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:
Amend Contract with KPM as the City’s Swap Advisor to
Refinance the 2005 Series B Pension Obligation Bonds
("2005 POB's")
FINANCIAL IMPACT: The additional expenditure of $40,000 can be reimbursed to the General Fund as part of the refinance of the
Pension Obligation Bonds (POBs)
PREVIOUS COUNCIL
ACTION:
June 7, 2022; May 17, 2022; April 26; 2022
STATEMENT OF THE
ISSUE:
City staff and its finance team are proceeding with
refinancing the 2005 POBs. The services of a Swap
Advisor are critical to the analysis related to the City's refinancing efforts.
RECOMMENDED ACTION:
APPROVE an amended sole source contact with KPM to
extend the term through June 30, 2023, and increase the current contract amount by $40,000, for a total payment limit not to exceed $50,000, to perform swap analysis – Finance Department – (Anil Comelo/Delmy Culler 510-
620-6600).
DISCUSSION:
The City currently has two outstanding series of pension obligation bonds ("POB's"), an approximately $18 million series maturing in 2023 (the "B-1 Bonds") and a $130 million series maturing in 2034 (the "B-2 Bonds"). The City needs to refinance the $130 million AGENDA
REPORT
June 21, 2022
series. The City is also party to two interest rate swaps (the “Swaps”) associated with the 2005 Bonds. 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 (currently ~$30 million), or (b) amend the B-2 Swap to remove or delay the mandatory early termination. City staff is clear that the goal is to refinance the POBs with minimal cost and risk (recognizing that there is an inverse relationship between cost and risk). City staff will be seeking to provide the City Council with any private placement offers from banks. Additionally, the City Council will also be provided with the option to direct City staff to seek conventional financing as a publicly offered municipal bond.
A proposed schedule for the refinancing of the 2005 POBs has been developed. Due to the complexity of the transaction, the schedule is divided into four tracks: (1) PTO revenue management, (2) Interest rate swap work out, (3) Bank placement, and (4) Public offering. All four tracks need to proceed concurrently. We need to determine how best to comply with the Huntington Beach decision and protect the PTO revenues, as well as come to a negotiated solution with RBC on the swap before we sell the refinancing bonds. With respect to the refinancing, we need to proceed concurrently with both a bank placement and a public offering until we know which approach is best for the City.
As part of the preparatory efforts, City Council previously approved contracts with two underwriters, a municipal advisor, disclosure counsel, bond counsel, actuary, and regulatory reviewer. This Swap Advisor is the final and key member of the City’s bond team and will play a critical role in helping the City address the myriad of issues related to the complex world of Swaps.
The swap expertise is urgently needed as part of the refinancing of the POBs and to address the disposition of the $30 million (currently estimated at $22 million based upon current interest rate) termination fee. The bond refinancing process is under very tight timelines and is likely to conclude by the time a formal Request for Proposals (RFP) could have been conducted and the item taken to City Council for approval. City Council is expected to take action on the Bond issue on July 19, 2022, and the swap advisor services were needed starting in early June. While City staff did not have sufficient time to conduct a formal RFP, four firms were invited to submit qualifications, and the two firms that responded were invited for interviews. Both firms were highly qualified, but panelists believed that the representatives from KPM would be better able to articulate to the City Council the nuances of the issues and better represent the City in meetings with RBC. City staff representing the City Manager’s Office, the Finance Department, and the City Attorney’s office, were involved in the interviews which resulted in the selection of KPM. Since time was of the essence, pursuant the City Manager’s authority, KPM was retained with a contract not to exceed $10,000 with the goal of seeking City Council approval for the remainder of the total proposed $50,000 contract amount.
June 21, 2022
KPM has already provided the City with invaluable services associated with the swap and has greatly assisted the rest of the bond team. A principal from KPM has also taken the lead in communications and meeting with RBC regarding the swap/termination fee and general discussions regarding refinancing the POBs.
Therefore, City staff recommends approving the contract term extension and increase in total payment limit as set forth above.
DOCUMENTS ATTACHED:
Attachment 1 – Current Contract with KPM
Attachment 2 – Proposed First Amended Contract with KPM