STAFF REPORT TO THE BOARD OF DIRECTORS OF THE SUCCESSOR AGENCY TO THE HERCULES REDEVELOPMENT AGENCY DATE: Regular Meeting of July 26, 2022
TO: Board of Directors of the Successor Agency to the Hercules Redevelopment Agency
VIA: Dante Hall, City Manager
SUBMITTED BY: Edwin Gato, Finance Director
SUBJECT: Report on Successor Agency to the Hercules Redevelopment Agency 2022 Tax Allocation Refunding Bonds RECOMMENDED ACTION:
Receive report.
EXECUTIVE SUMMARY:
The 2022 Tax Allocation Refunding Bonds (“2022 Bonds”) refunded all outstanding tax allocation bonds with net present value savings of approximately $2.17 million or 2.40% of the principal refunded, and gross nominal savings of over $13.0 million.
FINANCING OVERVIEW:
Purpose: The 2022 Bonds were issued to refund all the current Successor Agency to the Hercules Redevelopment Agency’s outstanding tax allocation bonds, to purchase a municipal bond insurance policy and surety reserve policy, and to pay other costs of issuance. The 2022 Bonds were issued in two series: the tax-exempt $29.51 million Tax Allocation Refunding Bonds, Series 2022A and the $51.18 million Tax Allocation Refunding Bonds, Series 2022B (Federally Taxable).
Security: The 2022 Bonds are secured by Pledged Tax Revenues, which is tax increment (the portion of property tax revenues collected above project area base year values) generated in the Merged Project Area after payment of certain County administrative fees. The Indenture also allows for the payment of Developer Agreements prior to the 2022 Bonds, as described below. In the post-dissolution era, the Agency must submit annual payment schedules (known as "ROPS") listing all its obligations for approval by an oversight board and the State Department of Finance before funds can be transferred to it by the County Auditor-Controller in each semi-annual period.
Negotiated and Statutory Pass-Through Payments: Under the Dissolution Act, certain payments of tax increment to Contra Costa County, pursuant to a negotiated agreement, and to other taxing entities, pursuant to AB1290 statutory pass-through formulas, are required to be paid out of the Agency’s Redevelopment Property Tax Trust Fund prior to payment of the Agency’s bonds and other enforceable obligations, unless such taxing entity payments are subordinated to Agency debt. The County Auditor-Controller, not the Agency or the City, is responsible for calculating these taxing entity payments (sometimes referred to as “pass through payments”) and paying the required amounts to the County and other taxing entities. The Agency pursued the statutory 45-day notice process to subordinate the AB1290 payments to the 2022 Bonds and secured affirmative consent from the County to subordinate the County Agreement to the 2022 Bonds. In preparing the tax increment projections for this financing, the fiscal consultant discovered that the County Auditor-Controller had not properly calculated these amounts over the past several years. The County Auditor-Controller now recognizes these amounts as past due and payable, on a basis subordinate to the 2022 Bonds.
Lien Priority of Various Developer Agreements and Pass-Through Payments: The Agency has outstanding two Developer Agreements, recognized as enforceable obligations, which have not been expressly subordinated to the Agency’s bonds. The County Auditor-Controller interprets the Dissolution Law as prohibiting the subordination of pass-through payments to enforceable obligations other than “bonded debt.” Consequently, the Auditor-Controller intends to repay the current year pass through payments and past due pass-through amounts after debt service but before the Developer Agreements. The 2022 Bonds were structured to facilitate rapid repayment of past due pass-through payments and restoration of current year Developer Agreement payments by the second installment of fiscal year 2024 (ROPS 23-24B), and repayment of past due Developer Agreement payments by the first installment of fiscal year 2025 (ROPS 24-25A) (based on the fiscal consultant’s projections of available tax increment revenues).
It is important to note that, if the Agency had not issued the 2022 Bonds to refund its prior bonds for debt service savings, it would have taken longer to repay the past due pass-through payments; and therefore, residuals to the affected taxing entities and Developer Agreement payments would have been deferred for a longer period of time.
