DATE:
October 15, 2024
TO:
Mayor and Council Members
FROM:
Rachel Molina, City Manager
BY:
Casey Brooksher, Assistant City Manager
Anne M. Duke, Deputy Finance Director
SUBJECT:
City of Hesperia Community Facilities District 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California Special Tax Refunding Bonds, Series 2024
RECOMMENDED ACTION
For the purpose of achieving debt service savings that can be passed through to taxpayers, it is recommended that the City Council adopt Resolution No. 2024-52, authorizing the issuance of the City of Hesperia Community Facilities District 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California Special Tax Refunding Bonds, Series 2024 (the “Bonds”) to refinance outstanding bonds and approving all related documents and actions.
BACKGROUND
The CFD. The City of Hesperia (the “City”) previously conducted proceedings under the Mello-Roos Community Facilities Act of 1982, as amended (the “Mello-Roos Act”), to form “City of Hesperia Community Facilities District 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California” (the “CFD”). 2005 Bonds. On April 14, 2005, the City issued $18,554,508 initial principal amount City of Hesperia Community Facilities District No. 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California Special Tax Bonds, 2005 Series A (the “2005 CFD Bonds”). The 2005 CFD Bonds were issued to cause a refinancing and exchange of the $10,000,000 original principal amount of Community Facilities District No. 91-3 of the City of Hesperia, Special Tax Bonds (the “1992 Bonds”), which were in payment default.
Also on April 14, 2005, the Hesperia Public Financing Authority (the “PFA”), issued its $18,554,508 initial principal amount Hesperia Public Financing Authority 2005 Local Agency Revenue Bonds, Series A (Tranches A Through C) (the “2005 PFA Bonds”) for the purpose of financing the acquisition by the 2005 PFA Bonds’ trustee of the 2005 CFD Bonds.
Both the 2005 CFD Bonds and the 2005 PFA Bonds were structured as convertible capital appreciation bonds, meaning that they did not pay current interest and instead accreted interest to a set conversion date. The conversion date was September 1, 2006. At conversion, the principal amount of both series of bonds was $20,260,000. 2014 Bonds. On December 18, 2014, for the purpose of achieving debt service savings that were available as a result of the development of property in the CFD since 2005 and favorable market conditions, the City issued $18,450,000 initial principal amount City of Hesperia Community Facilities District No. 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California Special Tax Refunding Bonds, Series 2014 (the “2014 Bonds”). The 2014 Bonds were issued to cause a refunding of the 2005 CFD Bonds and the 2005 PFA Bonds.
ISSUES/ANALYSIS
Refinancing Opportunity. The 2014 Bonds are subject to optional redemption on March 1, 2025, without any prepayment premium. The underwriter of the proposed Bonds, Stifel Nicolaus & Company, Incorporated (the “Underwriter”), estimates that, under current market conditions, the net present value of the savings that could be realized by the City as a result of the issuance of the Bonds (after deducting the costs of issuing the Bonds) is approximately $858,497 or approximately 6.69% of the outstanding principal amount of the 2014 Bonds. Market conditions could change between the date of this report, and the date on which the Bonds are sold to the Underwriter, particularly because of the upcoming presidential election.
No Change in the CFD; Benefits of the Refinancing. The refinancing of the 2014 Bonds will not result in a change in the existing CFD or the rate and method of apportionment of special tax for the CFD. The refinancing does not extend the term of the debt. Instead, the refinancing allows the levy on property owners in the CFD to be reduced.
City staff expects all the savings from the proposed refinancing to accrue to property owners in the CFD in the form of lower special taxes because the special tax levied by the CFD pays for both debt service on bonds of the CFD and police and fire services, but the City is already levying the maximum authorized amount for police/fire services (which escalates every year).
Required Documentation. The following documents are required to accomplish the proposed lease financing:
Fiscal Agent Agreement: The City will issue the Bonds on behalf of the CFD pursuant to the Fiscal Agent Agreement, which is between the City, on behalf of the CFD, and U.S. Bank Trust Company, National Association, as fiscal agent. The Bonds will be payable only from proceeds of the special taxes and not from any other funds of the City.
