DATE:
June 6, 2023
TO:
City Council of the City of Hesperia
FROM:
Nils Bentsen, City Manager
BY:
Casey Brooksher, Director of Administrative Services
SUBJECT:
Resolution of the City Council of the City of Hesperia and a Resolution of the Board of Directors of the Hesperia Joint Public Finance Authority, Each Authorizing the Issuance and Sale of the 2023 Refunding Lease Revenue Bonds and Related Documents and Actions
RECOMMENDED ACTION
It is recommended that the City Council adopt the following resolution:
Resolution No. CC 2023-24 – Resolution of the City of Hesperia approving, authorizing and directing execution of certain financing documents and directing certain related actions in connection with the refinancing of outstanding lease payment obligations It is recommended that the Hesperia Joint Public Finance Authority adopt the following resolution:
Resolution No. HJPFA 2023-02 – Resolution of the Hesperia Joint Public Finance Authority approving, authorizing and directing execution of certain financing documents and directing certain related actions in connection with the refinancing of an outstanding lease obligation of the City of Hesperia
BACKGROUND
In 2013, the Hesperia Joint Public Finance Authority (“Authority”) issued refunding bonds (“2013 Bonds”) to refinance the City of Hesperia’s (“City”) outstanding 2005 Variable Rate Demand Certificates of Participation (Civic Plaza Financing), which had financed the acquisition of the Civic Plaza. The 2013 Bonds are payable from lease payments made by the City from its General Fund. Based on current market conditions, there is an opportunity to refinance the outstanding 2013 Bonds for debt service savings (“Refunding Bonds”).
Issue Original Par
Hesperia Joint Public Finance Authority,
2013 Lease Revenue Bonds (Refinancing of the 2005 Civic Plaza Financing) * $12,445,000
* Callable any date after 10/1/2023 at par. Current outstanding principal balance is $9,610,000.
The City’s municipal advisor, in consultation with the proposed underwriter, estimates that, based on current market conditions:
(i) the projected debt service gross savings from issuing Refunding Bonds to refinance the outstanding 2013 Bonds is $2,121,900, or an average annual reduction in debt service payments of $163,223 over the next twelve (12) years. (ii) the projected true interest cost is estimated to be 3.53%, and (iii) the principal amount of outstanding bonds is projected to be reduced from $9,610,000 to $7,480,000.
The final bond year of the Refunding Bonds would remain the same as the 2013 Bonds, but the final maturity date will be extended by one month (from October 1, 2035 to November 1, 2035) to satisfy rating agency requirements.
The City’s Debt Policy requires a minimum net present value savings (including transaction costs) equal to at least 3% of the outstanding principal amount of the bonds to be refunded. Under current market conditions and using very conservative assumptions, the proposed refunding would result in projected net present value savings (including transaction costs) of 5.86% of the outstanding principal amount of the 2013 Bonds. In addition to generating debt service savings, the proposed refunding of the 2013 Bonds would also:
Potentially free up an encumbered City asset, which may facilitate future financings.
Use the existing debt service reserve fund to buy down the debt now instead of waiting to apply it as a credit against the debt service owed in the final year of the 2013 Bonds.
Reduce the principal amount of debt outstanding by about $2,130,000.
Below is a table summarizing the details of the Refunding Bonds:
*Preliminary subject to change. Based on interest rates as of May 2, 2023.
The Refunding Bonds will be payable from and secured by semi-annual lease payments made by the City to the Authority (and assigned to the Trustee) pursuant to the Property Lease described below with respect to the City properties identified in the list below (“Leased Property”). The City will covenant to budget and appropriate for the lease payments, subject to abatement in the event of eminent domain or property damage. Although the City is expected to pay the lease payments from its General Fund, there is no lien upon or pledge of any particular City revenues.
Initial Leased Property:
• City Hall*
• Civic Plaza Park
*It is anticipated that City Hall will be released and substituted with the Hesperia Branch Library.
Bond Sizing (Not-to-Exceed Amounts) - In order to authorize the sale of the Bonds, staff must provide not-to-exceed amounts in the City Resolution and the Authority Resolution. In order to provide staff with maximum flexibility in determining the optimal size of the Bonds, staff requests: a not to exceed principal amount of $9,000,000; a net present value savings of not less than 3% of the outstanding principal amount of the 2013 Bonds; and a not-to-exceed Underwriter’s discount of 1.10%. These limits have been included in the City Resolution and Authority Resolution to create a reasonable amount of flexibility for the City and the Authority, even though the final principal amount, and underwriter’s discount are anticipated to be less, and in the case of the net present value savings, savings are anticipated to be greater.
