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AUTHORIZE THE EXECUTION BY THE CITY AND THE STOCKTON PUBLIC FINANCING AUTHORITY OF A LOAN AGREEMENT (“WIFIA LOAN AGREEMENT OR WIFIA LOAN”) WITH THE U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA) UNDER THE WATER INFRASTRUCTURE FINANCE AND INNOVATION ACT PROGRAM (“WIFIA”) IN THE AMOUNT OF $108,000,000, THE ISSUANCE BY THE STOCKTON PUBLIC FINANCING AUTHORITY OF A WIFIA BOND TO THE U.S. ENVIRONMENTAL PROTECTION AGENCY IN SAID AMOUNT, AND THE AUTHORIZED OFFICERS TO APPROVE ALL RELATED DOCUMENTS AND TAKE ALL NECESSARY ACTIONS TO CARRY OUT THE PURPOSE AND INTENT OF THE RESOLUTIONS TO ASSIST IN THE FINANCING OF THE PLANNING, DESIGN AND CONSTRUCTION OF THE REGIONAL WASTEWATER CONTROL FACILITY MODIFICATIONS PROJECT (CIP NO. M16022) (“RWCF MODIFICATIONS PROJECT”)
recommended action
RECOMMENDATION
It is recommended that the City Council and the Stockton Public Financing Authority adopt resolutions:
1. Authorizing entrance into, and approving the forms of, a WIFIA Loan Agreement and an Installment Purchase Contract for the wastewater system in aggregate principal amount not to exceed $108,000,000, and authorizing the taking of certain actions in connection therewith.
2. Authorizing issuance and sale of wastewater revenue bonds, series 2020 in an aggregate principal amount not to exceed $108,000,000; authorizing entrance into, and approving the forms of a WIFIA Loan Agreement, an Installment Purchase Contract and an Indenture for the Wastewater System related thereto; and authorizing the taking of certain actions in connection therewith.
3. Authorizing the City Manager to carry out all actions necessary to carry out the purpose and intent of the resolutions.
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Summary
Adoption of the proposed resolutions will facilitate utility infrastructure projects that are necessary to provide sewer service to Stockton residents and businesses. Utility infrastructure is commonly debt financed due to the significant costs and long-term benefit. The Municipal Utility Department Wastewater Capital Improvement Program (“CIP”) has a total proposed cost of $483.2 million, with $191.2 million cash-funded and the balance of $292.0 million funded through the issuance of debt.
The Wastewater Utility rate study adopted in 2019 assumes that market rate municipal bonds will be sold to finance infrastructure. Other options to reduce the cost of financing infrastructure include the WIFIA Loan Agreement, which is up for review tonight, and a loan from the California State Water Resources Control Board’s State Revolving Fund (“SRF”) , still in early stages of negotiation. The WIFIA and SRF loans provide lower interest rates than those available in the municipal bond market.
To avoid delaying necessary capital improvements, on July 30, 2019, the City Council and the Stockton Public Financing Authority approved the issuance and sale of short-term financing in the form of Wastewater Bond Anticipation Notes (“BANs”). The BANs were issued on October 22, 2019 in the amount of $118.5 million at an interest rate of 1.40%. The BANs mature on June 1, 2022, pay interest only until maturity, and are callable beginning June 1, 2021, and any date thereafter without penalty.
When the BANs were issued, it was anticipated that proceeds of the WIFIA Loan Agreement would be used to pay off a portion of the BANs. The MUD and Finance Staff plan to draw the entire amount of $108 million on June 1, 2021, to partially redeem the BANs on their first call date. After the redemption, there will remain approximately $10.5 million in BANs outstanding. It is anticipated that proceeds of an SRF loan will retire the balance of the BANs but the remaining amount may also be paid off from a series of bonds the City anticipates issuing in Fiscal Year(FY) 2021-22. In addition to the anticipated SRF loan and additional bonds planned to be issued in FY 2021-22, the MUD also anticipates issuing bonds in FY 2023-24. There are currently no borrowing plans beyond 2024 and it is anticipated that the balance of the Capital Improvement Program will be funded on a pay-as-you-go basis through FY 2027-28. Staff reviewed the recommended financing strategy with the Water Advisory Group on September 2, 2020, and the Council Water Committee on September 10, 2020.