Ratings: S&P assigned an underlying rating of “A-” to the 2022 Bonds, noting the strong local economy and wealth levels, the strong growth in Merged Project Area assessed values, low volatility ratio and strong debt service coverage, tempered by the relatively concentrated tax base. Debt service payments on all maturities of the 2022 Bonds will be insured by Assured Guaranty (AGM); as a result, the 2022 Bonds were sold on the basis of AGM’s “AA” rating.
Market Conditions: The 2022 Bonds came to market at a time of rising interest rates, weakened investor demand, and economic uncertainty. Inflationary pressure and Federal Reserve actions to aggressively combat inflation and taper its market support have driven interest rates up dramatically since January 2022. Russia’s invasion of Ukraine and resulting sanctions increased geopolitical tensions and heightened economic uncertainty and market volatility. Federal Reserve Open Market Committee raised the short-term rate by 25 basis points in March and telegraphed expectations for multiple additional rate hikes in 2022, including the expected 50 basis point hike in May. Treasury yields climbed sharply across the yield curve since January 2022 with the short end rising fastest to create an extremely flat yield curve; by April 28th, the 2-year Treasury rate of 2.63% was within 29 basis points of the 30-year rate of 2.92%. Municipal rates followed a similar trajectory – increasing by over 166 basis points in every maturity since January, amidst the pressure of rising Treasury yields exacerbated by large outflows from municipal bond funds. After inflows into municipal bond funds through much of 2020 and 2021, investors withdrew funds from this asset class in 10 of the 11 weeks leading up to the Agency’s bond sale. In just the week prior to sale, investors withdrew $3.5 billion from municipal bond funds.
Pricing: The tax-exempt 2022A Bonds were structured with two term bonds, both priced with 5% coupons. The 2022A Bonds priced at yields of 3.70% in 2037 and 3.85% in 2042, both assuming a par call on August 1, 2032. The federally taxable 2022B Bonds were priced at par with yields ranging from 2.568% to 5.013%.
Call Features: The 2022A Bonds maturing on or after September 1, 2033, are callable on any date on or after September 1, 2032, at 100% of par plus accrued interest to the date of redemption. The 2022B Bonds were sold as non-callable given their 2034 final maturity.
Structure and Refunding Results: The 2022 Bonds refunded all four outstanding series of tax allocation bonds with net present value savings of approximately $2.17 million or 2.40% of the principal refunded and gross nominal savings of over $13.0 million. The 2022 Bonds were carefully structured to comport with the Agency’s previously submitted ROPS requests to facilitate rapid repayment of past due amounts arising from the County Auditor-Controller’s miscalculations of certain prior year pass through payments. Principal on the 2022 Bonds was deferred in full in 2023 and in part in 2024 to enable rapid repayment of the past due pass-through amounts. Based on the previously submitted ROPS requests and the restructured debt payments, the Agency will need to submit Notices of Insufficient Funds for each semi-annual period until past amounts are paid to ensure that the Agency receives sufficient moneys from the RPTTF to pay debt service on the 2022 Bonds. Based on projected Pledged Tax Revenues, the Agency is not expected to have sufficient funds to pay the Developer Agreements in the second installment of FY22, all of FY23, and a portion of FY24. Current amounts are expected to be timely paid beginning with the second installment of FY24, and past due amounts are projected to be repaid in full in the first half of FY25. Current year and past due other enforceable obligations, including the Agency’s administrative cost allowance, are also projected to be repaid by FY25. After all payments are brought current, residuals will be restored and cash flow savings from the refunding will benefit affected taxing entities. Without the refunding, it would have taken longer to repay the past due pass-through payments; and therefore residuals to the affected taxing entities and Developer Agreement payments would have been deferred for a longer period of time.
Financial Impact
Description:
Funding Source:
Budget Recap:
Total Estimated cost: $ New Revenue: $
Amount Budgeted: $ Lost Revenue: $
New funding required: $ New Personnel: $
Council Policy Change: Yes No
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