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APPROVAL OF PRELIMINARY OFFICIAL STATEMENT AND CONTINUING DISCLOSURE CERTIFICATE RELATING TO REFUNDING OF SUCCESSOR AGENCY TO THE FORMER REDEVELOPMENT AGENCY OF THE CITY OF STOCKTON, CITY OF STOCKTON ENFORCEABLE OBLIGATIONS THROUGH THE ISSUANCE OF ONE OR MORE SERIES (NOT TO EXCEED $130,000,000 AGGREGATE PAR AMOUNT) OF SUCCESSOR AGENCY 2016 TAX ALLOCATION REFUNDING BONDS, AND CITY OF STOCKTON AND PUBLIC FINANCING AUTHORITY OF THE CITY OF STOCKTON APPROVAL OF CERTAIN REFUNDING AGREEMENTS RELATING THERETO
recommended action
RECOMMENDATION
It is recommended that the City Council, the Stockton Public Financing Authority, and the Successor Agency adopt the following:
1) Resolution of the City of Stockton (the “City”) approving the refunding and termination of certain obligations relating to the Redevelopment Activities of the Former Redevelopment Agency of the City of Stockton, authorizing the execution and delivery of the Arena Refunding Agreement and the Ambac Refunding Agreement, delegating to the City Manager or his designee, the power to complete said documents and refunding. It is further recommended that the City Manager or his designee, be authorized to take appropriate and necessary actions to carry out the purpose and intent of the resolution.
2) Resolution of the Stockton Public Financing Authority authorizing the refunding and termination of certain obligations relating to the Redevelopment Activities of the Former Redevelopment Agency of the City, authorizing the execution and delivery of the Ambac Refunding Agreement, delegating to the Executive Director of the Authority or his designee the power to complete said documents and refunding, and authorizing the taking of all other necessary actions in connection therewith. It is further recommended that the Executive Director or his designee, be authorized to take appropriate and necessary actions to carry out the purpose and intent of the resolution.
3) Resolution of the Successor Agency of the City approving a form of Preliminary Statement and Continuing Disclosure Certificate in connection with the sale and delivery of its tax allocation refunding bonds and authorizing other actions in connection therewith.
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Summary
On June 26, 2016, and June 29, 2016 respectively, the Successor Agency and Oversight Board provided authorization to initiate the refinancing of bonds originally issued by the former Redevelopment Agency of the City of Stockton and the Stockton Public Financing Authority to provide significant savings. Initial estimates were that the City could save an average of $204,000 annually, or a total of over $4.3 million compared to the original financing terms. The Successor Agency approved the Indenture of Trust, Escrow Agreement, and Bond Purchase Agreement and these documents were brought forward for approval so the City could seek State Department of Finance (“DOF”) approval concurrently. Approval of the remaining documents is necessary to complete the refinancing (Preliminary Official Statement, Continuing Disclosure Certificate, and Refunding Agreements) and will end related settlement agreements reached with bond insurers in bankruptcy. The proposed bond refinancings were approved by DOF on August 25th.
It is now recommended that the City, the Stockton Public Financing Authority (the “Public Financing Authority”), and the Successor Agency provide final authorization to complete the refunding.
The primary goal of the refunding is to generate savings for the City, San Joaquin County, local schools and the State. The issuance of new bonds is estimated to achieve a net present value savings of approximately $16.2 million (13.17 percent), which exceeds the generally accepted threshold of 3 percent. By reducing the financing cost, fewer property tax revenues will be dedicated to debt service and the benefit to the City’s General Fund will average about $204,000 over the remaining life of the refunded bonds. The final savings amount will depend upon the rating that the new bonds receive and market conditions at the time of sale. In addition to this transaction’s significant financial benefits, the City can also simplify its debt commitments by eliminating the General Fund obligations related to both the 2003 COPs and the 2004 Arena Bonds and can terminate the related agreements entered into with Ambac and NPFG in its Chapter 9 bankruptcy proceedings.
