1 STAFF REPORT
______
________________________________________________________________ DATE
: June 4, 2024
TO: J
ustin Hess, City Manager
FR
OM: Mandip Kaur Samra, General Manager, Burbank Water and Power VIA: Joseph Lillio, Chief Financial Officer
BY: Stela Kalomian, acting Financial Planning and Risk Manager SUBJ
ECT: Adoption of Resolutions Authorizing the Issuance of Water Refunding Bonds, Series of 2024, and Electric Refunding Bonds, Series of 2024 _____________________________________________________________________________
RECOMMENDATION
1. Adopt A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $60,000,000 PRINCIPAL
AMOUNT OF ITS BURBANK WATER AND POWER ELEC TRIC REVENUE REFUNDING BONDS, SERIES OF 2024; APPROVING AND AUTHORIZING THE REFUNDING OF CERTAIN OUTSTANDING BONDS; APPROVING THE
ENGAGEMENT OF PROFESSIONAL SERVICES IN CONNECTION THEREWITH;
APPROVING AND AUTHORIZING THE EXECUTION OF AN EIGHTH
SUPPLEMENTAL ELECTRIC REVENUE BOND INDENTURE; APPROVING THE
FORM AND AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT FOR USE IN CONNECTION WITH THE SALE OF SUCH BONDS; APPROVING THE
FORMS OF AND AUTHORIZING CERTAIN DOCUMENTS IN CONNECTION THEREWITH; AND AUTHORIZING CERTAIN OTHER ACTIONS RELATING TO THE FOREGOING (Attachment 1).
2. Ado
pt A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK
AUTHORIZING THE ISSUANCE OF NOT TO EXCEED $30,000,000 PRINCIPAL
AMOUNT OF ITS BURBANK WATER AND POWER WATER REVENUE
REFUNDING BONDS, SERIES OF 2024; APPROVING AND AUTHORIZING THE REFUNDING OF CERTAIN OUTSTANDING BONDS; APPROVING THE
ENGAGEMENT OF PROFESSIONAL SERVICES IN CONNECTION THEREWITH;
APPROVING AND AUTHORIZING THE EXECUTION OF A FOURTH
SUPPLEMENTAL BOND INDENTURE; APPROVING THE FORM AND
AUTHORIZING THE DISTRIBUTION OF AN OFFICIAL STATEMENT FOR USE IN CONNECTION WITH THE SALE OF SUCH BONDS; APPROVING THE FORMS OF AND AUTHORIZING CERTAIN DOCUMENTS IN CONNECTION THEREWITH; AND
WATER AND
POWER
2 AUTHORIZING CERTAIN OTHER ACTIONS RELATING TO THE FOREGOING (Attachment 2).
BACKGROUND
In March 2010, Burbank Water and Power (BWP) issued Electric Revenue Bonds, Series of 2010B , in the amount of $52,665,000. The full amount of $52,665,000 is currently outstanding. In November 2010, BWP issued Water Revenue Bonds, Series of 2010B, in the amount of $27 ,945,000, of which $27,095,000 is currently outstanding. Both bonds were issued as Build America Bonds (BABs). BABs were taxable municipal bonds that featured federal tax credits or subsidies for local government bond issuers. BABs were introduced in 2009 as part of President Obama's American Recovery and Reinvestment Act (ARRA) to cre ate jobs, stimulate the economy, and improve c ritical infrastructure.
BWP has been receiving f ederal subsidy payments to offset semi -annual interest payments on both bonds. The original federal subsidy was equal to 35% of the interest payments.
Most BABs were issued with two redemption provisions: an extraordinary optional redemption feature (less costly) and a make- whole-call feature (more costly). The extraordinary optional redemption was intended to be available if material adverse changes to the federal tax code or related guidance would reduce the 35% subsidy rate for reasons other than the fault of the issuer, like sequestration. Sequestration is the automatic reduction of certain federal spending, generally by a uniform percentage. It is a budget enforcement tool that Congress established in the Balanced Budget and Emergency Deficit Control Act of 1985 and reinforced through the Budget Control Act of 2011, which mandates across -the-board reductions in certain federal spending. Sequestration is triggered when action is not taken to reduce the federal deficit as required under federal law.
Following the Taxpayer Relief Act of 2012, the 35% federal subsidy for BWP’s Water and Electric BABs has been continually reduced since 2013 through federal sequestration.
The Infrastructure Investment and Jobs Act of 2021 extended the current sequestration period to 2031. There is no anticipation that the current sequestration reduction will be eliminated or reduced. Therefore, the current market convention is to assume the current level of sequestration reduction continues for the remaining life of the BWP BABs, costing BWP an estimated $1 million in lost federal subsidies.
