TO:

Honorable mayor and city council and city of san jose financing authority board

FROM:

Scott P. Johnson

SUBJECT:

See Below

DATE:

July 30, 2003

Council District:  7

SUBJECT:     APPROVAL OF THE SALE AND ISSUANCE OF BONDS AND RELATED BOND DOCUMENTS FOR CITY OF SAN JOSE FINANCING AUTHORITY LEASE REVENUE BONDS, SERIES 2003A (CENTRAL SERVICE YARD REFUNDING PROJECT)

Recommendation

a.       Adoption of a resolution of 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 of 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.

Background

As part of the Finance Department's annual work plan, the Department reviews all of the City's outstanding debt for opportunities to reduce annual debt service obligations of the City.  Given the continued favorable interest rate environment, staff is recommending a refunding of the City of San José Financing Authority Lease Revenue Bonds, Series 1993D (Central Service Yard Acquisition and Improvement Project) (the “Prior Bonds”).

 

The refunding will provide two substantial benefits to the City:  economic savings and release of a pledged asset.  Economic savings result because, based on current interest rates, the true interest cost expected on the Refunding Bonds is 4.38%, significantly lower than the 5.85% true interest cost of the Prior Bonds.  The reduction in interest cost is anticipated to provide net present value savings of approximately $971,000, or 4.50% of the outstanding principal on the Prior Bonds.  This net present value savings translates to annual savings ranging between approximately $78,000 and $83,000.

 

The second benefit of the refunding will be the release of the Mabury Yard as an asset pledged to the financing.  When the Prior Bonds were sold in 1993, the Central Service Yard did not provide sufficient asset value to cover both the debt service payments and the cost of off-site toxic remediation at the Main Yard.  To make up the shortfall in value, the City included the Mabury Yard as a pledged asset.  Because the Central Service Yard now has sufficient value to cover the debt service payments on the Refunding Bonds, the Mabury Yard can be released.  The asset release restores the City’s ability to sell or lease the Mabury Yard, or use it for collateral on another financing.

Analysis

This section of the report provides a summary of the proposed refunding plan, a description of the bond documents, a discussion of financing team participants, and the financing schedule.

Summary of Proposed Refunding Plan

The Refunding Bonds will be issued pursuant to the Trust Agreement (the “Trust Agreement”) (described below) and the Marks-Roos Local Bond Pooling Act of 1985.  The Refunding Bonds will provide a current refunding of the Prior Bonds.  A current refunding is a refunding in which the refunding bonds are issued not more than 90 days before the redemption date upon which the prior bonds will be redeemed.  The proceeds used to refund the Prior Bonds will be held in trust in an escrow fund with the trustee until the redemption date.  The current financing schedule calls for the Refunding Bonds to close on September 18, 2003, and the Prior Bonds to be redeemed on October 20, 2003.

 

The Refunding Bonds will be sold on a competitive bid basis, and the  Financial Advisor for the City and the Authority, RBC Dain Rauscher, will oversee the competitive sale.  RBC Dain Rauscher may wish to submit a bid through the competitive process.  To permit the firm to do so, the resolution to be adopted by the Authority must specifically authorize RBC Dain Rauscher to submit a bid.

 

The Refunding Bonds will be sold to the underwriter(s) presenting the best bid based on the lowest true interest cost, not to exceed six percent (6%) per year.  Currently, the financing schedule calls for the competitive sale of the bonds to occur on September 9, 2003.

 

A summary of the estimated sources and uses of Bond funds is presented below:

 

City of San José Financing Authority

Lease Revenue Bonds, Series 2003A

(Central Service Yard Refunding Project)

Estimated Sources and Uses of Funds*

 

 

Sources of Funds

 

      Par Amount of Bonds

$21,680,000

      Transfer from Prior Issue Debt Service Reserve Fund

1,772,863

      Reoffering Premium

607,572

            Total Sources

$24,060,435

Uses of Funds

 

      Deposit to Escrow Fund

$22,032,000

      Deposit to Debt Service Reserve Fund (DSRF)

1,694,750

      Costs of Issuance

203,605

      Total Underwriter’s Discount (0.60%)

130,080

            Total Uses

$24,060,435

* Preliminary, subject to change.

 

 

The City will obtain ratings from Moody’s, Standard & Poor’s and Fitch.  It is anticipated the ratings will be in the AA (double A) category.  The City will also qualify the Refunding Bonds for bond insurance by one or more of the bond insurers: Ambac, FSA, MBIA and XL Capital Assurance.  Insurers that have obtained approval from their respective credit committees by August 15, 2003, will be available to insure bonds in the competitive sale process by working with the underwriting firms bidding on the Refunding Bonds.  The choice of whether or not to purchase bond insurance will be left to the bidders, and the cost of any insurance premium will be included in the underwriter’s discount.

 

Concurrent with the delivery of the Refunding Bonds, the City and the Authority will issue Irrevocable Refunding Instructions (the “Instructions”) to U.S. Bank National Association (“U.S. Bank”), the trustee for the Prior Bonds.  The Instructions will direct U. S. Bank to establish a special fund to be known as the “Escrow Fund” and to deposit the proceeds from the sale of the Refunding Bonds in the Escrow Fund.  The Escrow Fund will be used to redeem the outstanding Prior Bonds on October 20, 2003.  Amounts deposited into the Escrow Fund will be invested either in State and Local Governments Securities ("SLGS") issued by the U.S. Treasury or in other eligible federal securities.

