Report to Mayor and City Council
Tuesday, July 16, 2024
Special Orders of the Day
SUBJECT:
Title
PUBLIC HEARING TO CONSIDER APPROVAL OF LEASE FINANCING BY THE CITY AND THE CARSON PUBLIC FINANCING AUTHORITY IN ORDER TO PROVIDE FINANCING FOR VARIOUS CAPITAL IMPROVEMENTS
CONSIDER RESOLUTION NO. 24-071 AUTHORIZING AND DIRECTING EXECUTION OF A SITE AND FACILITIES LEASE, A PROPERTY LEASE AND CERTAIN OTHER FINANCING DOCUMENTS AND DIRECTING CERTAIN RELATED ACTIONS IN CONNECTION WITH THE ISSUANCE BY THE CARSON PUBLIC FINANCING AUTHORITY OF ITS 2024 LEASE REVENUE BONDS (CITY COUNCIL)
CONSIDER RESOLUTION NO. 24-01-CPFA, APPROVING, AUTHORIZING AND DIRECTING EXECUTION OF CERTAIN FINANCING DOCUMENTS AND DIRECTING CERTAIN RELATED ACTIONS IN CONNECTION WITH THE ISSUANCE OF ITS 2024 LEASE REVENUE BONDS IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $92,000,000 (CARSON PUBLIC FINANCING AUTHORITY)
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I. SUMMARY
The City is underway on a number of large capital improvements throughout the City. Staff is recommending that these activities be financed with the issuance of Lease Revenue Bonds (“Lease Revenue Bonds”) by the Carson Public Financing Authority. This will allow the projects to be paid for over a longer term and preserve General Fund balance for other projects.
II. RECOMMENDATION
Recommendation
TAKE the following actions:
1. OPEN the Public Hearing, TAKE public testimony regarding the issuance of Lease Revenue Bonds, and CLOSE the Public Hearing.
2. WAIVE further reading and ADOPT RESOLUTION NO. 24-071, A RESOLUTION OF THE CITY OF CARSON CITY COUNCIL AUTHORIZING AND DIRECTING EXECUTION OF A SITE AND FACILITIES LEASE, A PROPERTY LEASE AND CERTAIN OTHER FINANCING DOCUMENTS AND DIRECTING CERTAIN RELATED ACTIONS IN CONNECTION WITH THE ISSUANCE BY THE CARSON PUBLIC FINANCING AUTHORITY OF ITS 2024 LEASE REVENUE BONDS (Exhibit B)
3. WAIVE further reading and ADOPT RESOLUTION NO. 24-01-CPFA, A RESOLUTION OF THE BOARD OF THE CARSON PUBLIC FINANCING AUTHORITY APPROVING, AUTHORIZING AND DIRECTING EXECUTION OF CERTAIN FINANCING DOCUMENTS AND DIRECTING CERTAIN RELATED ACTIONS IN CONNECTION WITH THE ISSUANCE OF ITS 2024 LEASE REVENUE BONDS IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $92,000,000 (Exhibit C)
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III. ALTERNATIVES
DO NOT ADOPT the proposed resolutions and PROVIDE additional direction to staff.
IV. BACKGROUND
This staff report includes the information and resolutions necessary to finance approximately $90,800,000 of various capital improvements throughout the City. The recommendation is for the City Council to conduct a Public Hearing and consider approval of lease revenue bonds (Bonds) by the Carson Public Financing Authority (Authority), via the attached resolutions (Exhibit B and Exhibit C).
Capital Improvement Projects
A description of the projects (Projects) anticipated to be funded by the Bonds follows:
• Emergency Operations Center - remodel and renovate existing EOC to accommodate 36 employees and/or local, state or federal partners. Bids were received in June and the contract award to Interior Plus, Inc. Anticipated Bond funding: $4,300,000.
• Citywide Street Improvements, Phases 2 and 3 - continue existing street construction and reconstruction program. Construction is ongoing and is expected to be complete within 12 months. Anticipated Bond funding: $32,000,000.
• Lenardo Drive - balance of funds required for the construction of roadway to serve the 157-acre redevelopment of the former landfill. Bids are anticipated to be received in July and the contract awarded in August. Anticipated Bond funding: $26,000,000.
