Fremont City Council Meeting: 04/04/23 07:00 PM
3300 Capitol Avenue Div/Dept: Finance Department
Fremont, CA 94538 Category: Debt Financing
SCHEDULED
Sponsors:
COUNCIL STAFF REPORT (ID # 4842) DOC ID: 4842
Updated: 3/28/2023 2:59 PM by Susan Gauthier Page 1
PREPAYMENT OF GENERAL FUND LEASE PAYMENTS AND DEFEASANCE OF SERIES 2017B LEASE REVENUE BONDS - Consider Proposed Prepayment by the City of Fremont of General Fund Lease Payments and Defeasance of Fremont Public Financing Authority Lease Revenue Bonds, Series 2017B, and Related Appropriation Actions
Contact Persons:
Name: David Persselin
Title: Finance Director
Div/Dept: Finance Department
Phone: 510-494-4631
E-Mail: [email protected]
Note: A companion item appears on tonight’s Public Financing Authority agenda.
Executive Summary: In August 2017, the City of Fremont (the “City”) caused the Fremont Public Financing Authority (the “Authority”) to issue Lease Revenue Bonds, Series 2017B (2017 Fixed Rate Refinancing Project) (the “2017 Bonds”) to refinance an outstanding general fund lease payment obligation.
The 2017 Bonds are payable from lease payments (the “2017 Lease Payments”) made to the Authority by the City under a Lease Agreement (the “2017 Lease Agreement”). The City pays the 2017 Lease Payments from the General Fund.
The 2017 Bonds will become eligible for optional redemption (i.e., prepayment) on October 1, 2027. However, it is possible to immediately appropriate a portion of the unreserved fund balance in the General Fund to establish an escrow to defease the bonds and lock in debt service savings.
Staff recommends that the City Council approve the proposed prepayment of the 2017 Lease Payments, defeasance and redemption of the 2017 Bonds, and appropriate $17,350,000 in the General Fund for this purpose.
The recommended prepayment and defeasance is projected to result in annual General Fund debt service savings of approximately $1,355,000 and avoided interest payments of approximately $2,572,000.
BACKGROUND: In August 2017, the City caused the Authority to issue the 2017 Bonds.
The 2017 Bonds refinanced an outstanding general fund lease financing that had financed certain public safety buildings and equipment and the Fremont Main Library.
The 2017 Bonds are payable from the 2017 Lease Payments made by the City to the Authority under the 2017 Lease Agreement. The leased property under the 2017 Lease Agreement consists of four City fire stations (the “2017 Leased Property”), and the City pays the 2017 Lease Payments from its General Fund.
Council Staff Report (ID # 4842) Meeting of April 4, 2023 Updated: 3/28/2023 2:59 PM by Susan Gauthier Page 2
The principal amount of the outstanding 2017 Bonds is $16,585,000. The outstanding 2017 Bonds bear interest at fixed rates ranging from 3% to 5% and have a final maturity date of October 1, 2038. To service the outstanding 2017 Bonds, the General Fund is scheduled to pay annual 2017 Lease Payments (including principal and interest components) of approximately $1,355,000 through the final maturity date of the 2017 Bonds.
DISCUSSION/ANALYSIS: Through a combination of projected unbudgeted revenues and higher than anticipated expenditure savings, the City has the opportunity to pay off a portion of its General Fund debt.
Although the 2017 Bonds do not become eligible for optional redemption until October 1, 2027 (which means the Authority will not actually pay off the 2017 Bonds in full until October 1, 2027), it is possible to “defease” the 2017 Bonds now.
Defeasance: To defease the 2017 Bonds, the City will prepay the 2017 Lease Payments from unreserved fund balance in the General Fund. The prepaid 2017 Lease Payments will be deposited into an irrevocable escrow account to be held by the trustee for the 2017 Bonds, The Bank of New York Mellon Trust Company, N.A. (“BNY”). BNY will use the prepaid 2017 Lease Payments to purchase U.S. government securities and will hold a small amount uninvested in cash. The principal amounts, interest rates, and maturity dates of the escrowed securities will be structured to produce a stream of revenue that exactly matches the scheduled debt service payments to the bondholders through October 1, 2027, and the amount required to redeem (or prepay) the remaining principal of the 2017 Bonds on October 1, 2027. These amounts are generally referred to as the “escrow requirement”.