Bond Financing Documents

There are a number of bond financing documents which require Council and/or Authority approval to proceed with the refunding.  These documents will be filed with the City Clerk on or about August 11, 2003.  The major bond documents are described below.  In addition to these documents, the City and/or the Authority will be required to execute documents, such as the Irrevocable Funding Instructions described above, which are necessary or advisable in order to cause the issuance of the Refunding Bonds.

 

Official Statement.  The Official Statement, or prospectus, is being prepared for the City and the Authority by Jones Hall, bond counsel/disclosure counsel.  The Director of Finance and the Treasurer of the Authority  will execute this document.  The Official Statement generally discloses material information on the Central Service Yard and the bond issue, how the Refunding Bonds will be repaid, bond insurance (if any) for the Refunding Bonds, and a description of the refinancing structure and the financial condition of the City.  Investors will use this information to evaluate the credit quality of the Refunding Bonds.

 

A copy of the draft Preliminary Official Statement, in substantially final form, will be distributed to the City Council/Authority Board under separate cover on or about August 11, 2003.  The Finance Department, General Services Department and the City Attorney's Office have carefully reviewed the information contained in the Preliminary Official Statement and believe it to be accurate and complete in all material respects.

 

If any Council member or Authority Board member has any personal knowledge that any of the material information in the Official Statement is false or misleading, the Council member/Board member must raise these issues prior to approval of the distribution of the document. City staff, bond counsel, and the financial advisor will be available at the City Council/Authority Board meeting on August 19, 2003, to address any questions, issues and/or concerns.

 

Trust Agreement.  The Trust Agreement is between the City of San José Financing Authority and U. S. Bank, as the trustee (the “Trustee”).  Proceeds of the Refunding Bonds will be deposited and expended pursuant to the Trust Agreement.  The Trust Agreement pledges the lease payments received from the City to the repayment of the bonds, sets forth terms of the Refunding Bonds, establishes the funds and accounts to be held by the Trustee, sets forth the guidelines for the administration, investment and treatment of investment earnings generated by each fund and account and contains the responsibilities and duties of the Trustee and the rights of the bondholders.  The Trust Agreement obligates the Authority to pay compensation to the Trustee for services rendered under the Trust Agreement.

 

Site Lease.  The Site Lease is between the City of San José, as lessor, and the City of San José Financing Authority, as lessee.  The Site Lease sets forth the respective terms and conditions of the lease of the Central Service Yard from the City to the Authority.

 

Project Lease.  The Project Lease is between the City of San José Financing Authority, as lessor, and the City of San José, as lessee.  The Project Lease sets forth the respective terms and conditions of the lease of the Central Service Yard from the Authority to the City.  The Project Lease obligates the City to pay the Authority rental payments sufficient to cover debt service on the Refunding Bonds.

 

Notice Inviting Bids.  This document describes the competitive bidding process, the bidding parameters governing the submission of bids by potential underwriters for the Refunding Bonds, and the basis for awarding the Bonds to an underwriter.  The Notice Inviting Bids is provided to potential bidders with the Official Statement.  The City’s bond counsel will publish a notice of intention to sell the Bonds, in the form on file with the City Clerk, in “The Bond Buyer,” a financial publication generally circulated throughout the State of California, at least 15 days prior to the date for submission of bids.

 

Continuing Disclosure Agreement.  This Agreement is between the City and the dissemination agent, also U. S. Bank.  This document is executed for the benefit of the bondholders and obligates the City to immediately disclose to the marketplace the occurrence of any material events that are required to be disclosed by federal Securities Laws.  It also requires the City to prepare an annual report to the marketplace, the contents of which are outlined in the Continuing Disclosure Agreement.  These actions are taken in accordance with Rule 15c2-12(b)(d) adopted by the Securities and Exchange Commission.

Financing Team Participants

The financing team participants consist of:

 

Financial Advisor:

RBC Dain Rauscher

Bond and Disclosure Counsel:

Jones Hall, A Professional Law Corporation

Trustee:

U.S. Bank

Financing Schedule

The Finance Department, together with the City Attorney's Office, is proceeding on an aggressive schedule to meet the necessary bond call notice deadline of September 19, 2003, to notify bondholders of the Prior Bonds of the October 20, 2003, bond call.  The key dates to meet this deadline are highlighted below:

 

Council approval of the financing and related documents

August 19, 2003

Print and mail Preliminary Official Statement

August 21, 2003

Competitive sale

September 9, 2003

Bond Closing

September 18, 2003

Bond call of Prior Bonds

October 20, 2003

Coordination

This staff report has been prepared by the Finance Department in coordination with the City Attorney’s Office.

Cost Implications

Costs associated with the refunding will be paid from bond proceeds.  The financial advisor and bond counsel work on a contingency basis and are only paid upon the successful sale and close of the bonds.  This action is consistent with the Mayor’s Budget Strategy adopted by the City Council on February 4, 2003, under both General Principles and Economic Recovery.

CEQA

Not a project.

 

SCOTT P. JOHNSON

Director, Finance Department

Treasurer, City of San José Financing Authority