JOINT CITY OF SAN JOSÉ
Present: Council Members - Campos, Chavez, Chirco, Cortese, Dando, Gregory, LeZotte, Reed, Williams, Yeager; Gonzales.
Absent: Council Members - None.
GENERAL GOVERNMENT
2. Approval of actions related to the sale and issuance of bonds.
(a) Adoption of a resolution by the Authority Board:
(1) Authorizing the issuance of City of San José Financing Authority Lease Revenue Bonds, Series 2003A (Central Service Yard Refunding Project) (the “Refunding Bonds”), in an aggregate principal amount not to exceed $23,000,000, in connection with the refinancing of certain public capital improvements of the City of San José; and
(2) Authorizing and directing execution of a Trust Agreement and certain financing documents; approving an Official Statement; authorizing the competitive sale of the Refunding Bonds and authorizing related actions with respect to the issuance and sale of the Refunding Bonds, including authorizing the Treasurer to award the Refunding Bonds to the lowest responsive bidder in accordance with the Notice Inviting Bids.
(b) Adoption of a resolution by the City Council:
(1) Approving, authorizing, and directing execution of certain financing documents and directing certain related actions in connection with the refinancing of certain public capital improvements of the City of San José.
CEQA: Not a project. (Finance)
Documents Filed: (1) Memorandum from Director of Finance Scott P. Johnson, dated July 30, 2003, recommending adoption of said resolution of the Authority Board, and said resolution of the City Council. (2) Supplemental memorandum from Director of Finance Scott P. Johnson, dated August 12, 2003, transmitting the Preliminary Official Statement and its Appendix A.
Discussion/Action:
Director of Finance Scott P. Johnson presented an update on the Staff report,
based on the general interest rate market, which estimated that there would be
a net value savings on this financing of a little over $900,000 based on the market
as of August 18, 2003, Staff is projecting the net value saving will be
slightly over $.5 million and that is about 2.4%. He stated Council has a
policy of at least a 3% net present value savings, however Staff is
recommending approval of the financing given that this is a current refunding,
and will not miss any future opportunities for refunds. He pointed out that
originally Staff pledged the Mayberry Yard as an asset when this project was
financed before. He stated since Council will be modifying the fiscal year
2003-04 budget, Staff will be required to amend Appendix A in our Preliminary
Official Statement. He explained since the Preliminary Official Statement will
reflect those changes after Council takes those actions, in regard to an update
on the rating status stated in July Staff made presentations to the three
national rating agencies and this morning received the last rating from
Standard Reports. He stated all three national rating agencies were very
impressed with the action that this Council has taken in response to the
economic conditions, and have confirmed the City of San José’s excellent credit
rating positively. Mayor Gonzales acknowledged Director Johnson, the Finance
office, and City Administration for keeping the City of San José’s credit
rating as high as it has been through a very difficult time. Speaking on the
issue were Dale Warner, and William Garbett. Upon motion by Council Member
Chavez, seconded by Council Member Gregory, and carried unanimously, Resolution
No. SJFA-60, entitled: “A Resolution of the City of San José Financing
Authority Authorizing the Issuance of Lease Revenue Bonds in the Initial
Aggregate Principal Amount of Not To Exceed $23,000,000 in Connection with
Refinancing Certain Public Capital Improvements of the City, Authorizing and
Directing Execution of a Trust Agreement and Certain Financing Documents,
Authorizing the Competitive Sale of Bonds, Approving an Official Statement, and
Authorizing Other Related Actions”, and Resolution No. 71710, entitled: “A Resolution
of the City of San José Approving, Authorizing and Directing Execution of
Certain Financing Documents and Directing Certain Related Actions in Connection
with Refinancing of Certain Public Capital Improvements”, were adopted. Vote:
11-0-0-0.
RECESS/RECONVENE
The City Council recessed at 3:19 p.m. from the Joint City Council/Redevelopment Agency Board/Financing Authority Meeting, and reconvened in Joint Session with the Redevelopment Agency at 3:22 p.m. to consider Item 3 of the City of San José Financing Authority Agenda in conjunction with Redevelopment Agency Item 7.2 in the Council Chambers, City Hall.