A certified accounting firm, referred to as a “verification agent,” will provide a written report to the City and BNY that the escrow has been structured to satisfy the escrow requirement.
The defeasance transaction will be documented pursuant to an Escrow Deposit and Trust Agreement (the “Escrow Agreement”) among the City, the Authority, and BNY, a form of which is on file with the City Clerk.
Benefits of Defeasing the 2017 Bonds: There are two primary benefits to the City of defeasing the 2017 Bonds:
1. By investing moneys in the escrow account in federal securities and prepaying the remaining principal amount of the 2017 Bonds on October 1, 2027, the City will achieve annual General Fund debt service savings of approximately $1,355,000.
Additionally, because no principal will remain outstanding beyond the prepayment date, the City will avoid paying $2,572,000 of interest that otherwise would have accrued.
2. As a result of establishing the defeasance escrow, the City will be able to “release” the 2017 Leased Property from the 2017 Lease Agreement, which means those assets will be available for future City general fund lease financings, if needed.
Council Staff Report (ID # 4842) Meeting of April 4, 2023 Updated: 3/28/2023 2:59 PM by Susan Gauthier Page 3
Sources and Uses of Funds: The following table, using the latest scenario provided by the City’s municipal advisor, shows the estimated sources and uses of funds for defeasing the 2017B Bonds:
Sources of Funds
General Fund $17,350,000
Total Sources $17,350,000
Uses of Funds
Defeasance Escrow Deposit (estimate) $17,255,214
Contingency 67,736
Costs of Defeasance 27,050
Total Uses $17,350,000
Compliance with the City’s Debt Management Policy: The proposed defeasance is consistent with the City’s Debt Management Policy, which calls for long-term financial planning, maintaining appropriate reserve levels, and employing prudent practices in governance, management and budget administration.
FISCAL IMPACT: Staff recommends that the City Council appropriate $17,350,000 of unreserved fund balance in the General Fund to establish the defeasance escrow and pay the costs of defeasing the 2017 Bonds.
The estimated costs of defeasing the 2017B Lease Revenue Bonds are as follows:
Jones Hall, Bond Counsel $10,000
Public Resources Advisory Group, Municipal Advisor 15,000 Robert Thomas, CPA, Verification Agent 1,000
BNY Mellon, Escrow Agent 750
Stewart Title Company 300
Estimated Total Costs of Defeasance $27,050
The recommended lease prepayment and defeasance is projected to result in annual debt service savings to the General Fund of approximately $1,355,000 through the final maturity of the 2017B Bonds in FY 2038/39.
ENVIRONMENTAL REVIEW: The recommended action is a financial transaction and is “not a project” as defined by CEQA and is exempt from CEQA review under Section 15378(b)(2) and (b)(5).
ATTACHMENTS:
• Draft Escrow Agreement - FPFA 2017B LRB Defeasance
• Draft Resolution Approving Payment of Outstanding Lease Payment Obligation and the Defeance
RECOMMENDATIONS:
Council Staff Report (ID # 4842) Meeting of April 4, 2023 Updated: 3/28/2023 2:59 PM by Susan Gauthier Page 4
1. Find that the recommended action is a financial transaction and is “not a project” as defined by CEQA and is exempt from CEQA review under Section 15378(b)(2) and (b)(5).
2. Appropriate $17,350,000 in the General Fund (Fund 001) to establish a defeasance escrow for the purpose of prepaying the 2017 Lease Payments, defeasing the 2017 Bonds, and paying the costs of defeasance.
3. Adopt a resolution authorizing the preparation and execution by the City officers and staff identified in the resolution of all documents required to complete the proposed defeasance transaction, including the Escrow Agreement.