,805,000 |
4.60-4.85% |
2032 |
9/2/16 @ 100% |
|
2005 Series B Subordinate Lien |
$1,355,000 |
$770,000 |
4.60-5.10% |
2032 |
9/2/16 @ 100% |
The proceeds from the sale of the additional revenue bonds to the public will be placed, along with District funds on hand (including the payoffs as noted in the footnote below), in escrow and used to pay off/redeem the higher interest rate Prior Revenue Bonds and three (3) of the five (5) existing local obligations listed below will be transferred to the Revenue Bonds as the (“Transferred Local Obligations”).
Transferred Local Obligations
Blossom Ranch Assessment District No. 93-1(1)
La Morada Assessment District No. 96-4(1)
Morada North Assessment District No. 2002-01 (the “Morada North Bonds”)
Morada Ranch Assessment District No. 2000-01 (the “Morada Ranch Bonds”)
Waterford Estates Assessment District No. 2002-03 (the Waterford Estates Bonds”)
(1) Local Obligation Bonds for these districts are anticipated to be paid off with existing resources and are
not part of the refunding.
The Refunding Local Obligations together with the Transferred Local Obligations are collectively known as the “Local Obligations”.
The Revenue Bonds issued by the SPFA are secured solely by the receipt of debt service from the Local Obligations. The Local Obligations cannot be sold in the public markets and do not have marketability outside of this transaction. Annual debt service on the Local Obligations are paid from and secured by revenues received consisting primarily of the payment of reassessments and special taxes from the property owner’s tax bill.
The annual debt service each year from the Local Obligations flows to pay the debt service on the Revenue Bonds. This positive cash flow is estimated at approximately $4.35 million to the SPFA over the life of the Revenue Bonds averaging over $206,000 per year. Estimated annual debt service coverage ranges from approximately 1.07x in 2017 to 2019, increases up to 1.13x by 2026 and down to 1.01x in the final year 2037.
The higher the debt service coverage, the stronger the credit and the higher the bond rating. A higher rating equates to a higher possibility of securing bond insurance which further lowers the interest rates and enhances overall savings to the property owners. Without the coverage, it is unlikely the Revenue Bonds would achieve an investment grade rating and the property owners would realize much lower savings if the Revenue Bonds had to be sold as a non-rated transaction.
The Revenue Bonds and the Local Obligation Bonds do not constitute a debt, liability or obligation of the City, its General Fund, or any of the City’s other funds except from the funds in the District.
Debt Service and Projected Savings
Based on current market conditions as of May 27, 2016, the refunding program is estimated to result in total savings of approximately $15.72 million net of the cost of issuances. However, the total level of savings will depend upon the rating that the Revenue Bonds receives and the market conditions at the time of sale. It is anticipated that the property owners paying on the Spanos Park Bonds, the Northbrook Bonds, the March Lane/Holman Bonds, the Waterford II Bonds, the Camera Bonds and the Riverbend Bonds will receive a reduction in annual assessments or special taxes in the total amount of $11.37 million and the Authority will receive positive cash flow which serves to provide the debt service coverage in the approximate total amount of $4.35 million.
The table below highlights the property owner savings, based on current market conditions, through the issuance of the Refunding Local Obligations:
|
Refunding Local Obligation |
Taxpayer Total Savings |
Average Annual Savings |
Net Present Value Savings |
NPV Savings % (Refunded) |
|
Spanos Park Bonds |
$899,524 |
$59,968 |
$477,737 |
3.00% |
|
Northbrook Bonds |
$2,398,501 |
$114,214 |
$1,008,951 |
17.03% |
|
March Lane/Holman Bonds |
$1,272,735 |
$70,708 |
$308,878 |
12.69% |
|
Waterford II Bonds |
$1,359,206 |
$79,953 |
$292,559 |
11.32% |
|
Camera Bonds |
$778,240 |
$45,779 |
$323,439 |
12.84% |
|
Riverbend Bonds |
$697,072 |
$34,854 |
$167,818 |
4.97% |
|
Totals |
$7,405,278 |
$352,632(1) |
$2,579,382 |
7.88% |
Note: Projected savings are based on current interest rates assuming the Revenue Bonds have a “BBB” underlying rating and secure bond insurance. These rates are subject to change based on market conditions at the time of sale.