The MUD and Finance staff, along with the City’s Municipal Advisor and Bond Counsel, have approached S&P Global Ratings (“S&P”) and Fitch Ratings (“Fitch”) to rate the WIFIA Loan per a requirement of the loan program. Currently, S&P rates the outstanding obligations of the Wastewater System “A” and Fitch recently upgraded the rating of the Stockton Public Financing Authority, Wastewater Revenue Refunding Bonds, Series 2014 two notches from “A-” to “A+”. We expect to report the ratings of the WIFIA Loan Agreement at the meeting tonight.
The RWCF Modifications Project is currently in the construction phase. The City was invited by the U.S. Environmental Protection Agency (EPA) to apply for credit assistance under the WIFIA program for up to 49 percent of the total costs of the RWCF Modifications Project. The MUD and Finance Staff, along with the City’s Municipal Advisor and Bond Counsel, have negotiated the terms of the WIFIA Loan Agreement. It is anticipated that the interest rate will be around 1.1%, for a term of 30 years, and the amortization will be adjusted to consider existing bonds of the system. A loan at this rate is anticipated to save ratepayers approximately $40 million over the term of the loan.
DISCUSSION
Background
The RWCF Modifications Project consists of key upgrades to the RWCF to comply with permit-required effluent limits, in addition to replacing equipment and processes that are 40 to 70 years old and beyond their useful life. Upon completion of the Project, the RWCF will be modernized and able to expand to support the community, initially through 2035, with ability to expand through 2045 and beyond.
On November 15, 2016, by Resolution No. 2016-11-15-1503, City Council authorized the City Manager to award and execute a Progressive Design-Build Contract with the Joint Venture (JV) of AECOM/W.M. Lyles for Phase 1 design services for the RWCF Modifications Project. The scope of work for Phase 1 provided a 65 percent design completion level and developed a guaranteed maximum price for Phase 2. Due to financing considerations, Phase 2 was split into two phases, Phase 2A, and Phase 2B.
On March 26, 2019, by Resolution 2019-03-26-0802, Council approved and adopted Phase 2A of the RWCF Modifications Project, which advances the design to a 90 percent completion level.
On July 30, 2019, Council approved and adopted the following Resolutions:
• 2019-07-30-1402-01 authorizing the City to apply for the WIFIA loan
• 2019-07-30-1403 awarding Phase 2B of the Progressive Design-Build Contact for the final design, permitting, construction and engineering services during construction of the RWCF Modifications Project
• 2019-07-30-1401 approving documents necessary for issuance of the BANs
The federal Water Infrastructure Finance and Innovation Act of 2014 (WIFIA) established a federal credit program administered by the U.S. Environmental Protection Agency (EPA). The WIFIA program accelerates investment in water and wastewater infrastructure of national and regional significance by offering loans to creditworthy borrowers for up to 49 percent of eligible project costs.
The WIFIA program authorizes the EPA to provide secured (direct) loans and loan guarantees to eligible water infrastructure projects. On July 31, 2018, the City submitted a letter of interest demonstrating the RWCF Modifications Project’s eligibility, financial creditworthiness, engineering feasibility, and alignment with WIFIA selection criteria. Using the information provided in the letter of interest, the EPA evaluated and selected the RWCF Modifications Project for the next step in the application process. On October 30, 2018, the City was invited to apply to the EPA for funding under the WIFIA program. The City completed the application in September 2019. WIFIA notified the City of a complete application in October 2019 and the City has been actively responding to WIFIA inquiries and negotiating the WIFIA Loan Agreement.
On May 21, 2019, the City Council, by Resolution 2019-05-21-1506, approved implementation of a new Wastewater Utility rate structure to be implemented over a five-year period. These rates were necessary to ensure adequate revenues for completion of the City’s extensive wastewater capital improvement plan and to repay all proposed obligations issued to finance the RWCF Modifications Project. The 2019 Wastewater Rate Study and associated Plan of Finance assume 100% financing from a combination of Bond Anticipation Notes (BANs) and bonds. This was based on issuing bonds to generate the funds necessary to meet the cash flow needs identified in the rate study. Financing under WIFIA will provide more favorable interest rates than municipal bonds. The potential savings to the City’s rate payers are substantial. In addition, the City has applied for financing through the SRF. Should an SRF loan be received by the City, the cost of financing will be further reduced.