DISCUSSION
Background
The City, the former Redevelopment Agency of the City (the “Former Agency”), and the Public Financing Authority, as applicable, issued the following bonds to eliminate blight and to promote development of low income housing stock in the City. Approval of the proposed resolutions authorizes refunding certain enforceable obligations of the Successor Agency relating to these bonds:
• Certificates of Participation (Redevelopment Housing Projects) 2003A (the “2003A COPs”) & Certificates of Participation (Redevelopment Housing Projects) Taxable Series 2003B (the “2003B COPs” and, collectively, the “2003 COPs”): As described in an Official Statement dated June 17, 2003, the 2003 COPs were executed and delivered in the original principal amounts of $1,160,000 (2003A) and $12,140,000 (2003B). The net proceeds of the 2003 COPs were used to finance the construction of capital improvements to provide affordable housing in the City. The 2003A COPs and the 2003B COPs are currently outstanding in the aggregate principal amount of $985,000 and $10,515,000, respectively. The 2003 COPs are payable from certain lease payments to be made by the City’s General Fund under a lease agreement. The Successor Agency is obligated under a reimbursement agreement to reimburse the City from housing set-aside tax increment revenues for these lease payments. The 2003 COPs were the subject of negotiations during the City’s bankruptcy case, and the City entered into certain agreements with Ambac as part of the City’s Plan of Adjustment. The City will be able to terminate these agreements in connection with the prepayment of the 2003 COPs.
• 2004 Arena Bonds and Amended and Restated Pledge Agreement: As described in an Official Statement dated March 18, 2004, the Former Agency issued its Revenue Bonds, Series 2004 (Stockton Events Center - Arena Project) in the original aggregate principal amount of $47,000,000 (the “2004 Arena Bonds”) to finance a portion of the arena at the Stockton Events Center. The 2004 Arena Bonds are payable from certain lease payments to be made from the City’s General fund under a lease agreement, and, pursuant to a pledge agreement, the Successor Agency, as successor in interest to the Former Agency, is obligated to make certain pledge payments, the receipt of which acts as an offset to the City’s lease payment obligations. The 2004 Arena Bonds are currently outstanding in the aggregate principal amount of $43,360,000. During the City’s bankruptcy case, the City negotiated certain agreements with NPFG, the municipal bond insurer that insures the payment of debt service on the 2004 Arena Bonds. Under these agreements, NPFG and the trustee for the 2004 Arena Bonds agreed to forbear from enforcing certain remedies against the City under the bond documents and adjusted the lease repayment and pledge payment schedules. The City will be able to terminate these agreements in connection with the proposed refunding of the 2004 Arena Bonds.
• 2006A (Tax-Exempt) Tax Allocation Bonds & 2006C (Taxable) Tax Allocation Bonds: As described in an Official Statement dated June 21, 2006, the Stockton Public Financing Authority issued its Revenue Bonds (Redevelopment Projects), 2006 Series A in an original aggregate par amount of $75,755,000 (the “2006A Bonds”), its Taxable Revenue Bonds (Redevelopment Projects), 2006 Series B in an original aggregate par amount of $8,445,000 (the “2006B Bonds”), and its Taxable Revenue Bonds, (Housing Projects) 2006 Series C in an original aggregate par amount of $25,985,000 (the “2006C Bonds”). Proceeds of the 2006A Bonds and the 2006B Bonds were used to finance certain redevelopment projects within or of benefit to the Merged Midtown, North Stockton and South Stockton Merged Redevelopment Projects. Proceeds of the 2006C Bonds were used to fund a loan to finance certain low and moderate-income housing projects throughout the City. The 2006A Bonds and 2006C Bonds are outstanding in the aggregate principal amount of $49,160,000 and $22,285,000, respectively. The 2006B Bonds matured on September 1, 2013, and were paid in full.