• Foisia Park Improvements - renovations including new irrigation, sports field, lighting, restrooms, new turf (grass), amphitheater, playground surfacing and equipment. Bids are anticipated to be received in July and the contract awarded in August. Anticipated Bond funding: $4,250,000.
• Carriage Crest Park Improvements - renovation and enhancements to existing 5 acres, including community center, sports fields, restroom buildings and parking, with 10 acres to be added and developed with sports fields (synthetic turf) lighting, parking, and dog park. Bids are anticipated to be received in September and the contract awarded in October. Anticipated Bond funding: $6,400,000.
• Mills Park Improvements - balance of funds required for construction of building expansion for storage, office, mechanical room, and outside restrooms. Building improvements will include flooring, lighting, windows, and doors. Other improvements include new playground structures, picnic shelters, shade structures, splash pad and ADA pathway upgrades. Bids are anticipated to be received in September and the contract awarded in October. Anticipated Bond funding: $3,000,000.
• Anderson Park ADA Improvements - limited accessibility upgrades compliance, concrete reconstruction, asphalt and concrete pavement reconstruction, new curbs, steps, and added walkways. The improvements will enhance the entry pathway into the building and will comply with the requirements of the Americans with Disabilities Act. (ADA). Construction began April 2024 and construction completion will be in August 2024. Anticipated Bond funding: $2,000,000.
• City Hall Restrooms and Kitchenettes - renovation and upgrades to various outdated restrooms in City Hall and kitchenette areas. Anticipated Bond funding: $2,850,000.
• Community Center Improvements - construction of amphitheater, parking lot renovations, audio/visual upgrades, and installation of new coiling wall. Anticipated Bond funding: $10,000,000.
Expected funds for the Projects total $90,800,000.
The City, per the tax code, must expect to build all these projects by mid-2027 in order to finance them. City staff believe they can undertake the projects diligently and complete them within that timeframe.
Lease Revenue Bonds
Financing the construction costs of the Projects will be accomplished by the issuance of Lease Revenue Bonds by the Authority. The City will lease property from the Authority, and the City’s lease payments will secure the Authority Lease Revenue Bonds, as described further below.
This financing structure is used by cities throughout California for capital financing. The City originally formed the Carson Public Financing Authority in 1992 to assist in lease financings.
The financing requires a lease of assets from the Authority to the City. The City’s lease payments to the Authority are used as a revenue stream to secure repayment of the Lease Revenue Bonds. Because many of the Projects are not discrete properties, such as street reconstruction, the lease payments securing the Lease Revenue Bonds will be related to other facilities and properties owned by the City. The leased assets recommended for securing the City’s lease payments (and thus the Lease Revenue Bonds) include any or all of the following:
• Carson Event Center
• Public Works Corporate Yard
• Veteran’s Park
• Anderson Park
• Hemingway Park
• Carson Park
The combined insured value of the facilities plus the value of the land needs to be at least equal the principal amount of bonds issued, which was a factor in determining the assets selected for this financing. The total estimated value of the properties above is expected to exceed $92,000,000.
Method of Sale
The staff determined that it would be more cost effective to sell the Lease Revenue Bonds using a negotiated sale with one underwriter. The staff negotiated an underwriting proposal with Ramirez & Co., Inc., which was approved by the City Council on May 7, 2024.
Public Hearing
Because the Lease Revenue Bonds are being sold through the Authority, the Government Code requires the City Council, as the governing body of the jurisdiction where the facilities being financed are located, to hold a public hearing and make certain findings before the Authority may approve a resolution authorizing the sale of the Lease Revenue Bonds. The finding being made is that significant public benefits will arise from the Authority’s issuance of the Lease Revenue Bonds to fund the capital improvements, including demonstrable savings in effective interest rate, bond preparation and bond issuance costs achieved by consolidating the assets being leased.