3. Adoption of a resolution by the City of San José Financing Authority approving in substantially final form, the Bond Purchase Agreements with the Agency and JP Morgan Securities Inc., for the Series A Bonds and with the Agency and Bank of America Securities LLC for the Series B Bonds and authorizing the Authority's officers, agents, and employees to take such actions and execute such documents necessary and desirable to accomplish issuance of the Bonds. (Redevelopment Agency)
(Deferred from 8/12/03 – Item 2)
Documents
Filed: See Joint City of San José Redevelopment Agency Minutes, Item 7.2,
dated August 19, 2003.
Discussion/Action: This item
was heard in conjunction with 7.2 of the Redevelopment Agency (RDA). Council
Member Reed asked if this proposed debt service would be $108 million per year.
Redevelopment Agency Director of Finance David Baum replied as indicated in the
Staff report, the senior debt of the RDA, the tax allocation bonds, produces
about $100 million of annual debt service. He stated there were previously $59
million of variable rate bonds that are subordinate to the senior bonds that
produced, assuming a 5% interest rate, about $4 million, and similarly the $60
million as proposed would generate $4 million per year at a 5% interest rate,
and together that equals $108 million. Council Member Reed asked how does the
City pay the County’s share of the tax increment, what happens if the tax
increment actually goes down next year instead of staying flat, what will the
City do if the State decides to take another $5 million from the City similar
to January 2002, or another $17 million next year in July 2004. He pointed out
he did not see any reserves in the math calculation, and asked how will the
City deal with those unpleasant contingencies that could happen. Director of
Finance Baum replied Staff has assumed the tax increment would be flat, and
left out the additional revenues the RDA receives from other assets such as
operating agreements for parking facilities, leases, and that adds to the
revenue that is available to make payments to the County, to make payments for
the operating budget, but it would be difficult without other sources of
revenue to pay the County payment and the Agencies’ other operating expenses
solely from tax increment but with other sources such as financing proceeds and
these other revenues, however it is possible. Council Member Reed asked how
much other additional revenues amount to, not including the borrowing or
financing proceeds, just the leases and miscellaneous. Director of Finance Baum
estimated about $2 to $3 million per year that the City could count on, however
these revenues tend to be volatile depending upon whether assets are sold, for
example, the Fairmont Hotel contributed over $1 million to the RDA’s budget
because of participations that the Redevelopment Agency has in the Fairmont
Hotel. He stated there are other revenue sources that are somewhat volatile
that Staff does not typically count as ongoing revenue but there are sources
that can be made available to make payments for ongoing operations.
Council Member LeZotte asked assuming that the tax increment is flat, is Staff assuming flat at the previous $187 million or flat at the $168 million. Director of Finance Baum replied the tax increment in the adopted June 2003-04 was projected to be $187 million, and with the 10% drop and incremental assessed value, Staff is looking at $168 million of tax increment for the current year. He stated based on that figure, Staff has used the same tax increment projection looking forward for a working version of the budget model to be flat at $168 million for a couple of years, then increase at the 3% per year. Council Member LeZotte commented with regard to this request for this bond issuance, what Council is approving is authorizing the issuance, and how this money will be spent will be part of the discussion on August 26, 2003 and moving forward, and Redevelopment Agency Executive Director Susan Shick replied that is correct.
Council Member Williams asked along the line of sales, when does Staff expect to sell the bonds. Director of Finance Baum replied the schedule contemplates the sale next week. Council Member Williams asked if the City would start paying immediately once the bonds are sold, and is it necessary to sell the bonds next week. Director of Finance Baum replied when Staff’s budget was presented in June, Staff contemplated issuing $180 million of bonds in the current fiscal year and this would be one third of what was to be issued for the entire year. He stated with the drop in tax increment Staff had to adjust its spending plan but there are ongoing projects that could desperately use the money from the sale next week. Council Member Williams replied he was considering the cost, and maintaining the bonds after they are sold, and the question is if Staff delays, then money can be saved. Director of Finance Baum stated when the RDA sells the bonds, the current interest rates are about 1% on the bonds, and the RDA can invest the money and earn an amount equal to that interest rate in the market. He stated the ongoing cost of funds is probably zero, based on the fact that until those monies are spent, they generate an interest return to the RDA as well. Council Member Williams asked if Staff will generate enough to pay off the people who manage the bonds, and Director of Finance Baum replied not immediately, but over time Staff expects a full return on the issuance of the bonds.
