TO: HONORABLE MAYOR AND CITY
COUNCIL AND CITY OF SAN JOSE
FINANCING AUTHORITY BOARD
FROM: Julia H. Cooper
SUBJECT: SEE BELOW DATE: March 14, 2022
Approved Date
3/17/22
SUBJECT: APPROVAL OF THE SALE AND ISSUANCE OF BONDS AND
RELATED BOND DOCUMENTS FOR CITY OF SAN JOSE
FINANCING AUTHORITY, TAXABLE LEASE REVENUE BONDS,
SERIES 2022A (CONVENTION CENTER REFUNDING PROJECT)
RECOMMENDATION
(a) City Council take the following actions:
(1) Adopt a resolution to authorize the issuance and sale of the City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A (Convention Center Refunding Project) (2022A Bonds) in the not-to-exceed principal amount of $175,000,000 to refinance certain public capital improvements of the City, consisting of the expansion and renovation of the San José McEnery Convention Center, approve in substantially final form the Official Statement, Bond Purchase Agreement, Continuing Disclosure Certificate, Lease Agreement, Site Lease Agreement, and Pledge Agreement, and authorize the City Manager and other Authorized Officers, to execute and deliver these documents and any other related documents as necessary in connection with the issuance and sale of the 2022A Bonds.
(2) Adopt a resolution to authorize the City Attorney to negotiate and execute an agreement with Jones Hall, a Professional Law Corporation, for bond and disclosure counsel services in connection with the City of San José Financing Authority Taxable Lease Revenue Bond, Series 2022A (Convention Center Refunding Project) (2022A Bonds) for a term retroactive to November 3, 2021 through December 31, 2022 in an amount not to exceed $350,000 contingent on the issuance and sale of the 2022A Bonds.
(b) City of San José Financing Authority Board adopt a resolution to authorize the issuance and sale of the City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A (Convention Center Refunding Project) (2022A Bonds) in the not-to- exceed principal amount of $175,000,000 to refinance certain public capital improvements of the City, consisting of the expansion and renovation of the San José McEnery Convention Center, approve in substantially final form the Official Statement, COUNCIL/AUTHORITY BOARDAGENDA: 03/29/22
FILE: 22-409
ITEM: 2
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Indenture of Trust, Bond Purchase Agreement, Continuing Disclosure Certificate, Lease Agreement, Site Lease Agreement, and Pledge Agreement, and authorize the Executive Director and other Authorized Officers, to execute and deliver these documents and any other related documents as necessary in connection with the issuance and sale of the 2022A Bonds.
UNDER BOTH THE DEBT MANAGEMENT POLICY AND SAN JOSE MUNICIPAL CODE SECTION 4.34.200, APPROVAL OF THE ISSUANCE OF THE LEASE REVENUE BONDS REQUIRES A TWO-THIRDS VOTE BY THE CITY COUNCIL (8 VOTES).
OUTCOME
Approval of these recommendations will authorize the issuance and sale of the 2022A Bonds in an amount not to exceed $175,000,000 to refinance certain public capital improvements of the City of San José (City) consisting of the expansion and renovation of the San José McEnery Convention Center (Convention Center Refunding Project).
