Report to Mayor and City Council
Tuesday, March 19, 2019
Special Orders of the Day
SUBJECT:
Title
(1) A PUBLIC HEARING TO CONSIDER THE PUBLIC BENEFITS OF THE PROPOSED FINANCING OF THE CONSTRUCTION AND RECONSTRUCTION OF LOCAL STREETS AND IMPROVEMENTS WITHIN THE CITY FROM PROCEEDS OF THE CARSON PUBLIC FINANCING AUTHORITY REVENUE BONDS, SERIES 2019 (MEASURE M & R STREET PROJECTS); (2) ADOPT RESOLUTION NO. 19-061 OF THE CITY COUNCIL OF THE CITY OF CARSON AUTHORIZING EXECUTION AND DELIVERY OF AN INSTALLMENT SALE AGREEMENT AND A BOND PURCHASE AGREEMENT, APPROVING THE FORM AND AUTHORIZING THE DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT AND APPROVING RELATED ACTIONS AND (3) ADOPT RESOLUTION NO. 19-01-CPFA OF THE GOVERNING BOARD OF THE CARSON PUBLIC FINANCING AUTHORITY APPROVING THE ISSUANCE AND SALE OF ITS REVENUE BONDS, SERIES 2019 (MEASURE M & R LOCAL STREETS PROJECT) TO ASSIST THE CITY OF CARSON IN THE FINANCING AND CONSTRUCTION OF CERTAIN LOCAL STREETS AND TRAFFIC SIGNALS, APPROVING THE FORM AND AUTHORIZING EXECUTION AND DELIVERY OF AN INDENTURE, AN INSTALLMENT SALE AGREEMENT AND A BOND PURCHASE AGREEMENT, APPROVING THE FORM AND AUTHORIZING THE DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT AND APPROVING RELATED ACTIONS (CITY COUNCIL AND PUBLIC FINANCING AUTHORITY)
Body
I. SUMMARY
On September 4, 2018, the City Council directed staff to solicit proposals for financial advisor, underwriter and disclosure counsel to provide services in connection with an anticipated bond issue to finance street improvements using Measure R and Measure M sales tax revenue.
On February 5, 2019, the City Council awarded contracts for those services to Harrell & Company Advisors (financial advisor), Piper Jaffray & Co. and Cabrera Capital (underwriters) and Nixon Peabody (disclosure counsel). Aleshire & Wynder acts as the City’s bond counsel for these bonds.
Staff directed the consultants to prepare the documents necessary for the approval of the Measure R and Measure M bonds to finance street improvements. The next step in the issuance process is for the City Council to hold a public hearing, and for the City Council and Carson Public Financing Authority Board to adopt resolutions authorizing the issuance of bonds within certain parameters and approving related documents.
II. RECOMMENDATION
Recommendation
TAKE the following actions:
ACTING AS THE CITY COUNCIL:
1. OPEN the public hearing, TAKE public testimony, CLOSE the public hearing.
2. WAIVE further reading and ADOPT Resolution No. 19-061 entitled “A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARSON, CALIFORNIA APPROVING PROCEEDINGS TO FINANCE THE RECONSTRUCTION AND CONSTRUCTION OF CERTAIN LOCAL STREETS AND TRAFFIC SIGNALS FROM THE PROCEEDS OF THE CARSON PUBLIC FINANCING AUTHORITY REVENUE BONDS, SERIES 2019 (MEASURE M & R LOCAL STREETS PROJECT), APPROVING THE FORM AND AUTHORIZING EXECUTION AND DELIVERY OF AN INSTALLMENT SALE AGREEMENT AND A BOND PURCHASE AGREEMENT, APPROVING THE FORM AND AUTHORIZING THE DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT AND APPROVING RELATED ACTIONS”
ACTING AS THE CARSON PUBLIC FINANCING AUTHORITY:
3. WAIVE further reading and ADOPT Resolution No. 19-01-CPFA entitled “A RESOLUTION OF THE GOVERNING BOARD OF THE CARSON PUBLIC FINANCING AUTHORITY APPROVING THE ISSUANCE AND SALE OF ITS REVENUE BONDS, SERIES 2019 (MEASURE M & R LOCAL STREETS PROJECT) TO ASSIST THE CITY OF CARSON IN THE FINANCING AND CONSTRUCTION OF CERTAIN LOCAL STREETS AND TRAFFIC SIGNALS, APPROVING THE FORM AND AUTHORIZING EXECUTION AND DELIVERY OF AN INDENTURE, AN INSTALLMENT SALE AGREEMENT AND A BOND PURCHASE AGREEMENT, APPROVING THE FORM AND AUTHORIZING THE DISTRIBUTION OF A PRELIMINARY OFFICIAL STATEMENT AND APPROVING RELATED ACTIONS”
Body
III. ALTERNATIVES
TAKE such other action as the City Council deems appropriate.