Council Member Williams expressed concern about the urgency of selling the bonds. Director of Finance Baum replied that Staff has a letter of credit from JP Morgan, and there is no condition attached to that letter of credit as to whether it would expire if Staff does not act in a certain matter of time. Council Member Williams commented that, based on the fact that Council will be reviewing the entire package on August 26, 2003, it would save a miniscule amount of money, and it is just the idea of trying to do all that the City can to preserve all possible resources. He stated, in regard to the State, what assumptions has Staff made as to what the State plans to request of the City, and how did Staff arrive at being able to meet the obligations. Director of Finance Baum replied the State passed legislation last year that required the RDA to make an ERAF payment of $5.2 million, and that occurred in May 2002, and in January 2003, the Governor proposed a long term takeaway of $250 million per year from Redevelopment Agencies. He stated the Assembly and the Senate eventually came up with their own proposals, the Senate version was $250 million one time for this year, and the Assembly version was $135 million statewide one time. He commented that it turns out, today the Senate has validated the Assembly version of a one time takeaway of $135 million statewide, and for City budgeting purposes, that would be approximately $10 million shifted from the RDA to ERAF this year. He stated if Staff is able to make the payment as last year, the City would make the payment on behalf of the RDA and RDA would then reimburse the City for a capital project that is beneficial to the Redevelopment area. Council Member Williams stated he supported selling the bonds for $60 million but requested Staff to wait awhile.
Council Member Chirco asked when the letter of credit from JP Morgan was received, and Director of Finance Baum replied the letter of credit review was finished in Spring 2003. He stated when Staff was putting together the budget, JP Morgan was willing to provide a letter of credit based upon Staff’s request, and after the drop in tax increment that was announced by the assessor in July, Staff was able to reconfirm JP Morgan’s commitment to provide the letter of credit. He stated this has been an ongoing process for a couple of months. Council Member Chirco asked in regard to the letter of credit from JP Morgan, would the City would be going out to bond the $60 million due to the budget conversations at this time. Director of Finance Baum replied it was contemplated in Staff’s budget proposed on May 1 that Staff would be issuing $180 million net bond proceeds for the coming fiscal year. Council Member Chirco stated the letter of credit from JP Morgan was based on the premise that Staff would be bonding $60 million to cover the letter of credit, in order to reimburse them. She expressed concern that Staff had a conversation with large banking institute that has extended a letter of credit, and if Staff does not bond in the timeline that was presented to them, that does not reflect well on the City as a financial agency. Director of Finance Baum David stated early on in the process Staff did plan on a date in early August, and that date turned out to be last Tuesday, which was deferred until this Tuesday. Council Member Chirco declared she could not support this by delaying the sale of the bonds, it does not save money, the fees will be incurred at one time or another, and Staff can invest the money, recover the interest that the City would be paying. Council Member Chirco moved approval of the Staff recommendation. Vice Mayor Dando seconded the motion.
Council Member Reed stated he would not support the motion, and though at the minimum, Council should wait and see what the budget looks like next week. He stated there are several different scenarios, and few look promising. He stated the City could be operating on absolutely no reserve, and until which scenario the City is likely to be facing in next year’s budget and over the 5 year budget, stated he is not going to be supportive of any more bond issuance until that is clear.
Mayor Gonzales commented that Council begins that discussion next Tuesday, and the following Tuesday, hopefully he will bring back to the Council his recommendations on how the City should proceed and emerge from this crisis that was begun by the State Legislator. Mayor Gonzales stated he is grateful that the Assembly side of the State Legislature won out over the State Senate side, and the one time take will not be as much as anticipated. He pointed out the only thing that is between now and two weeks from now, is the City has to figure out a way to cut $300 million from the RDA budget, and by delaying this decision it does not make it any easier. He stated support of the motion. On a call for the question, the motion carried, and Resolution No. SJFA-61, entitled: “A Resolution of the City of San José Financing Authority Authorizing the Execution and Delivery of a Bond Purchase Agreement By and Among the Redevelopment Agency of the City of San José, the City of San José Financing Authority and J.P. Morgan Securities Inc. and Execution and Delivery of a Bond Purchase Agreement By and Among the Redevelopment Agency of the City of San José, the City of San José Financing Authority and Banc of America Securities LLC”, was adopted. Vote: 9-2-0-0. Noes: Reed, Williams.
ADJOURNMENT
The San José Financing Authority
Board adjourned at 3:40 p.m.
RON GONZALES, MAYOR
ATTEST:
PATRICIA L. O’HEARN, CITY CLERK