DATE:
April 4, 2023
TO:
Paul Buddenhagen, City Manager
FROM:
Lawrence Chiu, Finance Director
Chadrick Smalley, Deputy Director of Community Development SUBJECT:
Resolution Of The City Council Of The City Of Emeryville Approving The Forms And Authorizing Distribution Of A Notice Of Intention To Sell Bonds, A Notice Of Sale And A Preliminary Official Statement In Connection With The Offering And Sale Of The City’s 2023 General Obligation Bonds Recommendation
Staff recommends that the City Council adopt the above-entitled resolution authorizing the distribution of a Notice of Intention to Sell Bonds, Notice of Sale, and a Preliminary Official Statement in connection with the issuance and sale of up to $50 million 2023 General Obligation Bonds (Federally Taxable) (the “Bonds”).
The Bonds are being issued 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 (“Bond Counsel and Disclosure Counsel”) to provide bond counsel and disclosure counsel services for the issuance and sale of the Bonds.
On February 21, 2023, the City Council adopted Resolution No. 23-22, authorizing the issuance and sale of up to $50,000,000 of the City’s 2023 General Obligation Bonds and related actions.
Discussion
Council’s adoption of the proposed Resolution included approval of the issuance approach for the Bonds: i) single issuance up to the total Measure C authorization amount of $50,000,000; ii) taxable issuance given the use of Bond proceeds do not qualify for tax-exemption under IRS regulations; and iii) competitive sale of the Bonds.
Adoption of the proposed Resolution represents the second Council action necessary for the issuance and sale of the Bonds. Following the Council’s approval of the issuance of the Bonds on February 21, 2023, this second requested Council action recommends the approval of the Preliminary Official Statement (like a prospectus) and other related sale documents and related sale parameters as discussed below.
Proposed Sale of the Bonds
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 rationale and feedback from underwriters supportive of this method of sale, the Bonds are expected to be sold by competitive bid and will be awarded to an underwriter based on the lowest true interest cost (“TIC”).
However, should market conditions materially change between Council approvals and pricing, Council authority is delegated to a City Representative to proceed in the best interest of the City, upon consultation with the City Attorney, and the City’s Municipal Advisor and Bond Counsel. Thus, the Resolution also allows for the option of a negotiated sale.
Issuance Estimates and Parameters. 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.
Table 1 below provides previously reported estimated finance charges for the Bonds (pursuant to Section 5852.1 of the Government Code) in connection with Council’s authorization of the issuance of the Bonds on February 21, 2023. Based on market conditions as of March 9, 2023 and assuming an interest rate cushion of 1.00%, as previously assumed, current estimated finance charges for the Bonds remain consistent with prior estimates.
Table 1: Estimated Finance Charges of the Bonds
Bond Finance Charge Statistics
1/10/2023
True Interest Cost of the Bonds1
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
1Assumes an interest rate cushion of 100bps.
Final interest rates, finance charges, and final terms for the Bonds will depend on market conditions at the time of sale subject to a not-to-exceed interest rate of 8.0%.
Designation as Social Bonds. The City’s Municipal Advisor has recommended that the Bonds be designated as “social bonds” to attract socially conscious investors in hopes of lowering the interest cost on the borrowing. The “social bond” designation, like the widely known “green bond” designation, has arisen in many sectors of the capital markets as more and more investors want to direct their investments towards social-oriented purposes. For example, most of the bond mutual fund companies now have ESG funds (for “Environmental, Social and Governance”).
The City’s Measure C affordable housing program falls squarely within the definition of social bonds as set forth by the International Capital Markets Association, which are the guiding principles of this sector (https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/social-bond-principles-sbp/). While some issuers just self-designate with little justification provided for their “green” or “social” labels, the “gold standard” for ESG bonds is to get the opinion of an outside party on the issue’s alliance with the appropriate principals. This is the approach that is most common in Europe (where the ESG market is more mature) and the approach recommended by our Municipal Advisor. They further recommend that the second party opinion be obtained from Standard & Poor’s, who will also rate the bonds. S&P provides a high-quality report and has offered a substantially lower price than is typical for such services.