IV. BACKGROUND
In July 2008, LA County Metro’s Measure R was approved by Los Angeles County voters. In November 2016, Metro’s Measure M was approved. Both Measure R and Measure M included a new half-cent sales tax creating an ongoing source of funding for mobility improvements across Los Angeles County. Under Measure R and M, major road, transit and walking/biking projects are slated to be built in the next 40 years. Measure R and Measure M also includes funds that are returned directly to local cities for their own transportation projects and annual funding to ensure infrastructure is maintained.
Staff has developed a priority list and cost estimate for street improvements and traffic signal projects (Projects) that qualify for funding under Metro’s guidelines for both Measure R and Measure M. The list, included as Exhibit 7, shows total eligible Project costs of almost $31,000,000 to be completed over the next 20 years.
In the twelve months between January and December 2018, the City received a total of $2.4 million in combined Measure R and Measure M sales tax. In addition to using the annual funds to fund the Projects on a pay-as-you-go basis or to accumulate funds to finance the largest of the Projects, the City has the opportunity to leverage the Measure R and Measure M Revenues. The City can currently raise approximately $21 million for Project costs, providing enough funds to undertake the highest priority and largest Projects. Repayment of the financing will take place over the useful life of the Projects financed. Most of the Projects have a useful life of 15 years but the construction of Lenardo Drive has a useful life of 20 years. Approximately $12 million of the funds that can be raised are allocable to Projects with a 20-year useful life and $9 million is allocable to Projects with a 15-year useful life.
In addition to the useful life limitations for the financing of Projects, the City is also limited to raising funds that can be expended on Projects within 3 years of the issuance of bonds, and further by the amount of Measure R and Measure M sales tax that the City currently receives. The financing is of $21 million of Projects is designed to meet all these limitations.
However, if staff determines that some of the Projects cannot be completed within 3 years, the size of the bond issue may be reduced before the Bonds are sold. A final Project list of the Projects to be funded with the proceeds of the Bonds will be submitted to the City Council prior to the issuance of the Bonds, which is expected in June 2019.
Based on current market conditions and an assumed “A” credit rating for the Bonds, the par amount of the Bonds is estimated to be $18,300,000, issued with an original issue premium of $3,100,000, and will provide total funding of $21,400,000. This amount assumes that the bond issue will qualify to be insured by a bond insurer and that City will not be required to cash fund a reserve fund for the Bonds by purchasing an insurance policy in place of depositing bond proceeds (the costs of which is included in the costs of issuing the bonds).
The estimated par amount will be subject to prevailing market conditions at the time of sale. Therefore, a not-to-exceed par amount of $22 million is being requested to provide a reasonable cushion above the expected par amount should interest rates fluctuate, or if the bonds are priced without an original issue premium based on investor preference at the time of sale.
The estimated net proceeds of the Bonds are $21,000,000, which will be used to construct the $14.2 million of the highest priority projects and $6.8 million of the medium priority projects included on the Project list. Total use of bond proceeds, including estimated costs and contingency, is as follows:
|
|
|
|
Project Costs |
$21,000,000 |
|
Estimated Costs of Issuance |
400,000 |
|
|
|
|
Total Bond Proceeds |
$21,400,000 |
|
Original Issue Premium |
(3,100,000) |
|
Net Par Amount |
$18,300,000 |
Public Hearing:
Because the Bonds are being sold through the Authority, the City, as the jurisdiction where the facilities relating to the financing are located, is required to hold a public hearing before the Authority may approve a resolution authorizing the sale of the Bonds. The City Council must find that there will be significant public benefit from the issuance and sale of the Bonds by the Authority for the purpose of financing the street improvements.
“Significant public benefit” includes employment benefits from undertaking the Projects in a timely fashion, and more efficient delivery of local services associated with the Projects. The City and its citizens will significantly benefit from much needed capital improvements through the mitigating effects the construction and reconstruction of streets will have on the deteriorating public infrastructure. The Projects will provide proper and safe working local streets for both commercial and public uses. The City is also able to significantly benefit in costs savings through its leveraging of available revenue streams. Lastly, the Projects will require the continued employment of a labor force, and/or additional public works positions, to construct and complete the local streets.