Official Action - Tonight’s action is the last step in the process to refund the 2013 Bonds. It is anticipated that the refunding will be completed in July 2023. The key milestones to complete the refunding are identified below:
Secure underlying credit rating and municipal bond insurance (Pending) Adoption of Resolutions approving the Refunding Bonds, Preliminary Official Statement and related financing documents (Tonight’s Action) Negotiated sale of Refunding Bonds (June 2023)
Refunding Bonds Closing (July 2023)
Approval of tonight’s resolutions will authorize the issuance of the Refunding Bonds and approve the Preliminary Official Statement and related documents and actions as follows:
Approve Preliminary Official Statement – The form of the Preliminary Official Statement is approved and Designated Officers of the City and the Authority are authorized to deem it final within the meaning of Rule 15c2-12 of the Securities Exchange Act of 1934. Stifel, Nicolaus & Company, Inc., as the underwriter for the Refunding Bonds (“Underwriter”), is authorized to distribute the Preliminary Official Statement to potential investors. Designated Officers are authorized to finalize the Official Statement after the Refunding Bonds have been priced by the Underwriter.
Approve Continuing Disclosure Certificate – The form of the Continuing Disclosure Certificate is approved in substantially the form thereof or with such changes as may be approved by a Designated Officer of the City and is included in the Preliminary Official Statement as Appendix D.
Approve Site and Facilities Lease – The form of the Site and Facilities Lease is approved in substantially the form thereof or with such changes as may be approved by a Designated Officer. The Site and Facilities Lease is between the City and the Authority and allows the City to lease the Leased Property to the Authority in order to allow the Authority to sub-lease the Leased Property back to the City pursuant to the Property Lease.
Approve Property Lease – The Authority will sub-lease the Leased Property back to the City pursuant to the Property Lease. The City will covenant in the Property Lease to budget and appropriate for the scheduled lease payments – in an amount sufficient to pay debt service on the Refunding Bonds – on an annual basis.
Approve Indenture – Under the Indenture, between the Authority and U.S. Bank Trust Company, National Association, as trustee, the Authority will issue the Refunding Bonds; the trustee will use the lease payments paid by the City and assigned by the Authority to pay debt service on the Refunding Bonds. Proceeds from the sale of the Refunding Bonds by the Authority to the Underwriter will be used by the Authority to pay the site lease payment. The proceeds of the site lease payment will be used to (i) fund a refunding escrow for the 2013 Bonds and (ii) pay the costs of issuing the Refunding Bonds. There is no debt service reserve fund for the Refunding Bonds.
Approve Escrow Deposit and Trust Agreement– This Agreement with U.S. Bank Trust Company, National Association, as escrow bank and trustee for the 2013 Bonds, governs the use of the Refunding Bonds proceeds (and other available funds, including the 2013 Reserve Fund) to pay the principal and interest due on the 2013 Bonds on October 1, 2023 and to redeem the remaining principal of the 2013 Bonds on October 1, 2023. This document includes directions to invest the Escrow Fund, and includes forms of redemption notice and defeasance notice.
Approve Bond Purchase Agreement – The form of the Bond Purchase Agreement is approved in substantially the form thereof or with such changes as may be approved by a Designated Officer. The City and the Authority will enter into a Bond Purchase Agreement with the Underwriter with respect to the Refunding Bonds. The Bond Purchase Agreement will specify the conditions under which the Underwriter will purchase the Refunding Bonds.
Approve Amendments to 2012 Financing Documents – The Finance Authority previously issued its 2012 Lease Revenue Bonds (Water Rights Acquisition) in the aggregate principal amount of $26,735,000 (the “2012 Bonds”), under an Indenture dated as of December 1, 2012; the 2012 Bonds are payable from lease payments made by the City under a Property Lease dated as of December 1, 2012 (the “2012 Property Lease”), between the Finance Authority as lessor and the City as lessee. Staff is recommending that the City amend the 2012 Property Lease and other documents related to the 2012 Bonds to release the Hesperia Branch Library and the Civic Plaza Park as leased property thereunder. This release will provide greater flexibility to the City with future financings. The amendments are approved in substantially the form on file with the City Clerk, with such changes as may be approved by a Designated Officer.
Approve County Subordination Agreement – Staff recommends that the Hesperia Branch Library be leased under the Property Lease and the Site Lease, but, in order to lease the Hesperia Branch Library, the City needs to receive from the County of San Bernardino a written subordination of its interests under an unrecorded lease agreement to the Property Lease and the Site Lease. The form of the subordination agreement between the City and the County is approved in substantially the form on file with the City Clerk, with such changes as may be approved by a Designated Officer. If required by the County, the Authority will be added as a party.
