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CONDUCT A PUBLIC HEARING AND AUTHORIZE THE STOCKTON PUBLIC FINANCING AUTHORITY TO SELL LOCAL AGENCY REVENUE BONDS IN AN AMOUNT NOT TO EXCEED $27,500,000, THE PROCEEDS OF WHICH WILL BE USED TO PURCHASE TWO LOCAL OBLIGATIONS ISSUED BY THE CITY OF STOCKTON TO (1) REFUND CITY OF STOCKTON ARCH ROAD EAST COMMUNITY FACILITIES DISTRICT NO. 99-02 2007 SPECIAL TAX BONDS AND (2) PROVIDE ADDITIONAL CITY CAPITAL FUNDING
recommended action
RECOMMENDATION
Conduct a Public Hearing and Adopt Resolutions of the City of Stockton and the Stockton Public Financing Authority authorizing the issuance and sale of Stockton Public Financing Authority Revenue Bonds (City of Stockton Arch Road East Community Facilities District (“CFD”) 99-02) Series 2018 (the “Revenue Bonds”) in the estimated amount of $24,510,000 (not to exceed $27,500,000), and approving all necessary actions and approving all documents in connection with the refunding program for the City of Stockton Arch Road East CFD 99-02 District (“the District”) as set forth below and approving use of the proceeds of the Revenue Bonds to purchase an estimated $24,510,000 (not to exceed $27,500,000) amount of Special Tax Refunding Bonds Series 2018A and Special Tax Bonds, Series 2018B issued by the City of Stockton (the “Local Obligations”) (Attachment A).
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Resolution of the City of Stockton:
Adopt a resolution authorizing the issuance of City of Stockton, Arch Road East Community Facilities District No 99-02 Special Tax Refunding Bonds, Series 2018-A (Refunding Bonds) and 2018-B (New Money Bonds) and approving related documents and actions.
City Resolution Exhibits
1) Fiscal Agent Agreement
2) Escrow Agreement (among the Authority, the City, and Wells Fargo)
3) Preliminary Official Statement (includes Continuing Disclosure Certificate)
4) CFD Bonds Purchase Contract
5) Acquisition Agreement
Resolution of the Stockton Public Financing Authority (“Authority”):
Authorizing the issuance, sale, and delivery of an estimated $24,510,000 (not to exceed $27,500,000) principal amount of Authority Revenue Bonds, Series 2018 (the “Authority”) and approving all related documents and actions.
Stockton Public Financing Authority Resolution Exhibits
1) Indenture of Trust
2) Preliminary Official Statement (includes Continuing Disclosure Certificate)
3) CFD Bonds Purchase Contract
4) Bond Purchase Contract
5) Escrow Agreement (among the Authority, the City, and Wells Fargo)
The following appointments are approved as part of this item:
The appointment of Del Rio Advisors, LLC as Municipal Advisor, Quint & Thimmig, LLP as Bond and Disclosure Counsel and RBC Capital Markets, Inc. as Underwriter.
SUMMARY
If approved, the recommended actions will refund existing debt and issue new debt with the net effect of achieving approximately $4.1 million in savings; $1.8 million for tax payers and $2.3 million for the City. Staff seeks City Council and Board of Directors of the Stockton Public Financing Authority approval to refund approximately $17.8 million of outstanding land-secured bonds and to approve the issuance of an estimated $8.1 million in new money to support development in the Arch Road East Community Facilities District. The District consists of roughly 470 acres of contiguous and non-contiguous parcels north of Arch Road and east of Highway 99. The District includes 12 parcels of commercial/industrial property that are close to 50% developed.
The purpose of the refunding is to:
1. Generate annual savings for the property owners of approximately $97,000, $1.8 million overall.
2. Provide an estimated $8.1 million for needed capital improvements in the District.
3. Create new capital funds for the City of approximately $123,000 each year, $2.3 million overall.
4. Decrease the District’s overall bonding capacity to match the remaining improvements needed in the District.
Staff estimates the overall savings to be approximately $4.1 million from now through 2037 (the current final maturity of the bonds being refunded) with combined annual savings of $220,000. The net present value savings are estimated at 10.40%. The City’s debt policy stipulates minimum savings of 3% to pursue a refunding, so this transaction represents an excellent refunding opportunity. Staff and the financing team agree the City can procure good market access at lower interest rates and generate the expected savings.
