City of Gonzales
PUBLIC WORKS / CITY ENGINEER DEPARTMENT
STAFF REPORT
TO: Honorable Mayor Rios and City Council
DATE: November 18, 2024
FROM: Patrick Dobbins, Public Works Director/City Engineer THROUGH: Carmen Gil, City Manager
SUBJECT: Resolution No. 2024-67 Wastewater System Financing Documents
RECOMMENDATION
Staff recommends that the City Council Adopt Resolution No. 2024-67, A Resolution of the City Council of the City of Gonzales Approving a Conveyance Agreement and an Installment Purchase Contract, Making Certain Determinations Relating Thereto; and Authorizing Certain Other Actions in Connection Therewith.
The City secured funding through the State Water Resources Control Board (SWRCB) for construction of the Industrial Wastewater System. The Funding Agreement with SWRCB dated July 12, 2024 requires the City to submit a reimbursement request for costs incurred. The City cannot request reimbursement for any Project Cost until such cost has been incurred and is due and payable by the City. Due to the delay in reimbursement, the City expects it will need interim funding (“2024 Wastewater Interim Loan”) to bridge the gap between timely payment of project costs and receiving reimbursement from SWRCB.
The City must pay the various contractors on the Industrial Wastewater System Project within 30 days of approving their invoice for payment. It is anticipated that reimbursement from SWRCB will generally take three to five months from City submittal of a reimbursement claim. This timing gap results in the City needing short-term cashflow of potentially $10 million during the two construction contracts (IW Pipeline contract and the IW Treatment Facility contract).
Over the last two months, staff has been working with NHA Advisors (Municipal Advisor), Kutak Rock (Special Counsel), and Hilltop Securities (Placement Agent) to facilitate the 2024 Wastewater Interim Loan, secure a bank lender and draft the necessary legal documents.
AGENDA
ITEM
16 REVIEW AND ANALYSIS
Given the City’s need is short-term cashflow, it was determined that a revolving bank loan would be the best option, as it allows the City to only have an amount outstanding at any given time that is needed to bridge the cashflow gap, similar to a line of credit. Such structure limits the City’s interest cost.
Hilltop Securities, acting as Placement Agent for the financing, requested proposals from several banks for the City’s 2024 Wastewater Interim Loan. The City received five bank proposals, with Banner Bank offering the lowest and only fixed interest rate option. All other bank responses included only a variable rate option, with the initial variable rate higher than Banner Bank’s proposed fixed rate option. It was determined that a fixed rate option is ideal as it limits the interest rate risk associated with the variable rate options. Banner Bank’s proposal also includes an upfront bank fee of $25,000 plus Bank legal fees of $15,000.
The 2024 Wastewater Interim Loan with Banner Bank will be structured as an Installment Purchase Contract with a “revolving” or prepayment feature. This means that the City can borrow, prepay and reborrow at any time during the Loan term, if the total outstanding amount does not exceed $10,000,000.
The City will draw funds from the 2024 Wastewater Interim Loan to pay the Industrial Wastewater Project costs as needed. At the same time, the City will submit a reimbursement request to SWCRB for such Project costs. Once such reimbursement is received, the City will make a payment to the 2024 Wastewater Interim Loan (Installment Purchase Contract).
SWCRB reimbursements are pledged to the repayment of the 2024 Wastewater Interim Loan, along with the City’s Sewer Fund Net Revenues. SWRCB requires that their reimbursements are applied to specific Industrial Wastewater Project costs and that such reimbursements cannot be applied to interest or financing related costs. Therefore, it is anticipated that the City’s Sewer Fund Net revenues will be applied towards interest repayment and financing costs associated with the 2024 Wastewater Interim Loan.
Total interest and financing costs associated with the 2024 Wastewater Interim Loan:
It is not certain how much interest the City will pay on the 2024 Wastewater Interim Loan, as such interest is dependent on the outstanding balance at any given time, resulting from the timing of reimbursement from SWRCB. Based on the estimated Industrial Wastewater Project construction schedule and assuming a 4-month reimbursement from SWRCB, it is estimated that total interest cost could be $328,215 during the Project timeline. Such estimates assume that the City’s largest principal balance outstanding amount on the 2024 Wastewater Interim Loan reaches $7,704,799. The repayment of such principal amount together with estimated interest cost could be $8,033,014. The actual amount outstanding and actual interest may be more or less, depending on the actual construction schedule and SWRCB reimbursement timing.
In addition, financing issuance costs associated with the 2024 Wastewater Interim Loan are expected to be approximately $132,000. Such costs are summarized below. Financing costs related to Kutak Rock, NHA Advisors and Hilltop Securities were previously approved by the City Council at your October 7, 2024 meeting.
Financing Costs of Issuance
Service Payee
Private
Placement
Bond Counsel Kutak Rock $25,000
Municipal Advisor NHA Advisors 39,500
Placement Agent Hilltop Securities 25,000
Bank Fee for Facility Banner Bank 25,000
Bank Counsel Mardikes Law LLC 15,000
CDIAC State of California 2,500
Total $132,000
It is anticipated that the City will make monthly interest payments on the 2024 Wastewater Interim Loan for interest accrued on the outstanding balance through the maturity of the 2024 Wastewater Interim Loan. Maturity of the 2024 Wastewater Interim Loan will be 2.5 years after closing, with the option to extend for 6 months.