There is no guarantee that the social bond designation and verification will result in lower interest rates on the Bonds, although that is more likely for taxable bonds such as the City is issuing. Furthermore, it allows the City to clearly express its values to investors and materially contribute to the development of a more robust ESG bond marketplace.
Documents for Approval
The proposed financing requires the following additional documents for Council approval (attached as exhibits to the Resolution and filed with the City Clerk):
Preliminary Official Statement. The Official Statement is the primary disclosure document for investors in the Bonds. A Preliminary Official Statement will be circulated to potential investors prior to the pricing of the Bonds. After the Bonds have been priced, a Final Official Statement will be circulated to investors; the Final Official Statement should be identical to the Preliminary Official Statement except for the addition of pricing information (principal amount, interest rates, redemption terms).
The Preliminary Official Statement is prepared by Quint & Thimmig, serving the City as Bond Counsel and Disclosure Counsel for this transaction, with the assistance of the remainder of the financing team, including City staff; and the Municipal Advisor.
The Preliminary Official Statement has been reviewed and approved for transmittal to the City Council by the City’s financing team. The distribution of the Preliminary Official Statement 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 Preliminary Official Statement to include all facts that would be material to an investor in the Bonds. Material information is information that there is a substantial likelihood would have actual significance in the deliberations of the reasonable investor when deciding whether to buy or sell the Bonds. If the City Council concludes that the Preliminary Official Statement includes all facts that would be material to an investor in the Bonds, it must adopt a resolution that authorizes staff to execute a certificate to the effect that the Preliminary Official Statement has been “deemed final.” The key sections of the Preliminary Official Statement are summarized below:
“THE BONDS”: This section summarizes the key terms of the Bonds, including payment dates and prepayment provisions. “SECURITY FOR THE BONDS” AND “PROPERTY TAXATION”: This section summarizes key security for the Bonds including a discussion of the City’s property tax base and property taxation. “CERTAIN RISK FACTORS”: This section highlights the primary risks associated with the Bonds, most of which relate to the risks to assessed valuation generally, natural disasters, and state constitution and proposition restrictions to raising taxes. “APPENDIX C - CITY FINANCIAL INFORMATION”: This section summarizes financial and operating data that is material to the creditworthiness of the City.
Notice of Sale. The Bonds are expected to be sold pursuant to a competitive sale and the Notice of Sale establishes the terms of the sale. The terms and conditions of the offering and the sale of the Bonds will be as specified in the Notice of Sale. The Notice of Sale is distributed to potential investors along with the Preliminary Official Statement.
To the extent the market would materially change following the Council approvals and prior to the sale of the Bonds, the POS Resolution authorizes a City Representative, following consultation with the City Attorney, the Municipal Advisor and Bond Counsel, to determine that it is in the best interests of the City to sell the Bonds to an underwriter on a negotiated basis, and authorizes the execution and delivery of a purchase agreement with such underwriter on behalf of the City.
Notice of Intention to Sell Bonds. An advertisement published, at least five (5) days prior to the date to receive bids, in the Bond Buyer, a financial publication reasonably expected to be disseminated among prospective bidders for the Bonds. This document includes the anticipated par amount of the Bonds and the date and time of the sale of the Bonds.
Timeline
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
04/11/2023
Rating Presentation to Standard & Poor’s
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 (which are consistent with current market conditions as of March 9, 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
None.
Conflict of Interest
None.
Conclusion
Staff recommends that the City Council adopt the above-entitled resolution authorizing the distribution of a Notice of Intention to Sell Bonds, Notice of Sale, and a Preliminary Official Statement in connection with the issuance and sale of up to $50 million 2023 General Obligation Bonds (Federally Taxable).
PREPARED BY: Lawrence Chiu, 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
Preliminary Official Statement
Resolution
Exhibit A: Notice of Intention to Sell Bonds
Exhibit B: Notice of Sale
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 | April 4, 2023
City of Emeryville
CALIFORNIA
MEMORANDUM