DISCUSSION
Background
The City Council established the City of Stockton Arch Road East CFD 99-02 (“District”) in November 1999 to provide the funding necessary for public infrastructure improvements within the District. In December 1999, the City sold $2,085,000 of variable rate special tax bonds, and in February 2002, the City sold an additional $6,200,000 of variable rate bonds for the District. Both series were issued to finance the construction and acquisition of certain public improvements of benefit to the District, fund capitalized interest on the Bonds and to pay the costs of issuing the Bonds.
In August 2007, the City refunded the remaining portions of these bonds, revised the Rate and Method of Apportionment and added properties to the District. The City issued $19,065,000 of Special Tax Bonds (Prior Bonds) to support the development of the District.
The District consists of roughly 470 acres of contiguous and non-contiguous parcels of land in South Stockton, North of Arch Road and East of Highway 99. The District includes 12 parcels of commercial/industrial property that are close to 50% developed and have a 0% delinquency rate. The financing team requested an appraisal on the undeveloped property and assuming the current assessed values; the estimated value-to-lien ratio is approximately 6.6:1. Due to recent land sales, staff expects the final appraised value-to-lien ratio to be much higher. Generally, the higher the value-to-lien ratio, the lower the interest rates provided by prospective purchasers of the bonds.
Besides the special taxes paid by the property owners, the primary source of security for bondholders is the ability to foreclose on properties in the event the owners do not pay their special taxes. This accelerated foreclosure provision allows for foreclosure proceedings to commence sooner than the standard timeline.
Present Situation
The Municipal Advisor and City staff identified these bonds as a refunding candidate in 2016. However, it has taken some time to work through the various issues associated with the affected properties. The financing will include two series of Local Obligation Bonds: the 2018A series will be used to prepay the Prior Bonds, while the 2018B series will finance new infrastructure related to the storm drain/detention basin and pump station in the approximate amount of $8.1 million. These improvements are necessary as development has reached certain milestones that require these facilities.
As part of the 2007 transaction, the bonding capacity of the District was increased to $60 million. However, the parcels have all been sold to new developers, and consensus among the new owners is that, besides the estimated $8.1 million of projects funded from this proposed transaction, the only remaining project needing to be financed by the District will be the extension of Newcastle Road to Mariposa Road. That road project is anticipated to be needed sometime in the next ten years. Overall bonding capacity in the District is thereby being reduced to include the only the bonds issued to date, including the 2019 transaction, and an amount necessary to cover the financing of the Newcastle Road extension in an amount not-to-exceed $9 million).
Transaction Structure
The proposed refunding will consist of the issuance of two series of Local Obligation Bonds (LOBs), both issued by the City and secured by special taxes on properties in the District. One series will be sold to finance the refunding of the Prior Bonds, and the other will be sold to finance new projects. These LOBs cannot be sold in the public markets and therefore do not have marketability outside of this transaction.
At the same time the LOBs are issued, the Stockton Public Financing Authority (Authority), will issue and offer for public sale the proposed Revenue Bonds (Arch Road East Community Facilities District No. 99-02), Series 2018 (Revenue Bonds). The proceeds from this public sale will be used by the Authority to purchase the LOBs issued by the City, to fund a reserve fund for the bonds and pay the costs of issuing the bonds.
The proceeds from the sale of the City-issued LOBs to the Authority will be used to refund the Prior Bonds and to finance the estimated $8.1 million for the needed storm drain/detention basin improvements and pump station.
San Joaquin County collects the special taxes on the property tax bill and remits them to the City. The City then pays debt service on the Local Obligations to the Authority which in turn pays debt service on the revenue bonds to the Authority’s bondholders.
The annual debt service payments from the Local Obligations exceed the debt service of the Revenue Bonds by an average of $123,000 per year and provides annual coverage of the debt service due each year on the Revenue Bonds. This annual coverage is needed to enhance the credit of the sale which should provide for a lower interest rate on the Revenue Bonds and enhance overall savings to the property owners.
The Revenue Bonds and the LOBs 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.
