In 2014, the City/Authority issued the following Bonds to finance the acquisition of water rights for the benefit of the City’s Water system that are now able to be refunded (refinanced) at a savings to the City:
- $18,555,000 (original principal amount) 2014 Water Revenue Bonds, (the “2014 Authority Bonds”), of which $16,595,000 remain outstanding; of which $14,940,000 would be refunded (refinanced) and $1,655,000 will remain outstanding and will be paid on their current schedule;
On August 18, 2020, the City Council adopted Resolution 2020-054 approving the institution of proceedings to refund the outstanding 2014 Authority Bonds by issuing refunding bonds. Based on this authorization, staff and the City’s bond issuance team proceeded with further analysis of the refunding bonds structure and preparation of the required legal documents. It was determined that by refunding only the callable 2014 Authority Bonds (those bonds maturing from July 1, 2025 through July 1, 2044), the City could optimize its savings. This occurs because the refunding of the non-callable 2014 Authority Bonds (those shorter-term bonds maturing from July 1, 2021 through July 1, 2024) do not result in positive savings from an advance refunding.
The City received notification that the proposed 2020 Water Revenue Refunding Bonds (the "2020 Refunding Bonds") will maintain a "AA" rating from Standard & Poors similar to the 2014 Authority Bonds. The refunding of the callable 2014 Authority Bonds is projected to produce total gross savings of $1,714,721, or an average annual reduction in bond payments of $71,447, based on the current market conditions, subject to change. The net present value savings is projected at $1,294,231 or 8.66% of the refunded bonds which is in compliance with the City’s Debt Policy. These savings are able to be achieved because the interest cost of the proposed 2020 Refunding Bonds is projected to be 2.67% which is lower than the average interest (coupon) rate on the 2014 Authority Bonds of 4.82%. The proposed 2020 Refunding Bonds have a final maturity date of July 1, 2044, which is the same as the existing 2014 Authority Bonds and do not extend the life of the bonds.
It is noted that in order to refund the bonds, the interest that would otherwise be paid on the callable bonds from January 1, 2021 through July 1, 2024 must be pre-funded at this time. This interest cost totals $2,856,275 and would otherwise be paid over the next three and one-half (3 ½) years. This amount combined with the $14,940,000 of 2014 Authority Bonds to be refunded, totals $17,796,275 which is needed to defease or payoff the callable 2014 bonds. This results in a proposed 2020 Refunding Bond amount of $17,975,000. The difference between the amount of funds required to payoff the callable 2014 Authority Bonds and the 2020 Refunding Bonds is approximately $179,000. This represents the cost of issuance estimated at $288,000 less interest to be earned on the funds in escrow. The proposed 2020 Refunding Bonds of $17,975,000 plus the remaining 2014 Authority Bonds of $1,655,000, total $19,630,000 of bonds outstanding as compared to $16,595,000 currently outstanding. If the 2014 Authority Bonds are not refunded, the pre-funded interest would still be paid out over the next four years, however, there would not be any savings from lower interest rates.
Below is a table summarizing the detail of the 2014 Authority Bonds to be refunded and the anticipated savings:
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*$1,655,000 of the 2014 Authority Bonds will remain outstanding and will be paid on their current schedule from July 1, 2021 to July 1, 2024.
Staff is recommending refunding the 2014 Authority Bonds by issuing the proposed 2020 Refunding Bonds under the provisions of Articles 10 and 11 of Chapter 3 of Part 1 of Division 2 of Title 5 of the California Government Code, commencing with Sections 53570 and 53580 of said Code (the “Refunding Bond Law”). The proposed 2020 Refunding Bonds will be secured by a pledge of and payable from “Net Revenues”, which consist of certain revenues of the Water System less operations and maintenance costs. The proposed 2020 Refunding Bonds will be on parity with the outstanding 2019 Water Revenue Refunding Bonds and that portion of the 2014 Authority Bonds that is not being refunded.
Approval of the attached Resolution will approve the following documents required to issue the Refunding Bonds:
- Indenture of Trust – document between the City and BNY Mellon Trust setting up required accounts and providing the terms and provisions relating to the Refunding Bonds
- Escrow Agreement – document between the City and BNY Mellon Trust acting as an escrow agent to provide for the refunding of the outstanding 2014 Authority Bonds
- Purchase Contract – document between the City and Stifel, Nicolaus & Company whereby the underwriter agrees to buy the Refunding Bonds from the City and resell them to bond investors
- Official Statement – offering statement used to provide bond investors material information about the Refunding Bonds, to allow them to make an informed decision on buying the Refunding Bonds
- Continuing Disclosure Certificate (Exhibit E to the Preliminary Official Statement) – document requiring the City to provide annually updated information related to the Refunding Bonds until bonds are paid off
- Closing Documents – authorizing City officers and staff to execute and deliver all documents required for the closing of the bond issue.
NEXT STEPS:
- Post Preliminary Official Statement – October 7, 2020
- Price Bonds – mid October
- Close Bonds – late October
- Defease 2014 Authority Bonds - funds deposited to escrow for payoff on July 1, 2024
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