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AUTHORIZE ISSUANCE AND SALE OF STOCKTON PUBLIC FINANCING AUTHORITY WATER REVENUE REFUNDING BONDS, DESIGNATED AS “SERIES 2018,” IN AN AMOUNT NOT TO EXCEED $165,000,000 TO REFUND OBLIGATIONS OF THE WATER ENTERPRISE FUND AND ACHIEVE SAVINGS
recommended action
RECOMMENDATION
Staff recommends that the City of Stockton and the Stockton Public Financing Authority authorize the issuance and sale of bonds in a principal amount not-to-exceed $165,000,000 to refund the following water revenue bonds:
1) Series 2002A (“2002A”) in the outstanding principal amount of $4,030,000,
2) 2005 Water Revenue Bonds, Series A (“2005A”) in the outstanding principal amount of $19,055,000, and
3) Taxable Build America Bonds, Series 2009B (“2009B”) in the outstanding principal amount of $146,725,000.
Resolution of the City of Stockton: This Resolution authorizes the form of and the execution and delivery of one or more 2018 Installment Purchase Contracts, one or more Bond Purchase Contracts, a Continuing Disclosure Certificate, and an Official Statement relating to an installment purchase refinancing; and approving certain actions in connection therewith. Authorize to appropriate up to $1.6 million for costs related to the issuance.
Resolution of the Stockton Public Financing Authority: This Resolution authorizes the issuance and sale of Stockton Public Financing Authority Water Revenue Refunding Bonds designated as “Series 2018” in an aggregate principal amount not to exceed $165,000,000; approves the form of and authorizes the execution and delivery of a 2018 indenture, one or more 2018 Installment Purchase Contracts, one or more Bond Purchase Contracts, and an Official Statement relating to an Installment purchase refinancing; and approving certain actions in connection therewith.
Staff recommends that Council approve appropriation of up to $1.6 million for costs related to the issuance. It is also recommended that they approve the execution of all documents and other actions related to the issuance of the new Series 2018 bonds (Attachment A), and that the City Manager be authorized to take appropriate and necessary actions to carry out the purpose and intent of the resolutions.
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Summary
On October 18, 2016, Council approved the pursuit of refunding two series of bonds that included the Series 2002A and Series 2005A. That approval was necessary due to lapsed vendor pools and a desire to achieve possible savings. Unfortunately, revenue shortages from the drought and pending litigation prevented the City from moving forward with the refunding.
Water revenues have rebounded in the past two years. While the pending litigation still exists, the City better understands the financial implications of it and is able to adequately describe them to potential investors in the Official Statement. Since the original Council approval in 2016, a third bond, originally issued in 2009, is now able to be refunded as well and adds significant savings to the proposed refunding.
Staff seeks approval of the City Council and the Board of the Stockton Public Financing Authority (“Authority”) to refund three series (2002A, 2005A and 2009B) of outstanding water revenue bonds. The purpose of the refunding is to generate significant annual debt service savings for the water system. Staff estimates savings to be approximately $16.7 million from now through 2039 (the current final maturity of the bonds being refunded) with average annual savings estimated at $832,000 to the enterprise fund. This savings is roughly two and one-half times greater than the 2016 proposal due to the addition of the third bond issue. The financing team estimates the total net present value savings to be 7.20%. The City’s debt policy guidelines stipulates that a minimum savings of 3% should be present to pursue refunding. As a result of the improved financial condition of the water system, staff and the financing team agree the City can procure good market access at lower interest rates and generate significant savings for the water system. Staff recommends approval of the resolutions as proposed.
DISCUSSION
Background
The City issued the 2002 bonds in the original amount of $14.3 million to finance the 1986 Water Facilities project, while the 2005 bonds of $24.2 million financed numerous projects throughout the water system. The 2009B Bonds of $154.6 million financed the majority of the Delta Water Supply Project. These bonds represent 76% of the total outstanding indebtedness of the water system.