The resolution authorizes the Designated Officers to do any and all things and take any and all actions, which they, or any of them, may deem necessary or advisable in connection with the issuance, sale, and delivery of the Refunding Bonds.
Compliance with Federal Securities Laws - The attached Preliminary Official Statement has been reviewed and approved for transmittal to the City Council and the Board of Directors of the Authority by the City’s financing team. The distribution of the Preliminary Official Statement by the Authority 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 Refunding 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 Refunding Bonds. If the City Council and the Board of Directors conclude that the Preliminary Official Statement includes all facts that would be material to an investor in the Refunding Bonds, they must adopt a resolution that authorizes staff to execute a certificate to the effect that the Preliminary Official Statement has been “deemed final.” The Securities and Exchange Commission (the “SEC”), the agency with regulatory authority over municipal entities’ compliance with the federal securities laws, has issued guidance as to the duties of the City Council/Board of Directors with respect to their approval of the Preliminary Official Statement. 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 indicated that, if a member of the City Council/Board of Directors has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the Refunding Bonds, 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 indicated that the steps that a member of the City Council/Board of Directors could take include becoming familiar with the Preliminary Official Statement and questioning staff and consultants about the disclosure of such facts.
Set forth below is a summary of the financing, including cross-references to specific sections of the Preliminary Official Statement.
Purpose of Financing. The 2023 Bonds are being issued to (refinance the 2013 Bonds, which would reduce the semi-annual lease payments made by the City from its General Fund and (ii) pay the costs of issuing the 2023 Bonds. See the section of the Preliminary Official Statement entitled “REFUNDING PLAN.” Security for the Refunding Bonds. The 2023 Bonds will be payable solely from and secured by Revenues and certain funds and accounts held under the Indenture. Revenues consist primarily of lease payments (the “Base Rental”) payments to be made by the City pursuant to the Property Lease for the use of the Leased Property See “THE LEASED PROPERTY.” Under the Property Lease, the City covenants to take such action as necessary to include the Base Rental payments in its annual budgets and to make all necessary appropriations for such Base Rental payments (subject to abatement as described below). See “SECURITY FOR THE 2023 BONDS – Source of Payments; Covenant to Appropriate.” Risk Factors. Base Rental payments are subject to complete or partial abatement in the event and to the extent that there is substantial interference with the City’s right to use and occupy the Leased Property. See the sections of the Preliminary Official Statement entitled “SECURITY FOR THE 2023 BONDS – Abatement” and “BOND OWNERS’ RISKS – Abatement.” Abatement of Base Rental payments under the Property Lease, to the extent payment is not made from alternative sources as described in the Official Statement, would result in all Bond Owners receiving less than the full amount of principal of and interest on the 2023 Bonds. To the extent that moneys in any of the funds and accounts established under the Indenture or proceeds of rental interruption insurance are available, Base Rental payments (or a portion thereof) may be made during periods of abatement.
The Refunding Bonds are payable from Base Rental payments made by the City under the Property Lease. Because the City expects to pay the Base Rental payments from its General Fund, the Official Statement includes material information about the City’s finances in APPENDIX A. Risk factors related to the General Fund are set forth in the sections of the Preliminary Official Statement entitled “BOND OWNERS’ RISKS.”
FISCAL IMPACT
The issuance of the Refunding Bonds will result in an average annual reduction in debt service payments of approximately $163,223. These are estimated savings based on market conditions as of May 2, 2023, and are subject to change. Costs will be paid from the proceeds of the Refunding Bonds.
ALTERNATIVE(S)
Provide alternative direction to staff.
ATTACHMENT(S)
Resolution No. 2023-24
HPJFA Resolution No. 2023-02
Preliminary Official Statement (including Continuing Disclosure Certificate) Site and Facilities Lease
Property Lease
Indenture
Escrow Deposit and Trust Agreement
Bond Purchase Agreement
Amendment No. 1 to Site and Facilities Lease (related to the 2012 Bonds) Amendment No. 1 to Property Lease (related to the 2012 Bonds) Subordination Agreement
City of Hesperia STAFF REPORT City of Hesperia STAFF REPORT City of Hesperia
STAFF REPORT
City of Hesperia
STAFF REPORT
Staff Report to the Mayor, City Council and the Hesperia Joint Public Finance Authority Authorizing the issuance and sale of the 2023 Refunding Lease Revenue Bonds June 6, 2023