DATE: September 12, 2023
TO: Mayor and City Council
FROM: Director of Finance
SUBJECT: Lease Obligation Refinancing: Adopt Resolutions of the City Council and the Hayward Public Financing Authority Regarding Amended Savings Requirements Related to the Refinancing of Prior Lease Payment Obligations, Approval of the Preliminary Official Statement and Bond Purchase Contract for Refunding Certificates of Participation
RECOMMENDATION
That the Hayward City Council and the Board of Directors of the Hayward Public Financing Authority (the “City”) each adopt a resolution (Attachments II and III) approving amended savings requirements for the proposed refunding of outstanding general fund lease payment obligations and approving the attached preliminary official statement (“POS”) and purchase agreement for the 2023 Refunding Certificates of Participation (“2023 Refunding COPs). The POS serves as the offering document to investors and provides details about the terms of the 2023 Refunding COPs, the City’s financial condition, how the funds will be used, potential risks, and other relevant information. The POS helps potential investors make informed decisions about investing in the bonds.
SUMMARY
Under current market conditions, the City’s municipal advisor (NHA Advisors) and underwriter (BofA Securities, Inc.) estimate net present value savings from a potential refunding of the 2015 Certificates of Participation (“2015 COPs”) to be approximately $1.7 million and the aggregate cash flow savings is estimated to be in excess of $10 million. Under current market conditions, it is estimated that a potential refunding of the 2014 Lease Agreement would result in a slight net present value loss. However, staff and NHA Advisors continue to discuss the benefits of refunding the 2014 Lease Agreement and believe it may be in the best interests of the City to refund the 2014 Lease Agreement to unencumber the leased asset even if there are no net present value savings.
BACKGROUND
In August 2014, the City entered into a Lease Agreement dated as of August 1, 2014 (the “2014 Lease Agreement”), with the Public Property Financing Corporation of California (the “Corporation”), for the purpose of financing a new Fire Station No. 7 and a Firehouse Health Clinic to be located at the same site as Fire Station No. 7, under which the City agreed to pay semiannual lease payments (the “2014 Lease Payments”) to the Corporation. The Corporation assigned its right to receive the 2014 Lease Payments to Umpqua Bank (“Umpqua Bank”). The City may prepay the 2014 Lease Payments on any date, without a prepayment premium. As of September 1, 2023, the 2014 Lease Agreement has an outstanding principal balance of $2,482,104.
In October 2015, the Authority and the City entered into a Lease Agreement, dated as of August 1, 2015 (the "2015 Lease Agreement"), for the purpose of financing acquisition and construction of a number of capital improvements, including, but not limited to, (i) a new library and community learning center, (ii) improvements to existing fire stations and (iii) complete street rehabilitation and slurry seal repairs (collectively, the “2015 Project”), under which the City agreed to pay semiannual lease payments (the “2015 Lease Payments”) to the Authority. The Authority assigned its rights to receive the 2015 Lease Payments to The Bank of New York Mellon Trust Company, N.A. (the “2015 Trustee”), and the 2015 Trustee executed and delivered the $67,535,000 City of Hayward 2015 Certificates of Participation (“2015 COPs”). The 2015 COPs can be prepaid on November 1, 2023, and any date thereafter, without premium. As of September 1, 2023, the 2015 COPs has an outstanding principal balance of $52,245,000.
At its June 20, 2023 meeting, the City authorized delivery and sale of the 2023 Refunding COPs to refinance the City’s 2015 COPs and 2014 Lease Agreement as long as the refinancing resulted in (1) an aggregate minimum net present value savings to the City of at least 3% of the principal component of the 2014 Lease Payments and the 2015 Lease Payments and (2) positive net present value savings for each of the 2014 Lease Payments and the 2015 Lease Payments (when calculated separately), as such savings shall be verified and conclusively determined by the City’s municipal advisor (the “Savings Requirements”).
DISCUSSION
Under current market conditions, the City’s municipal advisor (NHA Advisors) and underwriter (BofA Securities, Inc.) estimate net present value savings from a potential refunding of the 2015 COPs to be approximately $1.7 million and the aggregate cash flow savings is estimated to be in excess of $10 million. It is anticipated that the refinancing will not require a debt service reserve fund. As a result, a refunding of the 2015 COPs will also allow for the release of the debt service reserve fund for the 2015 COPs, which has a balance of approximately $5.9 million and that may be used to contribute to the refunding and, as a result, reduce the principal amount of the 2023 Refunding COPs.
Under current market conditions, it is estimated that a potential refunding of the 2014 Lease Agreement would result in a slight net present value loss. For the reason that staff believes that there are economies of scale to combining the refunding of the 2014 Lease Agreement with the refunding of the 2015 COPs and public benefit from unencumbering the asset leased under the 2014 Lease Agreement (Police Station, located at 300 West Winton Avenue), staff recommends that the City Council and the Board of Directors amend the Savings Requirements to give the Finance Director the authority to authorize the refinancing of the 2014 Lease Agreement as long as the Finance Director determines that it would be in the best interests of the City.
The attached POS has been reviewed and approved for transmittal to the City Council and the Board of Directors by City staff and its financing team. The distribution of the POS 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 2023 Refunding COPs. 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 2023 Refunding COPs. If the City Council and Board of Directors conclude that the POS includes all facts that would be material to an investor in the 2023 Refunding COPs, they will authorize a member of staff to execute a certificate to the effect that the POS has been “deemed final.” The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over compliance with the federal securities laws, has issued guidance as to the duties of the City Council and the Board of Directors with respect to their 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 an issuer’s legislative body has knowledge of any facts or circumstances that an investor would want to know about prior to investing in a proposed securities issuance such as the 2023 Refunding COPs, 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 preliminary official statement. In the Release, the SEC stated that the steps that a member of the issuer’s legislative body could take include becoming familiar with the preliminary official statement and questioning staff and consultants about the disclosure of such facts.
The 2023 Refunding COPs represent lease payments made by the City from its General Fund. As such, information about the City’s General Fund is the focus of the POS, and the key provisions include the following:
Appendix B (“City of Hayward General Financial and Demographic Information”), which includes information about the City’s general fund budget (including the adopted fiscal year 2023-24 budget), historical general fund revenues and expenditures, reserve policies, pension and other retirement benefits (including their actuarial funded status); Appendix C, which contains the City’s Annual Comprehensive Financial Report for the fiscal year ended June 30, 2022; The section entitled “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS,” which describes constitutional and statutory limitations on the receipt of revenues and the expenditures of funds; and The section entitled “RISK FACTORS,” which highlights various risk factors related to the City’s general fund.
STRATEGIC ROADMAP
This agenda item does not directly relate to any of the six priorities outlined in the Council’s Strategic Roadmap.
FISCAL IMPACT
The net present value savings from refunding the 2015 COPs is projected to be approximately $1.7 million and the aggregate cash flows savings is estimated to be in excess of $10 million.
While refunding the 2014 Lease Agreement might result in a slight net present value loss, staff recommends that the City Council and the Board of Directors authorize the refunding of the 2014 Lease Agreement if the Finance Director and City Manager determine it is in the City’s best interests.
PUBLIC CONTACT
The agenda for this item was posted in compliance with the California Brown Act.
NEXT STEPS
Staff anticipates that a public offering of the 2023 Refunding COPs will offer the most cost-effective financing outcome for the City. Pending City Council approval of the POS at this meeting, staff will work with the financing team to finalize the POS and access the capital markets.
Prepared and Recommended by: Nicole Gonzales, Director of Finance Approved by:
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Kelly McAdoo, City Manager
2 June 20, 2023 City Council (https://hayward.legistar.com)