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17-1017_BEST BEST & KRIEGER_Agenda Report_E5TO : FROM : SUBMITTED BY: DATE: City of San Juan Capistrano Agenda Report Honorable Mayor and Members of the City Council ~njamin Siegel, City Manager Ken Al-lmam, Chief Financial OfficerP October 17, 2017 10/17/2017 E5 SUBJECT: Consideration to Refinance 2009 Revenue Certificates of Participation in Order to Reduce Annual Interest Costs RECOMMENDATIONS : 1. Direct staff to pursue the opportunity to refinance the 2009 Water Revenue Certificates of Participation in order to reduce annual interest costs paid by the Water Fund; and, 2. Direct the City Manager to engage the same financing team that was used to refund the City's Measure Y Open Space Bonds in March 2017. EXECUTIVE SUMMARY: The liabilities of the Water Fund include $8 .8 million in Revenue Certificates of Participation ("Water Bonds") that were in issued in 2009. The interest rate paid on the Water Bonds is 5.0%. Current market interest rates provide an opportunity to refinance this debt at a significantly lower interest rate (3.25% or lower). This will reduce the amount paid by the Water Fund for interest by approximately $150,000 per year through 2034, the scheduled date of maturity of the Water Bonds. Locking in a lower interest rate at this time will also facilitate the potential transfer of the water utility system to another agency, should that be the ultimate outcome selected by the City Council once the Municipal Services Review is complete. For this transaction, staff plans to use the same financing team that successfully refunded the City's Measure Y Open Space Bonds in March 2017. DISCUSSION/ANALYSIS: On April 14, 2009, the City issued $11.1 million of debt in the form of Certificates of Participation in order to finance capital improvements to the City's water utility system. This debt is secured by the net revenues of the City's Water Fund and is recorded as a City Council Agenda Report October 17, 2017 Page 2 of 3 liability of that fund. The interest rate paid on the Water Bonds is 5.0%. The outstanding balance on the Water Bonds is $8.8 million. As a result of dramatic declines in interest rates since 2009, the City has an opportunity to advance refund the Water Bonds at an interest rate of 3.25% or lower. This will reduce the debt service payments made by the Water Fund by approximately $150,000 per year without extending the maturity date. This refunding would be a private placement. This would allow the transaction to be completed at a reduced cost and within the tight 60 day window that the City has to refinance this debt before the next anticipated increase in interest rates. In a private placement, the City's financing team would send a solicitation of bids ("term sheets") to 30 banks in order to receive the lowest rate possible on this financing. It is expected that the interest rate received by this process will be less than 3.25%, possibly as low as 3%. The interest rate resulting from this competitive bidding process would be locked on November 10, 2017, and be in force for sixty days. Because of the short time frame available to complete this transaction, staff recommends that the City Council direct the City Manager to engage the same financing team that was recently used to successfully refund the 2009 Measure Y Open Space General Obligation Bonds earlier this year. This team consisted of Fieldman Rolapp as Financial Advisor, Raymond James as Placement Agent, and Best Best & Krieger as Bond Counsel. The successful completion of this refunding would also facilitate the potential transfer of the water utility system to another public agency should that be the outcome of the Municipal Services Review being conducted by the Orange County Local Agency Formation Commission. The bond documents would contain language that provides for the assignment of this obligation to any successor in interest that acquires the water utility system. This would allow the succeeding agency to assume responsibility for this debt without issuing its own bonds in what is likely to be a less favorable environment for debt issuance due to the increases in interest rates that are anticipated for 2018. Pending approval of the recommended action, staff plans to bring the bond documents for approval at the City Council meeting scheduled for December 5, 2017. The refunding bonds would be issued on December 15, 2017. FISCAL IMPACT: The refinancing of the Water Bonds would reduce the amount of interest paid by the Water Fund by approximately $150,000 per year through 2034, the scheduled date of maturity of the Water Bonds. ENVIRONMENTAL IMPACT: Not applicable . City Council Agenda Report October 17, 2017 Page 3 of 3 PRIOR CITY COUNCIL REVIEW : Not applicable. COMMISSION/COMMITTEE/BOARD REV IEW AND RECOMMENDATIONS : Not applicable . NOTIFICATION: Utilities Commission ATTACHMENTS: Not applicable.