Collectively, the Successor Agency’s obligations relating to the 2003 COPs, the 2004 Arena Bonds and the 2006A Bonds and 2006C Bonds are, in this report, referred to as the “Prior Obligations.”
The Successor Agency assumed responsibility for all debt management with respect to the former Redevelopment Agency in 2012. Under State law (including the Fiscal Year 2012-13 State of California budget bill (Assembly Bill 1484) and California Health and Safety Code Section 34177.5(a)), the Successor Agency may refund outstanding bonds and other indebtedness of the Former Agency with approval from the Oversight Board and DOF, subject to certain conditions, including that the total interest cost to maturity plus the principal amount of the refunding bonds does not exceed that of the bonds or other indebtedness to be refunded. In other words, there must be debt service savings created by the refinancing. The City and Successor Agency commissioned and approved a Refunding Plan and Savings Analysis prepared by the Municipal Advisor, which was subsequently approved by DOF. It is attached as Attachment A for reference.
Present Situation
The proposed Tax Allocation Refunding Bonds, Series 2016A & 2016B (collectively, the “2016 Bonds”) will be structured as a tax-exempt and a federally taxable series, respectively. The 2016A Tax-Exempt Tax Allocation Bonds (the “2016A Bonds”), with an estimated par of $79.1 million, will refund enforceable obligations of the Successor Agency relating to the 2003A COPs, the 2004 Arena Bonds, and the 2006A Bonds. The 2016B Taxable Tax Allocation Bonds (the “2016B Bonds”), with an estimated par of $32.1 million, will refund enforceable obligations of the Successor Agency relating to the 2003B COPs and the 2006C Bonds. The aggregate par amount of the 2016 Bonds is estimated to be approximately $111.2 million. The current estimate of the final maturity of the 2016A Bonds is September 1, 2037, which is the same final maturity as the 2006A Bonds (the 2003A COPs mature in 2033 and the 2004 Bonds mature in 2036). The 2016B Taxable Bonds are currently estimated to have an earlier final maturity, September 1, 2025, than that of the series they are refunding (the 2003B COPs and the 2006C Bonds).
The final interest rates and structure will be determined when the 2016 Bonds are priced and sold. The current target for the pricing date is October 10, 2016, subject to market conditions. Assuming pricing on that date, the bond closing could be expected to occur on or around November 2, 2016 and the Prior Obligations could be expected to be redeemed in December 2016.
The City and the Successor Agency directed the Municipal Advisor, Del Rio Advisors, LLC, to prepare an analysis of the potential savings that will accrue to the Successor Agency and to the applicable taxing entities as a result of the refinancing (the “Refunding Plan and Savings Analysis”) (Attachment A). That analysis demonstrates there are significant potential savings available to the Successor Agency and to the applicable taxing entities in compliance with the savings parameters as set forth by approval of the proposed resolution and the issuance of the 2016 Bonds, all as evidenced by the Refunding Plan and Savings Analysis on file with the Successor Agency, the Oversight Board, and the DOF.
The primary goal of the refinancing is to generate savings to the various participating taxing entities. The issuance of the 2016 Bonds will not move forward unless net present value savings of at least 3% of the refunded bonds can be achieved. This is the generally accepted threshold for proceeding with a refunding transaction. It is estimated that the net present value savings of this transaction will be 13.17%, or $25.53 million in cash flow savings to the Successor Agency (with an estimated 17% of that total flowing to the General Fund of the City) over the remaining 21 year term of the debt. In addition to this transaction’s significant financial benefits, the City can completely eliminate the General Fund obligations relating to both the 2003 COPs and the 2004 Arena Bonds and can terminate the agreements entered into with Ambac and NPFG in its Chapter 9 bankruptcy.
Documents Previously Approved
Approval of the earlier resolution authorized the issuance of the 2016 Bonds and the execution of the following documents:
• Indenture of Trust - This document contains the terms of the 2016 Bonds, including payment and redemption provisions, definition and pledge of revenues to pay the 2016 Bonds, Rights and Duties of the Trustee, remedies upon a default in the payment of the 2016 Bonds, and final discharge of the 2016 Bonds and other related matters.