Authorizing Resolutions
The resolution of the City Council approves the parameters of sale and documents required for the issuance of the Lease Revenue Bonds. The resolution authorizes the City Manager and Finance Director to sell the Bonds to the Underwriter, in an amount not-to-exceed $92,000,000, at an interest rate not-to-exceed 6% and with an underwriter’s discount not-to-exceed 0.5% of the par amount of the Bonds. This resolution also approves the form of the following documents:
• Preliminary Official Statement (POS) (Exhibit D);
• Property Lease between the City and the Authority (Exhibit E);
• Site and Facility Lease between the City and the Authority (Exhibit F);
• Continuing Disclosure Certificate (appended to POS); and
• Bond Purchase Agreement between the City, the Authority and the Underwriter (Exhibit G).
The preliminary official statement was prepared by staff and the Municipal Advisor, with input from the City’s bond counsel, disclosure counsel and underwriter. The City Council’s review of the sections of the preliminary official statement describing the City and the City’s financial information is requested and any modifications communicated to staff. The preliminary statement must be correct in all material respects and may not leave out material information about the city’s finances, projects or anything a reasonable investor would want to know when buying the Lease Revenue Bonds.
The resolution of the Authority Board also approves the same parameters of sale of the Bonds. This resolution also approves the form of the documents listed above to which the Authority is a party, as well as the Indenture between the Authority and The Bank of New York Mellon Trust Company, N.A, as Trustee (Exhibit H). The Resolution authorizes the officers of the Authority to sign the documents.
V. FISCAL IMPACT
Based on current market conditions, the par amount of the Bonds is estimated to be $84,600,000, issued with an original issue premium of $7,543,000, and will provide total funding of $92,143,000. The proceeds from the Bonds are estimated to be used as follows:
ESTIMATED USE OF BOND PROCEEDS
Improvements 90,800,000
Underwriter Discount 423,000
Bond Insurance 520,000
Costs of Issuance* 400,000
Total Costs 92,143,000
Original Issue Premium (7,543,000)
Par Amount of Bonds Issued $84,600,000
*Fixed costs paid from proceeds of the Bonds for Bond Counsel, Municipal Advisor, Disclosure Counsel, Trustee, Rating Agency, title insurance and printing.
An original issue premium (as shown in the table above) is generated when investors in tax-exempt bonds want to hedge against future higher interest rates and require a high stated interest rate (such as 5.0%), but price the Bonds to yield a lower current market interest rate (such as 3.0%) and therefore pay the Authority more than 100% of the face value of the Bonds, resulting in a lower par amount of Bonds required to be issued. The lower par amount is offset by a higher interest rate, so this pricing method has relatively little impact on the total debt service that the City will pay on the Bonds compared to if they were priced at 100% of the face value.
Based on current interest rates, the effective interest rate for the Bonds is expected to be 4.20% based on a 30-year maturity of the Bonds. A 25-year option is available with an approximately $500,000 increase in the annual payment, which would result in a $16M interest savings if this option is selected. As noted, the par amount of the Bonds will be subject to prevailing market conditions at the time of sale. Therefore, the City is requested to approve a not-to-exceed par amount of $92,000,000 for the Bonds 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 amount of the Bonds issued will only be the amount necessary to finance $90.8 million of the proposed capital improvements, and pay the other costs as shown above.
The sale date of the Bonds, when the interest rate will be locked in, is expected to be July 31, 2024.
Staff and the Municipal Advisor have submitted the bond issue to Standard & Poor’s Rating Agency for a credit rating. The City’s current General Fund lease credit rating is A+. Bond insurance is anticipated to be purchased for all or a portion of the Bonds, which will raise the Bonds rating to AA and result in a lower interest cost than a stand-alone issue with no bond insurance.
The new debt service beginning in FY 2024-25 is anticipated to be $5,950,000 annually based on a 25-year repayment. The Bonds contain a provision that they can be called for redemption and paid down or refinanced after 10 years.
VI. EXHIBITS
1. Exhibit A - Public Hearing Notice
2. Exhibit B - City Resolution
3. Exhibit C - Carson Public Financing Authority Resolution
4. Exhibit D - Preliminary Official Statement
5. Exhibit E - Property Lease
6. Exhibit F - Site and Facility Lease
7. Exhibit G - Bond Purchase Agreement
8. Exhibit H - Indenture
Prepared by: William Jefferson, Finance Director and City Manager's Office