(1) Column does not total due to varying final maturity of each Refunded Local Obligation
There is an allowable 1.00% (100 basis points) spread in interest rates between the Revenue Bonds and the Refunding Local Obligations. This spread is what makes up a component of the debt service coverage cash flow to the Revenue Bonds.
The SPFA will issue additional Revenue Bonds to refund the outstanding Prior Revenue Bonds:
|
Refunding |
Taxpayer Total Savings |
Average Annual Savings |
Net Present Value Savings |
NPV Savings % (Refunded) |
|
2005 Revenue Bonds |
$3,681,296 |
$230,100 |
$1,090,523 |
9.42% |
Note: Projected savings are based on current interest rates assuming the Revenue Bonds have a “BBB” underlying rating and secure bond insurance. These rates are subject to change based on market conditions at the time of sale.
There is an allowable 1.50% (150 basis points) spread in interest rates between the Revenue Bonds and the Transferred Local Obligations. This spread is what makes up a component of the debt service coverage cash flow to the Revenue Bonds. Any spread in excess of 150 basis points must be rebated in subsequent years to the property owners as an offset to the amount billed on their property tax roll. The table below shows the estimated total savings from the refunding and the expected rebate to the property owners by respective Transferred Local Obligation:
|
Transferred Local Obligation |
Refunding Savings |
150 Basis Point Rebate |
Total Savings |
Average Annual Savings |
|
Morada North Bonds |
$719,989 |
$60,382 |
$780,371 |
$78,037 |
|
Morada Ranch Bonds |
$1,252,788 |
$105,070 |
$1,357,858 |
$135,786 |
|
Waterford Estates Bonds |
$1,708,519 |
$121,811 |
$1,830,330 |
$114,396 |
|
Totals |
$3,681,296 |
$287,263 |
$3,968,559 |
$248,035(1) |
(1) Column does not total due to varying final maturity of each Transferred Local Obligation
The interest rates on the Refunding Local Obligation Bonds together with the cash flow generated from the Transferred Local Obligations (together the “Local Obligations”) will create a positive cash flow towards the repayment of the Revenue Bonds. This cash flow generates debt service coverage to help the Revenue Bonds obtain a higher investment grade rating and possibly qualify for bond insurance. Without the coverage, it is unlikely the Revenue Bonds would achieve an investment grade rating and the property owners would realize much lower savings if the Revenue Bonds had to be sold as a non-rated transaction.
As stated earlier, the total positive cash flow is estimated at approximately $4.35 million to the SPFA over the life of the Revenue Bonds averaging over $206,000 per year. Estimated annual debt service coverage ranges from approximately 1.07x in 2017 to 2019, increases up to 1.13x by 2026 and down to 1.01x in the final year 2037.
Documents to be Executed
Approval of the Resolutions, authorizing and directing execution of certain bond documents, authorizing and directing the sale of the proposed Revenue Bonds and authorizing and directing certain actions with respect thereto will authorize the execution of the following documents:
• Attachment A - Indenture - This document contains the terms and provisions of the Revenue Bonds, including payment and redemption provisions, definition and pledge of revenues, rights and duties of the Trustee, remedies upon a default in payment, final discharge and other related matters
• Attachment B - Bond Purchase Agreement (Revenue Bonds) - This document contains the terms and provisions of the purchase of the Revenue Bonds by the Underwriters after the public sale.
• Attachment C - CFD Refunding Bonds Purchase Agreement - This document contains the terms and provisions of the purchase of the CFD Refunding Local Obligations by the Revenue Bonds.
• Attachment D - Refunding Reassessment Bonds Purchase Agreement - This document contains the terms and provisions of the purchase of the Assessment Refunding Local Obligations by the Revenue Bonds.
• Attachment E - Preliminary Official Statement - This document contains a summary of information related to each District as well as the Revenue Bonds. This is the primary marketing document used by the Underwriters to market the Revenue Bonds in the public sale.
• Attachment F - Escrow Deposit and Trust Agreement - This document between the SPFA, the City and Wells Fargo Bank, National Association as escrow holder contains the provisions related to the redemption and defeasance of the Prior Bonds.
