Financing Options Evaluated by Staff:
A. Eliminated Options
• IBank (Infrastructure Bank) Loan: The California IBank program is structured to finance projects repaid from City revenue sources. Because the West Street undergrounding project would be repaid solely by assessments collected from private property owners, it is unlikely to meet IBank eligibility requirements. (staff recommend removal).
• Private Placement: Most private placement structures are limited to terms of 15 to 20 years, whereas the West Street district’s property owners have expressed a strong preference for a 25-year term to reduce annual assessments. Given limited bank interest and shorter terms available, this option was eliminated. (staff recommend removal).
B. Remaining Options
1. Public Offering (25-Year Term): Bonds would be marketed to external investors, similar to the recent Diamond Street and Woods Cove undergrounding districts. This approach includes full disclosure, underwriting, and investor outreach. While the issuance costs are higher, the risk is minimal as the City does not hold the bonds.
Current market rates for 25-year tax-exempt bonds are approximately 4.77%.
2. City Purchase at Market Rate: The City may elect to purchase 100% of the bonds at the prevailing market rate. This option would eliminate underwriting, placement, and disclosure costs, resulting in an estimated savings of approximately $47,500 in issuance expenses. However, the City would hold the bonds as a 25-year investment, limiting liquidity.
3. City Purchase at Below-Market Rate: The City may also consider purchasing the bonds at an interest rate lower than the market rate, if it determines that doing so supports a valid public purpose (e.g., wildfire safety, community infrastructure investment). This would reduce property owner costs even further, but would generate lower investment returns to the City. A comparative analysis was completed to evaluate interest savings versus opportunity cost.
Estimated Financing Requirements
The table below shows the estimated financing costs and bond proceeds for each method:
Purchase Method Total Fees Bond
Issuance
Total
Cost Interest Rate
Public Offering $566,772 $5,010,000 $5,576,772 4.77%
City Purchase MR $460,081 $5,081,000 $5,541,081 4.77%
City Purchase Below MR $460,081 $5,081,000 $5,541,081 4.77% or less City Purchase at Discounted Rate – Sensitivity Analysis If the City elects to purchase the West Street bonds at a rate below the estimated market rate of 4.77%, property owners would benefit from lower total interest costs over the 25- Attachment 1
3 year repayment period. However, the City would also reduce its investment earnings by allocating capital to a lower-yielding, long-term investment.
This analysis models the financial implications of offering discounted bond rates ranging from 0.25% to 1.00% below the market-equivalent rate of 4.77%. It calculates two types of opportunity cost to the City:
• Opportunity Cost vs. Market Rate (4.77%) – Reflects the investment return the City would forgo by not charging the full market rate when holding the bonds as a City investment.
• Opportunity Cost vs. LAIF Rate (4.15%) – Reflects the difference between returns on discounted bonds and the City’s current short-term, highly liquid investment option.
As shown in the table below, deeper discounts result in increased interest savings for property owners, but also greater opportunity costs to the City under both benchmarks.
This side-by-side comparison helps quantify the tradeoff between supporting lower property assessments and preserving the City’s long-term investment returns.
Assumptions Used
• Bond principal: $5,081,000
• Amortization term: 25 years
• Market-equivalent bond rate: 4.77%
• LAIF rate: 4.15% (as of October 15, 2025)
Discount Rate
Below 4.77%
Property Owner
Interest Savings
City’s Lost
Opportunity
(Foregone Earnings)
at 4..77%
City’s Lost
Opportunity
(Foregone Earnings)
at 4.15%
0.25% (4.52%) $222,015 $222,015 -$323,542
0.50% (4.27%) $441,292 $441,292 -$104,266
0.75% (4.02%) $657,784 $657,784 $112,225
1.00% (3.77%) $871,449 $871,449 $325,590
The analysis confirms that the greater the discount offered on the bond rate, the higher the City’s opportunity cost. While reduced rates lower property owner payments, they increase the City’s forgone investment earnings over the 25-year term.
Additional City Contribution Equivalent:
An alternative approach to purchasing the bonds at a lower rate could be for the City to maintain the bond rate at market and instead provide an additional upfront contribution to reduce the overall bond principal.
Reducing the bond rate from 4.77% to 4.15%, equal to the City’s current LAIF investment return, would save property owners approximately $545,558 in interest over the 25-year repayment term. This reduction results in lower annual assessments for property owners. 4 Because the City would earn the same return (4.15%) on the bond as it does through LAIF, there is no opportunity cost relative to its current investment strategy. However, there is a significant opportunity cost when measured against the higher 4.77% market-equivalent rate that the City could otherwise charge.
Councilmembers may ask: What would it take to achieve the same benefit to property owners through a one-time contribution instead of offering a discounted rate? To deliver the same level of interest savings without lowering the rate, the City would need to make a one-time contribution of $545,558 to reduce the bond principal. This would lower property owner debt service and produce an identical long-term benefit, while allowing the City to maintain the full 4.77% return on the remaining invested capital.
Although a contribution requires more upfront funding, it avoids tying up capital in a longterm, fixed-rate investment and preserves greater liquidity and flexibility for future needs or unforeseen opportunities.
Legal Review of City Council’s Authority to purchase bonds at below market rate Staff consulted with the City Attorney’s Office to assess whether a City bond purchase at a below-market rate could be considered a gift of public funds under California law. The Public Finance legal team concluded that such a transaction would not constitute a gift of public funds, as the City is under no legal obligation to invest its reserves at a specific rate of return. Provided that the City Council determines the undergrounding project serves a public benefit, a discounted bond rate may be legally supported. 5