• Escrow Agreement - This document provides for the investment and application of the proceeds of the 2016 Bonds to prepay or redeem the Prior Obligations.
• Refunding Agreements - These documents authorize the termination of the agreements entered into with Ambac and NPFG in connection with the City’s Chapter 9 bankruptcy case.
• Bond Purchase Contract - This document provides for the sale of the Bonds by the Successor Agency to the underwriter, and includes representation and warranties, and preconditions for the closing of the transaction including the delivery of various documents and legal opinions.
Documents Now Being approved:
• Preliminary Official Statement (Attachment B) - This document is the marketing document that is brought to prospective investors. It contains detailed information on the structure of the financing, what funds are being sought and what they will be used for, as well as what sources of revenue are pledged toward repayment.
• Continuing Disclosure Certificate (Attachment B) - This is a certificate delivered by the issuer (Successor Agency) and accepted by the Bond Trustee (Wells Fargo Corporate Trust). It contains covenants for the issuer to disclose certain material events that may affect the value of the bonds. Among these are ratings changes, use of bond reserves, or defaults in provisions of the bond documents. It also provides detail on the contents of annual disclosure reports and filing requirements.
• Refunding Agreements (Attachment D) - The City and the Public Financing Authority are also approving execution of the applicable Refunding Agreements.
FINANCIAL SUMMARY
Based on market conditions as of May 5, 2016, which have become more favorable since preliminary estimates were provided to the Successor Agency and Oversight Board in June, the refinancing is estimated to result in net present value savings of approximately $16.2 million, or 13.2 percent (see table below). However, the final savings amount will depend upon the rating that the 2016 Bonds receive and market conditions at the time of sale. The estimated annual savings will become available after the payment of enforceable obligations as approved on the Recognized Obligation Payment Schedule approved by DOF, and will be distributed among various taxing entities such as the State of California, San Joaquin County, and the City. A summary listing of the pro forma bond numbers is presented in Attachment C, however, as described above, such numbers are subject to change based upon final ratings of the bonds, market conditions at the time of sale, and other factors.
Summary of Savings Results for 2016 Bonds*
|
2016 Bonds |
|
|
Net Present Value Savings |
$16.2 million |
|
Net Present Value Savings (% of Par Value Refunded) |
13.17% |
|
Avg. Annual Savings |
$1.2 million |
|
Total Debt Service Savings |
$25.5 million |
*Projected savings are based on current interest rates assuming the 2016 Bonds have a “BBB” underlying rating and overall level debt service on the bonds issued for the refinancing. These rates are subject to change based on market conditions at the time of sale.
The City’s share of the annual savings is currently estimated to average around 17 percent, or $204,000 per year based upon the City’s share of property taxes, with the remainder of the savings accruing to the other taxing agencies.
The 2016 Bonds would not be an obligation of the City, but rather the Successor Agency. Debt service on the 2016 Bonds will be supported by tax increment revenues collected by the County and deposited into the Successor Agency’s Redevelopment Property Tax Trust Fund.
The fees and expenses of this transaction have been previously approved in the Debt Fund of the City (Fraser & Associates - Fiscal Consultant and Del Rio Advisors, LLC - Municipal Advisor). Sufficient funds are in account number 201-2001-510. Many of the costs will be recovered through the cost of issuance upon successful closing and, should the refinancing not close, these costs can be recovered from allowable administrative expenses (Standard & Poor’s and Fitch Ratings - Bond Rating Agencies).
The remainder of the financing team will work on a contingent basis with fees payable only from a successful sale and closing of the 2016 Bonds.
Attachment A - Savings Analysis (PowerPoint presentation for DOF)
Attachment B - Preliminary Official Statement and Continuing Disclosure Certificate
Attachment C - Complete Set of Bond Numbers
Attachment D - Refunding Agreements