• Attachments G and H - Fiscal Agent Agreements - These documents between the City and Wells Fargo Bank, National Association contains the provisions related to the purchase of each Refunding Local Obligation by the Authority from the City.
• Attachment I - Continuing Disclosure Agreement / Certificate - This document governs the terms and conditions by which the Authority will disclose all relevant financial and other related matters to investors through the Electronic Municipal Market Access System (“EMMA”).
• Attachment K - Reassessment Report for March Lane/Holman Road Reassessment District No. 2016-1.
• Attachment L - Reassessment Report for Waterford Estates East Phase II Reassessment District No. 2016-2.
Additionally, attached as Attachment J is the Savings Summary which details the estimated realized savings for each district.
FINANCIAL SUMMARY
Refunding the land-secured bonds will provide savings and lower payments for affected property owners and provide funding for capital projects throughout the City. By completing the issuance of the Revenue Bonds in a public offering at interest rates lower than the Prior Bonds and the Prior Revenue Bonds, the districts will be able to reduce their total assessments or special taxes by an approximate average of $541,000 per year, ranging from approximately $884,000 per year from 2017 to 2019 declining to approximately $145,000 by 2037.
The refunding transaction will also provide the City, through the SPFA, a projected average amount of annual cash flow available to fund capital projects currently estimated at approximately $206,000 per year through 2037. Staff anticipates these savings will be programmed as part of the City’s overall 5-Year Capital Improvement Program to provide funding for needed but unfunded capital projects. These projects may be within or outside of the respective districts.
The City’s Policies and Procedures for Land-Secured Financing also allow the City to charge a City Administrative Fee to reimburse the City for staff time and expenses associated with the issuance of the Revenue Bonds. The amount of that fee based on the expected $38,120,000 size of the Revenue Bonds, is currently estimated at $132,800 and will be credited to the City’s General Fund.
Total costs of issuance, including underwriter’s discount, fixed costs of issuance and the cost of credit enhancement are currently estimated at $1.3 million and will be recovered as part of the refunding. This total includes an estimate $435,000 of fixed costs, $348,000 for the underwriter’s discount and $538,000 for credit enhancement (both bond insurance and surety policy).
Due to preparing the reassessment reports for March Lane/Holman and Waterford Estates East Phase II, the fees and expenses of Willdan Financial Services, acting as Reassessment Engineer, will not be contingent on the sale of the Revenue Bonds. The fee for the Reassessment Engineer is currently estimated at $20,000 and can be recovered through the costs of issuance upon successful closing or paid from land-based district funds on hand.
The fees for a bond rating would be required to pay for a review of the credit of the Revenue Bonds by Standard & Poor’s. The fees are currently estimated at $40,000 for Standard & Poor’s. A higher rating will yield lower interest rates, thereby increasing the likelihood of qualifying for bond insurance. The rating fee would not be incurred until later in the process when the team is reasonably confident that the transaction will move forward. The fees for a bond rating can be recovered through the costs of issuance upon successful closing.
The fees of Del Rio Advisors, LLC acting as Municipal Advisor to the City and Successor Agency are payable under an hourly contract and are currently estimated at $40,000. The fees of the Municipal Advisor can be recovered through the costs of issuance upon successful closing or paid from land-based district funds on hand.
The remainder of the financing team will work on a contingent basis. All fees are contingent on a successful sale and closing of the Revenue Bonds with the exception of fees and expenses of the Reassessment Engineer, the bond rating, and the Municipal Advisor as described above.
Attachment A - Indenture
Attachment B - Bond Purchase Agreement
Attachment C - CFD Refunding Bonds Purchase Agreement
Attachment D - Refunding Assessment Bonds Purchase Agreement
Attachment E - Preliminary Official Statement
Attachment F - Escrow Deposit and Trust Agreement
Attachment G - AD Fiscal Agent Agreement
Attachment H - CFD Fiscal Agent Agreement
Attachment I - Continuing Disclosure Certificate
Attachment J - Savings Analysis
Attachment K - Reassessment Report - March Lane/Holman Reassessment District 2016-1
Attachment L - Reassessment Report - Waterford Estates East Phase II Reassessment District 2016-2