Approved by City Manager: CITY COUNCIL AGENDA REPORT DATE: APRIL 13, 2015 TO: FROM: HONORABLE MAYOR AND COUNCILMEMBERS DR. GARY J. LYSIK, CHIEF FINANCIAL OFFICER SUBJECT: ADOPTION OF RESOLUTION 2015-1452 APPROVING DOCUMENTS RELATED TO THE ISSUANCE OF THE SERIES 2015 CERTIFICATES OF PARTICIPATION (CIVIC CENTER) AND THE EXECUTION AND DELIVERY OF THESE CERTIFICATES OF PARTICIPATION IN AN AMOUNT NOT TO EXCEED $43,000,000. MEETING APRIL 22, 2015 DATE: SUMMARY RECOMMENDATION: Staff recommends that City Council: 1. Approve the execution of sale documents, a trust agreement, a lease, a sublease agreement, assignment agreement, continuing disclosure agreement, and preliminary official statement, 2. Authorize the funding of the Series 2015 Certificates of Participation in an amount not-to-exceed $43,000,000. Final bond size to be determined at time of competitive bid 3. Authorize the taking of certain actions in connection with the execution and delivery of such Certificates of Participation, and 4. Convene to the City of Calabasas Facilities Corporation (the Corporation ) and have the Corporation approve documents in connection with the execution and delivery of the Series 2015 Certificates of Participation (Civic Center) in an amount not-to-exceed $43,000,000. AGENDA ITEM NO. 9
BACKGROUND: In November 2006, the City of Calabasas issued Series 2006 Certificates of Participation with an aggregate principal amount of $35,000,000 for the purpose of financing the construction of the City Hall, the Library, and the Civic Center Facility, and to purchase necessary furniture, fixtures, and equipment associated with that project. Since that time, Council has decided to construct a new Senior Center in the parking lot immediately south of and adjacent to the City Hall and Library buildings. The total expected cost for the design and construction of the new Senior Center, including project management costs, landscaping, parking lot, and furniture, fixtures, and equipment will be less than $6M. The average coupon rate for the Series 2006 COPs is 4.39%, and currently the amount of the outstanding principal balance is $33,450,000. Annual debt service for this issue averages $1.7M per year through 2017, and will then increase to $2.2M per year until maturity in 2041. The anticipated true interest cost for the proposed new issue would be approximately 3.44%, representing a rate reduction of nearly 1.0%. The final true interest will be determined at the time the bonds are sold by competitive bid in mid- May. The annual debt service for the new issue, including borrowing an additional $6M, is expected to be $1.6M per year through FY 2018, then increasing to $2.5M per year until maturity in 2041. (Note: The maturity date for the new issue would not change from the current debt structure.) The real advantages of refunding the existing Series 2006 COP is to take advantage of lower interest rates while maintaining a healthy City reserve level. Without adding an additional $6M to the amount currently outstanding, refunding would yield a total Net Present Value (NPV) Savings of $1.6M based on current rates. Whether the City adds an additional $6M or not, it should at least refund the existing debt to take advantage of the currently lower interest rates. During the Council Meeting dated April 8, 2015, Council voted to approve the refunding of the Series 2006 Certificates of Participation, and issue new Series 2015 Refunding Bonds for the purpose of taking advantage of lower interest rates while adding an additional $6M for the estimated cost of construction and completion of a new Senior Center. DISCUSSION / ANALYSIS: At this time, based on construction and other cost estimates related to the Senior Center Project, the City s Chief Financial Officer indicates that given today s interest rates (3.44%) and a term of 26 years, estimated annual debt service 2
payments on a debt amount not-to-exceed $43,000,000 could be structured whereby the annual debt service payments will be approximately $1.6 million until FY 2019, at which time annual debt service payments will increase to approximately $2.5 million. The annual increase of $900K of debt service payments in 2019 will be partially offset by $500K per year from the retirement of debt service payments in December 2016 associated with the 2005 Refunding Certificates of Participation used to purchase Creekside Park. If the City were to issue debt in the amount of $43,000,000 (it is currently estimated that the bond will be bid at premium and the issuance amount may be closer to $39 million), it is estimated that approximately $393K of that amount will be used for the cost of issuance, the underwriter s discount, and the purchase of a bond reserve fund surety. Approximately $378K will be set aside to cover capitalized interest, leaving $35.3M to be used to refund the 2006 Bonds and $6.0M for the Senior Center construction costs, Furniture, Fixtures & Equipment, project management costs, etc. Any amount remaining after the completion of the Project will be used to make initial debt service payments. The Process: As is currently the case with the Series 2006 Bonds, the City will lease the Civic Center site and the improvements thereon (the Leased Property ) to the Calabasas Facilities Corporation pursuant to a Lease. The Corporation will then leaseback the Leased Property to the City who will make lease payments to the Corporation. Pursuant to the Assignment Agreement, the lease payments will be assigned to a Trustee. Each owner of the COPs will have an undivided interest in the lease payments. The lease payments have an interest and principal component and will be payable semiannually. It is proposed that the bonds will be sold at competitive sale in mid May 2015 with multiple underwriting bids expected.. The underlying rating on the City s Series 2006 COPs was an AA+ from Standard & Poor s and a similar underlying rating is expected for this new issue. The average interest rate on the bonds is expected to be roughly 3.44% based on current market conditions and the rate will be fixed for 26 years. Final interest rates will depend on bond market conditions at the time of sale. The proceeds from the sale, excluding the cost of issuance, will be safeguarded and invested by an investment group designated by the City. Regular payments associated with the cost of construction of the Project will first be taken from the proceeds of the bond sale, with monies being drawn from the City s General Fund last. It is appropriate at this meeting to consider for adoption the resolution of the City authorizing the execution and delivery of the Series 2015 COPs. 3