Present Situation
Concurrent with the planning and design work under the progressive design-build contract for the RWCF Modifications Project, the MUD and Finance Staff, along with the City’s Municipal Advisor and Bond Counsel, completed the application for credit assistance under the WIFIA program. The WIFIA program staff encouraged the City to apply for the maximum allowable loan amount, which is 49 percent of the total project cost. The requested loan amount is up to $108 Million of the $222.7 Million RWCF Modifications Project total cost.
The City has completed negotiations on the attached WIFIA Loan Agreement and related legal documents.
Below is a brief description of the documents for review and approval tonight:
Historical and Projected Pro Forma Debt Service Coverage (Attachment A) which provides historical and projected revenues along with historical and projected expenditures. Also included is the debt service and projections on reserve balances.
The WIFIA Loan Agreement (Exhibit 1 to the resolution) governs all the specific terms and conditions of the WIFIA loan, including interest rate, maturity, redemption, payment terms, ongoing fees, and default provisions. This document is in the form required by WIFIA.
The 2020 Installment Purchase Contract (Exhibit 2 to the resolution) is between the City and the Stockton Public Financing Authority and provides for the City to purchase the portion of the RWCF Modifications Project being financed through WIFIA over time in installments. The semi-annual installment payments to be made by the City to the Financing Authority are payable from, and secured by a pledge of, the “Net System Revenues” of the Wastewater Fund, on a parity basis with other existing obligations of the Wastewater Fund.
The 2020 Indenture (Exhibit 3 to the resolution) is between the Stockton Public Financing Authority and Wells Fargo Bank, N.A., as trustee, and governs the role and duties of the bank as Trustee thereunder. Pursuant to the 2020 Indenture, the Financing Authority will issue EPA a bond in the amount of $108 million evidencing the upfront loan from the EPA used to finance the portion of the RWCF Modifications Project being financed through WIFIA. The Financing Authority will pay amounts due to EPA under the 2020 Indenture with the installment payments received by the City under the 2020 Installment Purchase Contract.
The staff recommendations to adopt resolutions authorizing entrance into a WIFIA Loan Agreement, an Installment Purchase Contract, and the issuance and sale of wastewater revenue bonds were considered by the Water Advisory Group and approved by the Council Water Committee at their respective September 2020 meetings.
FINANCIAL SUMMARY
There is no impact to the City’s General Fund. Entering into the WIFIA loan will save ratepayers approximately $40 million in interest costs over the term of the loan versus a typical bond. The installment payments payable by the City under the 2020 Installment Purchase Contract that are used to repay the loan made by the EPA under the WIFIA Loan Agreement will be secured by ”Net System Revenues” (gross revenues less operations and maintenance charges) of the Wastewater System. The obligation will be on parity with existing wastewater debt. It is anticipated that the MUD will be paying certain fees and expenses for the City’s financing team along with those of the WIFIA team. These fees and expenses are anticipated to be paid from the wastewater utility funds previously allocated to the RWCF Modifications Project (M16022) and will not be financed in the WIFIA Loan. Below is the estimated budget:
|
Line Item |
Subtotal |
Amount |
|
WIFIA Legal Advisor |
159,500.00 |
|
|
WIFIA Financial Advisor |
91,166.00 |
|
|
WIFIA Engineering Consultant |
33,472.76 |
|
|
Servicing Setup Fee |
15,610.00 |
|
|
Construction Period Servicing Fee |
2,600.00 |
|
|
Total WIFIA Estimated Costs |
|
302,348.76 |
|
Bond Counsel (Draft Documents) |
|
20,000.00 |
|
Bond Counsel (Opinion) |
|
15,000.00 |
|
Bond Counsel (Hourly Review) |
|
10,000.00 |
|
Municipal Advisor (Hourly) |
|
22,500.00 |
|
Municipal Advisor Expenses |
|
125.00 |
|
Standard & Poor's |
|
53,550.00 |
|
Fitch |
|
55,000.00 |
|
Trustee Fee and Acceptance |
|
1,000.00 |
|