The table below shows the information related to the Prior Bonds issued in 2007 by the City for the District:
|
Original Principal |
Remaining Principal (a) |
Interest Rates |
Final Maturity |
Call Date / Premium |
|
$19,065,000 |
$17,760,000 |
5.25%-5.875% |
9/1/2037 |
3/1/19 @ 101% |
Debt Service and Projected Savings
Overall Refunding Program Savings
The table below shows the information related to the entire refunding program assuming both property owner tax savings and Authority cash flow (assuming market interest rates as of September 25, 2018):
|
Proposed Yields |
Total Savings |
Average Annual Savings |
Net Present Value Savings |
Net Present Value Savings% |
|
2.72% - 4.43% |
$4,064,832 |
$219,720 |
$1,846,639 |
10.40% |
The City’s debt policy sets a target of minimum savings of 3% to pursue a refunding, so this transaction is an excellent refunding candidate. To enhance the credit quality of the bonds, the LOBs will have higher interest rates than the Revenue Bonds but will still be much lower than the interest rates on the Prior Bonds. The higher interest rates on the LOBs will create net positive cash flow from the LOBs to the Revenue Bonds and provide coverage more than the debt service due on the Revenue Bonds. There is an allowable 1.00% (100 basis points) spread in interest rates between the debt service on the LOBs and the Revenue Bonds. This spread generates coverage to help the Revenue Bonds obtain lower yields.
Property Owner Savings
|
Proposed Yields |
Total Savings |
Average Annual Savings |
Net Present Value Savings |
Net Present Value Savings% |
|
3.52% - 5.47% |
$1,790,683 |
$96,793 |
$787,103 |
4.43% |
SPFA Cash Flow and Savings (Coverage)
|
Total Savings |
Average Annual Savings (Coverage) |
|
$2,274,149 |
$122,926 |
After annual debt service on the Revenue Bonds is paid in full by the Authority on September 1 each year, the remaining amount (averaging approximate $123,000) will be available to the City to fund capital projects. These funds can be used for any capital project within the City and will be evaluated and programmed as part of the City’s overall 5-Year Capital Improvement Program. The allowable 1.00% (100 basis points) spread in interest rates between the debt service on the LOBs, and the Revenue Bonds provides the annual debt service coverage on the Revenue Bonds and provides critical funding to put towards these capital project needs.
Due to the limited diversification of ownership in this District, and the development not having achieved full build-out, the financing team will be taking this to market as a non-rated issuance.
Legal Authority and Procedures
The special taxes are paid on the property tax bill and are treated the same as other taxes such as the ad valorem, general obligation bonds for schools and other overlapping assessments and special taxes from other jurisdictions. Should a property owner become delinquent on any portion of their tax bill, the property is subject to accelerated judicial foreclosure, and the amount of lien on the property associated with the special taxes can be paid from proceeds of any foreclosure action. This structure provides security to the bondholders and is why the value-to-lien ratio is so critical to prospective investors in the bonds.
Financing Team
Along with City staff, the financing team includes Quint & Thimmig LLP as Bond and Disclosure Counsel as a member of the authorized Bond Counsel Pool (Resolution No. 2012-05-15-1102) and RBC Capital Markets, 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.
If City Council and the Authority approve this transaction, the schedule to complete the transaction is as follows:
|
Date |
Action |
|
November 6 |
City Council / Authority Consideration |
|
Week of November 12 |
Print and Post Preliminary Official Statement |
|
Week of November 26th |
Pre-Pricing and Pricing |
|
Week of December 3rd |
Print and Post Final Official Statement |
|
Week of December 10th |
Close the Transaction |
|
March 1, 2019 |
Redemption of the Prior Bonds |
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. The current year appropriation is sufficient to pay the annual debt service on the Series 2018 Refunding Revenue Bonds.
The refunding will provide annual savings of averaging approximately $97,000 to property owners and is anticipated to provide average annual inflows of $123,000 to the City for capital projects. These funds can be used for any capital project within the City and will be evaluated and programmed as part of the City’s overall 5-Year Capital Improvement Program.
The City’s Debt Management Policy for Capital and Land-Secured Financings allows the City to collect an administrative fee at closing. The fee for this issuance is estimated to be $98,525. This fee will be used to offset the costs of the City’s debt program.
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, financial advisor or private lender before authorizing the issuance of the Bonds (Attachment B). The Authority and the City have received this information from the Underwriter and is included in this packet.
Attachment A - Description of Documents and Terms Used
Attachment B - Good Faith Estimate