“Significant public benefit” also includes a demonstrable savings in effective interest rate, bond preparation, bond underwriting, or bond issuance costs.
An alternative to the issuance of bonds by the Authority for the purpose of financing the Projects, is for the City to deliver “certificates of participation.” Certificates of participation are not bonds, but provide the investor with a fractional interest in the lease payments. Certificates of participation are generally not as popular among investors as Revenue Bonds for several reasons. The most important reason is thought to relate to the investor’s perceived ability to resell the certificates of participation in the secondary market should they need to divest of the security before maturity. Investors generally prefer an issue with “Bond” in the title for this purpose, even if the security is essentially the same - the City’s installment payment from the Measure R and Measure M Revenues. The issuance of Bonds by the Authority instead of certificates of participation by the City will generally result in more interested investors. This can reduce the effective interest rate on the financing.
Financing Approvals:
In order to authorize the issuance of the Bonds, the City Council and the Authority Board of Directors have been presented with resolutions for their consideration. The City Council resolution approves the form of the following documents in connection with the financing:
• Installment Sale Agreement between the City and the Authority;
• Bond Purchase Agreement between the City, Authority and the Underwriters;
• Preliminary Official Statement; and
• Continuing Disclosure Certificate (included as an appendix to the Preliminary Official Statement).
The City Council resolution also approves the distribution of the preliminary official statement relating to the Bonds and sale of the Bonds within certain parameters. These parameters are: (1) the par amount of the bonds cannot exceed $22,000,000, (2) the underwriters’ discount cannot exceed 0.42% of the par amount of the Bonds, (3) the annual Installment Payments cannot exceed $1,610,000, and (4) the final payment date of the Bonds cannot exceed June 1, 2039.
The Authority Board resolution approves the form of the following documents in connection with the financing:
• Indenture of Trust between the Authority and The Bank of New York Mellon Trust Company, as Trustee;
• Installment Sale Agreement;
• Bond Purchase Agreement; and
• Preliminary Official Statement.
The Authority resolution also approves the distribution of the preliminary official statement and sale of the Bonds within the same parameters described above.
The preliminary official statement was prepared by staff and the Municipal Advisor, with input from the City’s Bond Counsel and Disclosure Counsel. The City Council’s review of the description of preliminary official statement is requested prior to May 1, 2019.
V. FISCAL IMPACT
The estimated bond financing is approximately $18.3 million and will be secured by future Measure R sales tax revenues and Measure M sales tax revenues allocated to the City annually by the Los Angeles County Metropolitan Transportation Authority. The true interest cost (that is, the effective interest rate) for the Bonds is expected to be 3.35% based on current market conditions as of February 26 plus a contingency of 1/4% added to account for possible changes in market conditions before the Bonds can be issued. The total debt service is estimated to be $28,350,000, with 15 years of annual debt service of $1,605,000 beginning in FY 2019-20, and 5 years of annual debt service of $855,000 beginning in FY 2034-35.
All estimated costs associated with the Bonds will be paid out of proceeds from the issuance of the bonds as outlined below:
|
Bond Counsel |
$90,000 |
|
Disclosure Counsel |
15,000 |
|
Municipal Advisor |
71,500 |
|
Rating Fee |
25,000 |
|
Trustee |
6,500 |
|
Printing |
2,000 |
|
Total Fixed Costs |
$210,000 |
|
|
|
|
Bond Insurance Premium |
70,000 |
|
Surety Bond Premium |
40,000 |
|
Underwriting |
80,000 |
|
Total Issuance Expenses |
$400,000 |
In addition to debt service, the City will pay (from Measure R and Measure M Revenues) an estimated $60,000 in trustee administrative costs over the life of the issue as well as an estimated $70,000 for continuing disclosure annual reporting and new state debt annual reporting requirements.
VI. EXHIBITS
1. City Council Resolution No. 19-061 - Resolution Approving Financing of Street Improvements with Measure R and Measure M Revenues (Pgs. 8-12)
2. Public Financing Authority Board Resolution No. 19-01-CPFA - Resolution Approving Financing of Street Improvements with Measure R and Measure M Revenues (Pgs. 13-17)
3. Form of Preliminary Official Statement (Pgs.18-87)
4. Form of Indenture of Trust (Pgs. 88-144)
5. Form of Installment Sale Agreement (Pgs. 145-165)
6. Form of Bond Purchase Agreement (Pgs. 166-198)
7. Project List (Pgs. 199-200)
1.
Prepared by: City Manager's Office