June 21, 2022
Finance Department
DATE: June 21, 2022
TO: Mayor Butt and Members of the City Council
FROM:
Anil Comelo, Interim Deputy City Manager
Delmy Cuellar, Director of Finance
Subject:
Resolution Authorizing Issuance of Taxable Pension
Refunding Bonds, Series 2022 ("2022 Refunding Bonds")
FINANCIAL IMPACT: Potential increase in annual debt service required because of need to fund termination payment on an
interest rate swap.
PREVIOUS COUNCIL
ACTION:
April 6, 2021; October 5, 2021; December 7, 2021, June
7, 2022
STATEMENT OF THE
ISSUE:
On June 7th, the City Council heard a presentation on
the proposed refinancing of the 2005 Pension Obligation Bonds ("2005 POBs"). The Council is being asked to
consider authorizing the issuance of the refinancing of the 2005 POBs, as well as to approve a supplemental
indenture for the refinancing.
RECOMMENDED ACTION:
APPROVE resolution authorizing issuance of taxable
pension refunding bonds, series 2022, to refund certain outstanding taxable pension funding bonds of the City,
authorizing the execution of a first supplemental
indenture, and approving and directing of other matters related thereto.
DISCUSSION:
Background. The City currently has the following outstanding two series of 2005 POBs:
(i) an approximately $18 million principal amount series maturing in 2023 (the "B-1 AGENDA
REPORT
June 21, 2022
Bonds"), and (ii) an approximately $130 million principal amount series maturing in 2034 (the "B-2 Bonds"). The City needs to refinance the $130 million series. The City is also party to two interest rate swaps (the “Swaps”) associated with the 2005 POB's.
However, the swap for the B-2 Bonds (the “B-2 Swap”) is subject to mandatory early termination on August 1, 2023, before which time the City will need to either (a) arrange financing to pay the market value of the B-2 Swap upon such early termination or (b) amend the B-2 Swap to remove, reduce, or delay the mandatory early termination.
The Refinancing Plan. The City's finance team has made a preliminary determination that refinancing both the B-1 and B-2 series of the 2005 POB's is advisable. As was explained to City Council at the June 7th presentation, this will enable the City to (1) make debt service payments several business days in advance of their due date, as opposed to the current mandate to make such payments about one year in advance and (2) eliminate the mandate for the County to directly transfer the pension tax override and other property tax revenue necessary for debt service to the trustee on the 2005 POB's. The City's finance team has also made a preliminary determination that a defeasance of the remaining 1999 bonds may be advisable for similar reasons.
In addition, the City's finance team has made a preliminary determination that extending the amortization period for the 2022 Refunding Bonds beyond the current final maturity for the B-2 Bonds of August 1, 2034, may be advisable. Such an extension may optimize the allocation of the City's approximately $24 million per year in pension tax override revenues to reduce future need to pay CalPERS costs from regular General Fund revenues.
The Options Allowed Under the Resolution. The authorizing resolution gives the City the option to (1) refinance both the B-1 and B-2 series of 2005 POB's and (2) amortize the principal on the 2022 Refunding Bonds for a period of up to 30 years. The resolution, however, does not commit the City to either of these options. As is explained in the Finance Schedule section below, the City Council would make a final decision on these options at its July 19 or July 26th meeting.
Maximum Authorized Principal Amount. The resolution authorizes a maximum principal amount for the refinancing of $170 million. This is significantly more than the combined outstanding amount of the 2005 POB's, which is approximately $146 million.
The difference between these two numbers allows additional bonds to be sold to fund the termination payment under the Swaps.
The "Good Faith Estimates" in Appendix A. The City's municipal advisor, NHA Advisors, is required by state law to provide "Good Faith Estimates" of the cost of a bond issue at the time the City Council adopts the authorizing resolution for a bond issuance. These estimates are shown in Appendix A of the authorizing resolution. The estimated amount of 2022 Refunding Bonds is shown in Appendix A at $155,755,000.
The difference between this figure and the $170 million maximum authorized principal amount in the authorizing resolution is due to (1) a scheduled major payment of
June 21, 2022
principal on the B-1 Bonds on August 1, 2023, and (2) the finance team wanting to be conservative on the amount of the swap termination payment.
The Supplemental Indenture. The authorizing resolution also approves a form of a Supplemental Indenture for the 2022 Refunding Bonds. This legal document is called a "Supplemental Indenture" because it is a supplement to the original indenture for the 2005 POB's. The Supplemental Indenture sets forth how all cash flows related to the 2022 Refunding Bonds are to be managed by the City and the bond trustee.
The Financing Schedule. The City Council will be asked to consider approval of other legal documents required for the 2022 Refunding Bonds at its meeting of either July 19th or July 26th. The Supplemental Indenture is recommended for approval on June 21st because if the actual closing for the bond issuance takes place 60 or more days after City Council approval, additional legal protections for all the bond provisions, including the pension tax override, is provided under State law.
As noted earlier, no final decision on (1) refinancing the B-1 bonds, (2) defeasing the 1999 bonds or (3) extending the term of the 2022 Refunding Bonds will be made until the proposed City Council action on July 19th or 26th. At that time, the City's finance team will provide a final recommendation based on the now in process actuarial analysis of the eligibility of future pension tax override revenues to pay future CalPERS expenses.
Assuming City Council approval of the other legal documents required by the 2022 Refunding Bonds, as well as the final recommendations on the financing plan, as described above, at its meeting of either July 19th or July 26th, the 2022 Refunding Bonds will be sold in late August.
DOCUMENTS ATTACHED:
Attachment 1 - A Resolution of the City Council of the City of Richmond Authorizing the Issuance of its Taxable Pension Refunding Bonds, Series 2022, to Refund Certain Outstanding Taxable Pension Funding Bonds of the City, Approving the Form and Authorizing the Execution of a First Supplemental Indenture and Approving and Directing Other Matters Related Thereto
Attachment 2 - First Supplemental Indenture By and Between the City of Richmond US Bank Trust Company, National Association, as Trustee