Escrow Deposit and Trust Agreement: Under this agreement between the City and U.S. Bank Trust Company, National Association, the proceeds of the Bonds and other available funds related to the 2014 Bonds will be used to refinance the 2014 Bonds on March 1, 2025. Between the date of issuance of the Bonds in December 2024, proceeds of the Bonds will be invested in federal securities to further increase the debt service savings for the benefit of the taxpayers in the CFD.
Bond Purchase Contract: On a “pricing date,” the Underwriter and the City will enter into the Bond Purchase Contract that will detail the principal amount and interest rate on the Bonds and the conditions under which the Underwriter will buy the Bonds. The Bond Purchase Contract will establish a “closing date,” which will be approximately 2-3 weeks after the pricing date.
Official Statement: Prior to execution of the Bond Purchase Contract, the Underwriter will distribute to potential investors a “Preliminary Official Statement” that is prepared by the City. After execution of the Bond Purchase Contract, the Underwriter provides each investor with a copy of a final Official Statement, which is identical to the Preliminary Official Statement except that it includes the principal amount and interest rates agreed upon in the Bond Purchase Contract.
The attached Preliminary Official Statement has been reviewed and approved for transmittal to the City Council by City staff and its financing team. The distribution of the Preliminary Official Statement 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 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 Bonds. If the City Council concludes that the Preliminary Official Statement includes all facts that would be material to an investor in the Bonds, it 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 the City’s compliance with the federal securities laws, has issued guidance as to the duties of the City Council with respect to its 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 stated that, if a member of the City Council has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 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 stated that the steps that a member of the City Council could take include becoming familiar with the Preliminary Official Statement and questioning staff and consultants about the disclosure of such facts.” As described above, the Bonds will be payable from special taxes only, so the focus of the Official Statement is on the taxable property in the CFD. The security for the Bonds is described in the section of the Preliminary Official Statement entitled “SECURITY FOR THE 2024 BONDS”; information about the CFD is set forth in “THE DISTRICT”. The District is primarily built-out. Since issuance of the 2014 Bonds, there has been no need to levy special taxes on Undeveloped Property (property without a building permit), and staff does not expect that to change following issuance of the Bonds. The key risk factors associated with the Bonds are described in the section of the Preliminary Official Statement entitled “SPECIAL RISK FACTORS”.
Continuing Disclosure Certificate. Under Securities and Exchange Commission Rule 15c2-12, the Underwriter may only purchase the Bonds if it has determined that the City is obligated to provide continuing disclosure, including annual updates of the financial and operating data included in the Official Statement.
CITY GOAL SUPPORTED BY THIS ITEM
Financial Health – Maintain a balanced budget and adequate reserves.
FISCAL IMPACT
Subject to market conditions, which could be impacted by, among other things, the upcoming presidential election, the City expects to generate significant savings for property owners in the CFD. All costs of the refinancing will be paid with the proceeds of the Bonds.
The City Council resolution authorizes issuance of the Bonds only if they will result in at least 3% net present value savings, which is a minimum industry savings standard for refinancings.
ALTERNATIVES
Provide alternative direction to staff.
ATTACHMENTS
Resolution No. 2024-52
Preliminary Official Statement (including the Continuing Disclosure Certificates as an appendix) Fiscal Agent Agreement between the City and U.S. Bank Trust Company, National Association (On file in the City Clerk’s Office) Escrow Deposit and Trust Agreement by and between the City and U.S. Bank Trust Company, National Association (On file in the City Clerk’s Office) Bond Purchase Contract (On file in the City Clerk’s Office) 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 and City Council
City of Hesperia Community Facilities District 2005-1 (Belgate Development Restructuring), County of San Bernardino, State of California Special Tax Refunding Bonds, Series 2024 October 15, 2024