General Summary of Security: The Series 2015 COPs are payable from the lease payments to be made by the City. The City covenants to annually budget and appropriate for the lease payments from its general fund and maintain insurance on the Leased Property. There is also a reserve fund for the Certificates. Description of Documents: Lease: Document in which the City leases the Leased Property to the Calabasas Facilities Corporation. It is drafted by Special Counsel and executed by the City and the Corporation. Sub-lease Agreement: Key legal document in which the Authority leases back the Leased Property to the City for lease payments. It also contains the City s covenants to appropriate and maintain insurance and prepayment provisions. It is drafted by Special Counsel and executed by the City and the Corporation. Trust Agreement: Another key legal document that lays out the legal structure and terms of the COPs. It specifies payment dates, maturity dates; revenues and accounts specifically pledged to the repayment of the COPs; flow of funds, additional debt requirements; default and remedy provisions; and defeasance provisions in the event the COPs are prepaid. It is drafted by Special Counsel and executed by the City, the Corporation, and Trustee. Assignment Agreement: Document in which the lease payment to the Calabasas Facilities Corporation are assigned to the Trustee. It is drafted by Special Counsel and executed by the Trustee and the Corporation. Official Statement: This document describes the security and discloses potential risks to prospective investors. It will generally describe the sources of payment for the COPs, the City s financial state, particularly its general fund, economic and demographic characteristics of the City, and inherent known risk factors associated with the security. It s important that this document not contain any material misstatements or omissions. The Preliminary Official Statement (often referred to as the POS ) is distributed to prospective investors prior to the sale so that they can make informed purchase decisions. The POS should be as close to final as possible with the actual terms of the pricing (interest rates and principal amounts) left necessarily blank. The Final Official Statement will be prepared shortly after the sale and must be available in time for closing. The POS and FOS are drafted by Special Counsel, acting as disclosure counsel and is executed by the City. Continuing Disclosure Agreement: This agreement, attached as an appendix of the POS, outlines the updated information related to the security that the City will agree to provide to the bond markets. Disclosure is required annually, and on an 4
exceptional basis for any major material event. This document is drafted by Special Counsel and executed by City. Notice of Sale and Bid Form: The COPs, with a term ending no later than on December 1, 2041, will be sold on a competitive basis to the underwriting firm offering the City the lowest combination of total interest cost and underwriting fees, on a present value basis, otherwise known as the true interest cost. The maximum true interest rate cannot exceed 4.25%, and the maximum allowable discount rate on the bonds cannot exceed 1%. The sale of the COPs is scheduled for late May 2015 at the offices of the C.M. de Crinis, Financial Advisor, at which time the City Manager or Chief Financial Officer will award the COPs to the best bidder. The bid will be published nationally and all underwriters will be allowed to bid. The bids will be received electronically over the internet and a good faith deposit of $500,000 will be required. The bid form is submitted electronically by potential underwriters on the day of the bond sale, and specifies the actual principal amounts, interest rates and prices at which the COPs will be purchased. In it, the underwriter commits, at closing, to purchase the COPs at the agreed upon prices and amounts subject to certain closing conditions. FINANCIAL IMPACT / SOURCE OF FUNDING: It is expected that annual debt service payments associated with the issuance of the Series 2015 COPs will be approximately $1.6 million per year through June 2018, after which time they will increase to, and remain at approximately $2.5 million per year until final payment has been made in 2041. Lease payments currently being made for the Series 2005 Refunding Certificates of Completion used to finance Creekside Park will end in December 2016, two years before the increase in the payments associated with the new issuance. In this way, total debt service payments made by the City for its outstanding debt will actually decrease by approximately $0.2 million per year relative to debt service payments as they are currently structured. In addition to the issuance of the Series 2015 COPs, no additional City funding is anticipated to be required to complete the build of the new Senior Center. In this way, there will not be any additional drain on the City s General Fund reserve balance or Management Reserve. REQUESTED ACTION: Staff recommends that City Council takes action on the following 4 items as it relates to the Series 2015 Certificates of Participation (Civic Center): 1. Approve the execution of sale documents, a trust agreement, a lease, a sublease agreement, assignment agreement, continuing disclosure agreement, and preliminary official statement, 5
2. Authorize the funding of the Series 2006 Certificates of Participation in an amount not-to-exceed $43,000,000, 3. Authorize the taking of certain actions in connection with the execution and delivery of such Certificates of Participation, and 4. Convene to the City of Calabasas Facilities Corporation (the Corporation ) and have the Corporation approve documents in connection with the execution and delivery of the Series 2015 Certificates of Participation (Civic Center) in an amount not-to-exceed $43,000,000. ATTACHMENTS: 1. Resolution No. 2015-1452 2. Lease Agreement 3. Sublease Agreement 4. Trust Agreement 5. Assignment Agreement 6. Preliminary Official Statement 7. Continuing Disclosure Agreement 8. Notice Inviting Bids 9. Series 2015 Refunding COPs Analysis 6