Trustee Counsel |
|
2,500.00 |
|
Trustee Legal |
|
1,500.00 |
|
CDIAC |
|
5,000.00 |
|
|
|
|
|
Total |
|
$ 488,523.76 |
In addition to the fixed one-time fees listed above, there are ongoing annual costs that are paid to WIFIA along with debt service each year. These fees escalate annually at the rate of inflation. Below is a table listing the initial ongoing fees:
|
Line Item |
|
Amount |
|
Construction Period Servicing Fee (During Construction) |
15,610.00 |
|
Operation Period Servicing Fee (Life of Loan) |
|
7,810.00 |
|
|
|
|
|
Total |
|
$ 23,420.00 |
As mentioned earlier, the WIFIA Loan is being amortized around the outstanding 2014 bonds. In addition, the Authority anticipates issuing an additional series of bonds in FY 2021-22 that will pay off any remaining balance of the BANs and to fund capital improvements. The amount of the FY 2021-22 borrowing will be offset by the proceeds of any SRF loan secured. In addition, to complete the financing component of the Plan of Finance, the Authority anticipates issuing a final series of bonds in FY 2023-24. There are no borrowing plans from FY 2023-24 through FY 2027-28 and the balance of the capital improvement program is anticipated to be funded with pay-as-you-go dollars.
To determine the benefits of entering into the WIFIA loan, one must compare it to the alternative of borrowing the same dollars through a public offering of municipal bonds. Below is a comparison table of the estimated benefits of the WIFIA Loan:
|
Line Item |
Public Offering |
WIFIA Loan |
|
Estimated Issuance Amount |
$101,085,000 |
$108,000,000 |
|
Estimated Interest Rate |
2.96%(1) |
1.14% |
|
Total Debt Service |
$173,610,507(2) |
$133,222,067(3) |
|
Estimated Savings |
|
$40,388,440 |
|
Net Present Value Benefit(4) |
|
$30,461,179 |
Notes
(1) Estimated market interest rates as of August 20, 2020, assumes the sale of the bonds at premium coupons to market investors
(2) Assumes the “all-in” true interest cost which includes all the estimated costs of issuing the bonds
(3) Includes estimated ongoing annual costs discussed earlier
(4) Discounted at the arbitrage yield of the public offering at 2.57%
Below is a table of the estimated debt service including all series of bonds and the WIFIA Loan:
Below is a graph of the estimated debt service of all obligations, per the Plan of Finance when fully executed:
SB 450 COMPLIANCE (GOOD FAITH ESTIMATES)
In compliance with state law (Government Code 5852.1), a good faith estimate related to the WIFIA Loan Agreement and related obligations of the City and Financing Authority is outlined below. The good faith estimates have been provided to the City and the Financing Authority by the Municipal Advisor. Each estimate is based on the City’s Plan of Finance and current market conditions, including the proposed interest rate prevailing at the time of preparation of the estimate.
Principal Amount: The estimated aggregate principal amount of the WIFIA Loan is $108 million.
True Interest Cost: The estimated true interest cost of the WIFIA Loan, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the WIFIA Loan, is 1.14%.
• Finance Charge: The estimated finance charge for the WIFIA Loan, which means the sum of all fees paid to third parties is $488,523.76.
• Amount of Proceeds to be Received: The estimate of the amount of proceeds to be received by the City and the Authority from the WIFIA Loan is $108 million.
• Total Payment Amount: The estimated total payment amount, which means the sum of all payments on the WIFIA Loan $132,877,357.88 plus an estimate of the ongoing fees calculated to the final maturity of the WIFIA Loan in the amount of $344,709.32 equals $133,222,067.20 plus the finance charges for the WIFIA Loan not paid with the proceeds of the WIFIA Loan in the amount of $488,523.76 equals $133,710,590.96.
The preceding estimates are good faith estimates only. The actual figures may differ due to:
• Differences between assumptions regarding the date of the closing of the WIFIA Loan, the principal amount of the WIFIA Loan, the amortization of the WIFIA Loan, the final interest rate of the WIFIA Loan
• Market conditions
• Changes in the City’s Plan of Finance
Attachment A: Historical and Projected Pro Forma Debt Service Coverage