DISCUSSION
Refunding
Approximately $23 million tax-exempt water refunding bonds will be issued to refund the outstanding taxable water BABs. The repayment schedule of the refunding bonds will match the repayment schedule of the original BABs with a final maturity of 2040. Based on current market rates, the refunding bonds can be issued at an interest rate of approximately 3. 2% and provide present value savings of approximately $670,000 or
2.6% of the refunded BABs. The ultimate rate and savings will depend on market conditions at the time of pricing, which is anticipated to be June 11, 2024.
3 Approximately $46 million tax -exempt electric refunding bonds will be issued to refund the outstanding taxable electric BABs. Repayment of the refunding bonds will match the repayment schedule of the BABs with a final maturity of 2040. Based on current market rates, the refunding bonds can be issued at an interest rate of 3.16% and provide present value savings of approximately $390 ,000 or 0.77% of the refunded BABs. The ultimate rate and savings will depend on market conditions at the time of pricing, which is anticipated to be June 18, 2024.
If there is an opportunity to sell par bonds rather than premium bonds at a lower interest rate, BWP aims to ensure that the principal authorization amount is approved accordingly.
This is why the resolution includes a not -to-exceed amount, which surpasses the value of the current refunding bonds.
In connection with the issuance, the C ity will need to issue a series of documents, including supplemental indentures to supplement the existing indentures for water and electric, continuing disclosure agreements, bond purchase agreements, and an offering statement based on a preliminary offering statement (see Attachment 3 thr ough Attachment 12).
Debt Service Reserve
The debt service reserve (reserve) fund is designed to ensure full and timely payments to bondholders. This reserve fund provides additional security and reduces the risk premium or amount of interest desired by investors. The rating agencies view reserve inclusion as an enhancement to the credit of the bond issuance. The refunding bonds will be structured with a reserve to maintain credit quality. A reserve will be positively viewed by rating agencies and investors, which, in turn, enhances the credit quality of the new bonds.
Credit Rating
The water fund maintains a AAA credit rating from Standard & Poor’s (S&P) and Fitch.
This rating is the highest credit standard and is a significant achievement as it provides the water fund access to capital markets as needed to modernize and improve system efficiency and reliability at a low financing cost.
The electric fund maintains an AA- credit rating from S&P and A a3 from Moody’s. This rating is an outstanding credit standard for the electric utility industry and is a significant achievement as it provides the electric fund access to capital markets as needed to modernize and improve system efficiency and reliability at a low financing cost.
Both the refunding bonds will utilize only the S&P rating. S&P recently performed credit review of both the water fund and the electric fund and can accommodate an expedited rating process. Furthermore, one rating minimizes issu ance costs and market feedback indicates one rating is sufficient given the expected size of the water and electric bond issuances.
4 Disclosure
The official statement is the primary disclosure document for investors in the 2024 water and electric bonds. A preliminary official statement ( POS) will be circulated to potential investors prior to the market pricing of the bonds. After the bonds have been priced, a final official statement will be circulated to investors.
The POS will be prepared by Norton Rose Fulbright , serving the C ity as disclosure counsel for this transaction, with input from staff and the utility’s bond financing team.
The distribution of the POS by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor in the bonds. Material information is any information that would likely hold significan t importance for a reasonable investor when deciding whether to buy or sell the bonds. In the resolution related to the bonds to be considered by the City Council, the City Council will approve the POS and authorize staff to certify that the POS is , as of its date , “deemed final” for purposes of federal securities law (i.e., that it includes all facts that would be material to an investor except for certain pricing-related information, such as final principal amounts and interest rates, that will be added in the final official statement).
The Securities and Exchange Commission (SEC), the federal agency with regulatory authority over the City’s compliance with federal securities laws, has issued guidance as to the duties of the City Council with respect to its approval of the POS. In its “Report of Investigation in the Matter of County of Orange, California as it Relates to the Conduct of the Members of the Board of Supervisors” (Release No. 36761/January 24, 1996) (the “Release”), the SEC stated that, if a member of the City Counci l has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 2024 water and/or electric bonds, whether relating to their repayment, tax-exempt status, undisclosed conflicts of interest with interested parties, or otherwise, he or she should endeavor to discover whether such facts are adequately disclosed in the POS. In the release, the SEC st ated that the steps that a member of the City Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts.
The following table gives a brief description of each attachment that is included with this report.
