DATE:
February 21, 2023
TO:
Paul Buddenhagen, City Manager
FROM:
Bill Zenoni, Interim Finance Director
Chadrick Smalley, Deputy Director of Community Development SUBJECT:
Resolution Of The City Council Of The City Of Emeryville Authorizing The Issuance And Sale Of Up To $50,000,000 Of The City’s 2023 General Obligation Bonds And Authorizing Actions Related Thereto Recommendation
Staff recommends that the City Council adopt the above-entitled resolution authorizing the issuance and sale of up to $50 million 2023 General Obligation Bonds (Federally Taxable) (the “Bonds”) to finance facilities to provide affordable housing and prevent displacement of vulnerable populations, including low and middle-income households, veterans, local artists, seniors, and the disabled and provide supportive housing for people experiencing homelessness; and help low and middle-income households purchase homes as described in and in compliance with the Measure C Affordable Housing Bond Administration and Expenditure Plan (the “Plan”).
Background
On March 6, 2018, the City Council authorized placement of a $50 million affordable housing bond initiative on the June 5, 2018 ballot to finance the development of affordable housing projects within the City of Emeryville. This ballot initiative (Measure C) was approved by over two-thirds of the Emeryville voters. Measure C allows the City of Emeryville to issue $50 million in general obligation bonds to be repaid with the voter-approved supplemental ad valorem taxes to support the City’s Housing Element and other General Plan policies by financing affordable housing development costs for extremely low, very low, and low-income households as well as for persons with special needs.
On March 2, 2021, the City Council adopted Resolution No. 21-13, approving the Affordable Housing Bond Administration and Expenditure Plan. The Plan guides the expenditure of the $50 million in Measure C Affordable Housing Bond funds, as well as approximately $14 million in additional affordable housing resources available to the City. The Affordable Housing Bond Administration and Expenditure Plan is available on the City’s website at https://www.ci.emeryville.ca.us/DocumentCenter/View/13878.
On November 15, 2022, the City Council adopted Resolution No. 22-149, authorizing the City Manager to execute a professional services contract with KNN Public Finance, LLC (“KNN” or “Municipal Advisor”), for municipal advisory services to assist with implementation of the $50 million Measure C General Obligation Bond Program and provide transaction services in connection with the issuance of the Bonds. The City Attorney also appointed Quint & Thimmig LLP (“Special Counsel”) to provide bond counsel and disclosure counsel services for the issuance and sale of the Bonds.
Discussion
Adoption of the proposed Bond Resolution is the next step towards the issuance and sale of the City of Emeryville 2023 General Obligation Bonds (Federally Taxable) to finance projects under the Measure C Affordable Housing Bond Administration and Expenditure Plan. Key aspects of the issuance and sale of the Bonds are discussed below.
The Bonds
Issuance Overview
The Bond Resolution will approve the issuance and sale of the general obligation bonds under the Measure C authorization. A second Council action, anticipated in April 2023, will approve the Preliminary Official Statement (similar to a prospectus) and other related sale documents for the transaction. Staff, in consultation with its Special Counsel and Municipal Advisor, have determined the following approach to issuing the Bonds:
Taxable Issuance: Given the anticipated use of the Bond proceeds set forth in the Plan, and pursuant to tax analysis prepared by Special Counsel, the issuance of the Bonds does not qualify as tax-exempt (which would require 100% governmental use) and, thus, the Bonds must be issued on a taxable basis. This tax status was anticipated at the time of the ballot measure in June 2018.
Single Issuance: While the Bonds may be issued in one or more series up to the maximum authorized par amount of $50,000,000, staff seeks approval to issue up to the full authorization with the proposed first issuance. Because the Bonds are free and clear of federal tax law stipulations governing tax-exempt bond issues, including the use of bond proceeds, the City has flexibility in its issuance approach. Specifically, the City is not constrained by the structuring requirements driven by IRS regulations, including the condition that the City expects to spend tax-exempt bond proceeds within three years.
The Plan, approved by City Council on March 2, 2021, provides a preliminary project expenditure schedule over an eight-year period – from Spring 2023 to Winter 2030. Under the single issuance approach, the City can invest the Bond proceeds over a longer duration of time and direct earnings on undrawn proceeds toward additional projects consistent with the objectives of the Measure C authorization. Based on an analysis prepared by the Municipal Advisor and reviewed with City staff, the single issuance approach has the potential to generate approximately $4.7 million in additional project resources (assuming a 3.5% investment rate and expected use of Bond proceeds); this effectively indexes the original authorization for inflation. This approach would increase estimated present value debt service cost by $4.9 million versus if the City issued in two tranches over the eight-year period. Thus, the “net cost” of financing housing by issuing the entire Measure C authorization through the proposed first issuance is estimated to be approximately $200,000, which is relatively negligible considering the estimated amount of additional resources to be directed toward projects to further support the Measure C objectives.
While staff seeks approval to issue up to the full Measure C authorization in a single issuance, the final issuance amount will be determined closer to the sale of the Bonds (May 2023). Should long-term interest rates be materially higher than current expectations or investment rates not prove meaningful in generating additional resources toward projects, then staff in consultation with its Municipal Advisor, would issue a smaller par amount of Bonds to finance the first few years of projects under the Plan and then return to the municipal bond market in 3 to 4 years to issue a second tranche of general obligation bonds under Measure C.
Competitive Sale: The City’s proposed Bonds generally meet the criteria that favors competitive bidding for the sale (rather than a negotiated sale, whereby the City would choose an underwriter up font). Competitive sales are appropriate when the bond issue will be a simple, well-understood security, with expected high credit ratings, manageable borrowing size, and stable market conditions. Given this rational and feedback from underwriting desks supportive of the method of sale approach, the Bonds are expected to be sold by competitive bid in accordance with, a Notice of Sale (“NOS”) a Preliminary Official Statement (“POS”) and will be awarded to an underwriter based on the lowest true interest cost (“TIC”). The NOS and POS will be presented to and approved by Council at the April 4, 2023 Council Meeting. Further, the POS Resolution will provide authority to sell the Bonds to an underwriter by negotiated sale if market conditions are not conducive to a competitive sale.