Upon final reimbursement from the SWRCB, the City will apply such reimbursement to redeem the outstanding amount of the 2024 Wastewater Interim Loan. At such time, the 2024 Wastewater Interim Loan will no longer be outstanding and the City will begin making payments on the SWRCB Agreement.
The SWRCB Agreement provides long-term funding of $28,884,000 at 1.70% annual interest rate.
Payments associated with the SWRCB are estimated at $1,242,000 annually over 30-years.
Not-to-Exceed Parameters in the Resolution:
The resolution before the City Council would authorize staff to proceed with the 2024 Wastewater Interim Loan, so long as the maturity does not exceed December 31, 2027 (includes the 6-month extension subject to approval by the Lender), the interest rate with respect to the Installment Payments does not initially exceed 4.34% per annum (except in the event of default or the transaction converting from tax-exempt to taxable), and the total principal amount outstanding at any one time does not exceed $10,000,000.
Financing Documents:
Being presented for approval by the City Council and the Authority, as applicable, are the following documents:
Authorizing Resolution:
Authorize the City to enter into a Conveyance Agreement and Installment Purchase Contract to secure interim funding in an amount not to exceed $10,000,000 and authorize certain other actions.
Conveyance Agreement:
The Conveyance Agreement will be entered into between the City and Banner Bank. City conveys the project to the Bank in exchange for payment of up to $10,000,000. The Bank immediately resells the Property to the City pursuant to the Installment Purchase Contract.
Installment Purchase Contract:
This agreement is between the City and Banner Bank establishing that the City will finance certain improvements to and provide working capital for the City’s industrial wastewater system. The City will pay the Installment Payments to the Bank to purchase such improvements. This agreement also contains covenants for the benefit of the Lender, including a covenant to set rates and charges in the future at levels that are sufficient to repay the Loan, if necessary.
Hilltop Securities Placement Agent Agreement:
Hilltop Securities Agreement with the City, which sets forth Hilltop Securities’ work to be performed for the 2024 Wastewater Interim Loan. Such fees set forth therein were previously approved by City Council.
Financing Schedule:
If City Council approves the resolution, City staff will work with the financing team to execute and close on the loan with Banner Bank. Below is a summary of the anticipated financing schedule:
November 18, 2024 – City Council considers approval of the loan and related documents November 19 – 22, 2024 – Finalize and execute closing documents November 26, 2024 – Close the Loan; City draws funds, as necessary How Recommendation Supports the Vision
Gonzales will continue to be a safe, clean, family-friendly community, diverse in its heritage, and committed to working collaboratively to preserve and retain its small-town charm.
Explain: This project supports our vision by making improvements to the wastewater system to increase its capacity for residential and industrial developments Explain how the Recommendation Directly Implements the Mission The City Council and Staff of the City of Gonzales will realize our Vision by providing the leadership, commitment and resources necessary to provide excellent services that enhance the quality of life of our diverse community. X Yes ____ No____ N/A
Explain: Maintaining and improving the wastewater treatment plant enhances the community’s quality of life by providing for treatment and safe disposal of the City’s wastewater.
City services will be delivered in a cost-effective, respectful and friendly manner to insure the safety and well-being of the residents and the promotion of business, recreational, housing and employment opportunities in an environmentally sustainable manner. X Yes ____No ____ N/A Explain: See Vision explanation above.
Strong fiscal policies allow us to provide appropriate infrastructure for:
• Public Safety X Yes No N/A
• Housing X Yes No N/A
• Recreation Yes X No N/A
• Environment X Yes No N/A
• Education Yes X No N/A
ALTERNATIVES
Alternative funding options are available and such alternatives were considered and were determined to be either more costly or unavailable to the City.
BUDGET IMPACT
Upon closing of the 2024 Wastewater Interim Loan in late November, the City will initiate the first draw on the 2024 Wastewater Interim Loan to pay costs of issuance related to the financing in an amount estimated to be $132,000. The City anticipates using Sewer Fund Net Revenues to repay such financing costs.
Assuming a 4-month reimbursement timeline and the estimate construction draw schedule, it is estimated that total interest cost could be $328,215 during construction of the project and it is also estimated that the City’s largest principal balance outstanding amount on the 2024 Wastewater Interim Loan reaches $7,704,799. The repayment of such principal amount together with estimated interest cost could be $8,033,014.
The actual amount outstanding and actual interest may be more or less, depending on the SWRCB reimbursement timing. SWCRB reimbursements are pledged to the repayment of the 2024 Wastewater Interim Loan, along with the City’s Sewer Fund Net Revenues. It is anticipated that the City’s Sewer Fund Net revenues will be applied towards interest repayment and financing costs associated with the 2024 Wastewater Interim Loan and that SWCRB reimbursements applied towards the principal balance.
CONCLUSION
Staff recommends that the City Council Adopt Resolution No. 2024-67, A Resolution of the City Council of the City of Gonzales Approving a Conveyance Agreement and an Installment Purchase Contract, Making Certain Determinations Relating Thereto; and Authorizing Certain Other Actions in Connection Therewith
Attachments:
1. Resolution No. 2024-67
2. Exhibit A - Conveyance Agreement
3. Exhibit B - Installment Purchase Agreement
4. Exhibit C - Hilltop Securities Placement Agent Agreement
5. Exhibit D - Banner Bank Term Sheet
6. Powerpoint presentation