Attachments Document Name Document Description
Attachment 1 Resolution for BWP
2024 Electric
Revenue Bonds
Document authorizing the issuance of the
electric refunding bonds; outlines the terms
and conditions
Attachment 2 Resolution for BWP
2024 Water
Revenue Bonds
Document authorizing the issuance of the
water refunding bonds; outlines the terms and
conditions
5 Attachment 3 Electric Revenue
Bond Indenture
Document specifying the responsibilities of the
issuer, trustee, and bondholders; establishes
the credit pledge of the electric fund
Attachment 4 Eight Supplemental
Bond Indenture for
2024 Electric
Revenue Bonds
Document specifying the responsibilities of the
issuer, trustee, and bondholders; establishes
the credit pledge of the electric fund for the
2024 electric bonds
Attachment 5 Continuing
Disclosure
Agreement for 2024
Electric Revenue
Bonds
Agreement in which the issuer commits to
provide ongoing disclosure about the financial
condition and operations of the electric fund
Attachment 6 Bond Purchase
Agreement for 2024
Electric Revenue
Bonds
Agreement between the issuer and the
underwriter out lining the terms of the sale of
the electric bonds
Attachment 7 Preliminary Official
Statement for 2024
Electric Revenue
Bonds
Document providing detailed information about
the new electric bonds being issues, including
financial statements, legal descri
ptions, and
risks associated with the bonds
Attachment 8 Water Revenue
Bond Indenture
Document specifying the responsibilities of the
issuer, trustee, and bondholders; establishes
the credit pledge of the water fund
Attachment 9 Fourth
Supplemental Bond
Indenture for 2024
Water Revenue
Bonds
Document specifying the responsibilities of the
issuer, trustee, and bondholders; establishes
the credit pledge of the water fund for the 2024
electric bonds
Attachment 10 Continuing
Disclosure
Agreement for 2024
Water Revenue
Bonds
Agreement in which the issuer commits to
provide ongoing disclosure about the financial
condition and operations of the water fund
Attachment 11 Bond Purchase
Agreement for 2024
Water Revenue
Bonds
Agreement between the issuer and the
underwriter outlining the terms of the sale of
the water bonds
Attachment 12 Preliminary Official
Statement for 2024
Water Revenue
Bonds
Document providing detailed information about
the new water bonds being issues, including
financial statements, legal descriptions, and
risks associated with the bonds
ENVIRONMENTAL REVIEW
This activity has no potential for resulting in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment, 6 and as such, is not a “project” subject to the requirements of the California Environmental Quality Act (CEQA) 14 Cal. Code Regs § 15378.
FISCAL IMPACT
In the current market at a n approximate interest rate of 3.2%, annual debt service is expected to be $2 .0 to $2.3 million, which will provide annual budgetary savings of approximately $50,000 to $60,000 for the water fund. The total present value savings in interest payments over the life of the refunding water bonds are approximately $670,000 or 2.6%. For electric bonds, annual debt service is approximately $4.3 million, and it provides an annual budgetary savings of approximately $33 ,000. Total present value savings are approximately $390,000 or 0.77% of the refunded BABs. The ultimate rates and savings will depend on market conditions at the time of pricing, which is anticipated to be June 11, 2024, for the water bonds and June 18, 2024, for the electric bonds.
CONCLUSION
Staff requests that the City Council adopt a resolution approving the issuance of the 2024 water refunding bonds not to exceed $30 million to refund the outstanding 2010B water BABs, adopt a resolution approving the issuance of the 2024 electric refunding bonds not to exceed $60 million to refund the outstanding 2010B electric BABs, and to authorize the approval and execution of certain documents in connection with such issuances in accordance with the resolutions.
ATTACHMENTS
Attachment 1 – Resolution for BWP 2024 Electric Revenue Bonds Attachment 2 – Resolution for BWP 2024 Water Revenue Bonds Attachment 3 – Electric Revenue Bond Indenture
Attachment 4 – Eight Supplemental Bond Indenture for 2024 Electric Revenue Bonds Attachment 5 – Continuing Disclosure Agreement for 2024 Electric Revenue Bonds Attachment 6 – Bond Purchase Agreement for 2024 Electric Revenue Bonds Attachment 7 – Preliminary Official Statement for 2024 Electric Revenue Bonds Attachment 8 – Water Revenue Bond Indenture
Attachment 9 – Fourth Supplemental Bond Indenture for 2024 Water Revenue Bonds Attachment 10 – Continuing Disclosure Agreement for 2024 Water Revenue Bonds Attachment 11 – Bond Purchase Agreement for 2024 Water Revenue Bonds Attachment 12 – Preliminary Official Statement for 2024 Water Revenue Bonds