Issuance Estimates
The Bonds will be issued in an aggregate principal amount not to exceed $50,000,000 consisting of a single taxable issuance. The Bonds will have a final maturity date no later than 26 years after issuance and bear interest at a fixed interest rate. The Bonds will be structured to produce level annual debt service payments, which results in a declining tax levy assuming continued annual growth in the City’s assessed valuation (“AV”) from the FY 2022-23 value of $7,201,663,184.
Table 1 below and Exhibit D of the Bond Resolution describe the estimated finance charges for the Bonds per Section 5852.1 of the Government Code, which requires reporting of certain good faith estimates prior to approval of a bond sale. Interest rates will depend on market conditions at the time of sale and final terms of the Bonds will be specified in the Paying Agent Agreement.
Table 1: Estimated Finance Charges of the Bonds as of 1/10/2023 Bond Finance Charge Statistics
2023 Issuance
True Interest Cost of the Bonds
6.34%
Finance charge of the Bonds
$615,000
Bond proceeds received by the City
$49,385,000
Total payment/debt service amount
$101,347,059
Debt service on the Bonds is payable from supplemental ad valorem taxes levied annually upon all taxable property in the City. The estimated average property tax rate levy required to pay the Bonds’ estimated annual debt service of approximately $4 million is 0.04273% or $42.73 per $100,000 of assessed valuation.
Issuance Documents
The City, with the assistance of its Special Council, Municipal Advisor, and financing team, has prepared the Bond Resolution and forms of Paying Agent Agreement and Continuing Disclosure Certificate (“CDC”).
The Paying Agent Agreement creates the legal structure for the security of the Bonds and provides terms of the Bonds, including payment dates, maturities, redemption provisions, etc.
The CDC identifies the City’s disclosure obligations for the life of the Bonds. The CDC contains requirements for material event notices and annual financial information. The CDC is prepared in accordance with rules of the Securities and Exchange Commission (the “SEC”).
Forms of the Paying Agent Agreement and Continuing Disclosure Certificate are attached as Exhibit B and Exhibit C respectively to the Bond Resolution. The Notice of Sale and Preliminary Official Statement will be presented to City Council for approval at the April 4, 2023 meeting. Not-to-exceed sale parameters will also be established through the Resolution accompanying the Notice of Sale and Preliminary Official Statement.
Financing Team and Timeline
The City has made the following financing team appointments to assist with the issuance, sale, and payment of the Bonds:
Quint & Thimmig LLP: Bond and Disclosure Counsel
KNN Public Finance, LLC: Municipal Advisor
Bank of New York Mellon Trust Company, N.A: Paying Agent A proposed financing schedule is included in the following Table 2.
Table 2: Proposed Financing Schedule
Date
Activity
02/21/2023
City Council approval of Bond Resolution
04/04/2023
City Council approval of POS Resolution
04/26/2023
Pricing of the Bonds
05/10/2023
Closing of the Bonds
Fiscal Impact
The Bonds are payable from supplemental ad valorem taxes levied upon all taxable property in the City. The City is authorized and obligated to levy and collect ad valorem taxes in an amount sufficient to pay the principal and interest due on the Bonds (i.e. debt service). There is no financial impact on the General Fund.
Based on FY 2022-23 assessed valuation and market conditions as of January 10, 2023, the estimated average property tax rate levy required to pay the Bonds’ estimated annual debt service of approximately $4 million is 0.04273% or $42.73 per $100,000 AV. The current projected average annual tax rate per $100,000 AV of $42.73 falls below the projected is 0.0492% or $49.12 per $100,000 AV included in the tax rate statement and disclosed to voters in June 2018.
Fees related to the issuance of the Bonds will be paid from bond proceeds and contingent upon closing of the transaction. Such fees, consisting of underwriter’s discount and costs of issuance including fees for bond counsel, disclosure counsel, municipal advisor and rating agencies, are estimated to be $615,000.
The Bonds’ debt service payments and corresponding property tax revenues will be included in the City’s budgets beginning in FY 2023-24 and annually until the Bonds are paid in full.
Staff Communication with the Public
This item was presented to the Budget & Governance Committee on Tuesday, February 7, 2023 and the Budget Advisory Committee on Thursday, February 9.
Conflict of Interest
None.
Conclusion
Staff recommends the City Council authorize the issuance and sale of up to $50 million in voter-approved 2023 General Obligation Bonds (Federally Taxable) to finance facilities to provide affordable housing and prevent displacement of vulnerable populations, including low and middle-income households, veterans, local artists, seniors, and the disabled and provide supportive housing for people experiencing homelessness; and help low and middle-income households purchase homes as described in and in compliance with the Measure C Affordable Housing Bond Administration and Expenditure Plan.
PREPARED BY: Bill Zenoni, Interim Finance Director Chadrick Smalley, Deputy Director of Community Development Approved and Forwarded to the
City Council of the City of emeryville:
Paul Buddenhagen, City Manager
Attachments
Bond Resolution
Exhibit A: Form of Bond
Exhibit B: Form of Paying Agent Agreement
Exhibit C: Form of Continuing Disclosure Certificate
Exhibit D: Government Code Section 5852.1 Disclosure
Par amount issued will depend on bond structure and market conditions at the time of sale.
Measure C General Obligation Bond Issuance
City Council Meeting | February 21, 2023
City of Emeryville
CALIFORNIA
MEMORANDUM