City staff and its Municipal Advisor identified these bonds as potential refinancing candidates several years ago. However, the City’s bankruptcy and the treatment of these bonds under Chapter 9 prevented a refunding, and refunding the 2009B bonds was not economically viable until recently. More recently, declining revenues and litigation forestalled the refinancing. The water utility experienced declines in consumption and revenue loss due to the recent drought. The Stockton East Water District also initiated litigation related to contract terms.
Since 2016, the water utility has since recovered financially due to rate increases and increased consumption with the easing of drought restrictions. The City Finance team worked to understand the potential implications of the pending litigation, and is able to adequately describe them to investors.
With the completion of the Delta Water Supply Project, the water utility has no significant future borrowing plans and intends to handle ongoing capital costs on a pay-as-you-go basis, using annual revenue to both maintain the current system and pay for future limited capital needs.
Present Situation
Since October 2016, staff tracked the bond market and associated interest rates to determine if a refunding was still economically viable. Staff also worked through various issues related to the outstanding Stockton East Water District litigation.
Assuming market interest rates as of August 13, 2018; staff estimate the proposed refunding will result in the following savings:
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Prior Bonds Total Debt Service: |
$246,929,938 |
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New Bonds Total Debt Service: |
$230,278,460 |
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Total Savings: |
$16,651,479 |
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Average Annual Savings: |
$832,574 (FY 2019 to FY 2039) |
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Net Present Value (“NPV”) Savings: |
$12,232,230 |
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Final Maturity |
10/01/38 |
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NPV Savings % |
7.20% |
Credit Rating
The financing team plans to approach both Fitch Ratings (“Fitch”) and Standard & Poor’s (“S&P”) to provide ratings for the refunding bonds. Both Fitch and S&P hold stable investment-grade ratings on the existing bonds. Given the savings that the refunding presents, staff expects Fitch and S&P will provide a favorable rating on the proposed refunding. The better the rating the City receives, the greater the savings the City will experience.
Financing Team
Along with City staff, the financing team includes Orrick, Herrington & Sutcliffe LLP as Bond and Disclosure Counsel as a member of the authorized Bond Counsel Pool (Resolution No. 2012-05-15-1102) and Citigroup Global Markets Inc. as the Underwriter as a member of the authorized Underwriter Pool (Resolution No. 2017-07-25-1101). Other members of the financing team include Del Rio Advisors, LLC Municipal Advisor to the City as a member of the authorized Municipal Advisor Pool (Resolution No. 2017-05-25-1102), and Wells Fargo Bank National Association as Trustee/Fiscal Agent.
Financing Schedule
If the refunding is approved by Council, the Stockton Public Financing Authority bonds will issue on the following schedule:
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Date |
Action |
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Week of October 22nd |
Print and Post Preliminary Official Statement |
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Week of November 5th |
Sell Bonds |
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Week of November 12th |
Print and Post Final Official Statement Documents Executed |
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Week of November 18th |
Transaction Closes |
FINANCIAL SUMMARY
There is no impact to the City’s General Fund or any other unrestricted fund as a result of taking the recommended action. There is sufficient budget in the Water Enterprise Fund to pay the revised FY 2018-19 annual debt service on the Series 2018A Refunding Revenue Bonds.
Costs of issuance of up to $1.6 million (and Bond Insurance/Debt Service Reserve policy, if cost effective of up to $1.6 million) will be paid for out of bond proceeds. An appropriation of up to $1.6 million is requested to the Water Debt Service Fund Account No. 423-2001-914 to cover the costs of issuance.
The refunding will annually free up approximately $832,000 through 2039 that the water utility can use to meet operational needs.
California Government Code Section 5852.1 requires the Authority and the City to disclose specified information obtained as a good faith estimate from an underwriter, municipal advisor or private lender before authorization of the issuance of the Bonds (Attachment B). The Authority and the City have received such information from the Underwriter and have included it in this packet.
Attachment A - Description of Documents Being Approved and Terms Used
Attachment B - Good Faith Estimate