EXECUTIVE SUMMARY
The issuance and sale of the 2022A Bonds in an amount not to exceed $175,000,000 will refinance the Convention Center expansion and renovation project through the use of the net proceeds of the 2022A Bonds to refund the following outstanding obligations:
• City of San José Special Hotel Tax Revenue Bonds, Series 2011 (2011 CCFD Bonds) in the outstanding principal amount of $93.4 million
• City of San José Financing Authority Lease Revenue Bonds, Series 2011A (2011A Lease Revenue Bonds) in the outstanding principal amount of $27.3 million • City of San José Financing Authority Taxable Lease Revenue Commercial Paper Notes issued to finance, on an interim basis, the purchase of certain public capital improvements of the City and payment of certain related costs (Exhibit Hall Commercial Paper Notes) in the outstanding principal amount of $8.4 million • City of San José Financing Authority Taxable Lease Revenue Commercial Paper Notes issued to finance, on an interim basis, the purchase of certain real property in the City commonly known as the San José Convention Center South Hall and payment of certain related costs (South Hall Commercial Paper Notes) in the outstanding principal amount of $42.4 million
• Pay for the costs of issuing the 2022A Bonds
The refunding of the 2011 CCFD Bonds and the 2011A Lease Revenue Bonds is projected to generate approximately $27.5 million in net present value savings if current interest rates prevail at the time of sale. Refinancing the bonds will enable the City to create near-term savings to
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
mitigate the reduction in special hotel tax revenue, create more operating flexibility for the Convention Center by issuing low-cost taxable bonds, and reduce the risk of increases in the interest rates of the Exhibit Hall Commercial Paper Notes and the South Hall Commercial Paper Notes by refinancing these notes with the 2022A Bonds with a fixed interest rate and amortizing repayment over 20 and 30 years, respectively. In addition, by structuring the refunding transaction as General Fund lease, the refinancing of the 2011 CCFD Bonds will benefit from the City’s stronger lease revenue bond ratings relative to the existing special hotel tax ratings, thereby lowering the cost of debt service and maximizing savings.
While the City will incur a cost by replacing low-cost tax-exempt bonds with taxable bonds, as quantified in the memorandum, it would be doing so at a time when the spread is historically low and thereby provide much greater operating flexibility for the Convention Center. The issuance of taxable bonds and the release of the South Hall site from the leased assets, provides much greater flexibility for how that site is to be used in the future for convention center related purposes. In the event that the South Hall site is no longer operated or owned by the City for convention-related purposes, the use of sales proceeds along with consideration of remaining convention center debt will need to be evaluated and sales proceeds will likely need to be deposited into the Convention Center Facilities District Fund for the purposes prescribed under the resolution approving the formation of the district.
BACKGROUND
The City of San José Financing Authority (Authority) issues lease revenue bonds from time to time to assist the City in financing the acquisition and construction of public facilities. Unlike the City’s General Obligation Bonds, no new property taxes are imposed to pay the debt service on such bonds and no voter approval is required. Instead, lease revenue bonds are paid from City lease payments for the beneficial use of facilities. Typically, under this structure, the City enters into a site lease with the Authority under which the City leases City-owned facilities to the Authority, and concurrently, the City and the Authority enter into a lease agreement, under which the Authority leases such facilities back to the City (Lease).
Under the terms of the Lease Agreement, in exchange for beneficial use of the Convention Center, the City will use revenues, as defined in the Indenture of Trust, to make lease payments to the Authority (Lease Payments). The City will covenant under the Lease Agreement that as long as the City has beneficial use thereof, the City will take all necessary actions to include the semi-annual Lease Payments required to be made by the City under the Lease Agreement in the City’s annual budget and make the necessary appropriations annually.
The Convention Center Facilities District No. 2008-1, City of San José, County of Santa Clara, State of California (Convention Center Facilities District or CCFD) was established by the City under Chapter 14.32 of the Municipal Code of the City of San José (Chapter), which includes by reference, to the extent they are not amended by the specific terms of the Chapter, the provisions of the Mello-Roos Community Facilities Act of 1982, pursuant to:
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
(i) the City Council adopted Resolution No. 74826, which established the Convention Center Facilities District and authorized the levy of a special tax within the CCFD; and
(ii) an election was held on June 9, 2009, at which the then-qualified electors of the CCFD authorized the CCFD to incur bonded indebtedness and approved the levy of a 4% hotel special tax (Special Tax) within the CCFD.
The Special Tax is currently levied on 87 hotels representing 9,779 rooms that are part of the Convention Center Facility District.
Prior Bonds issued for Convention Center Expansion/Renovation to be refunded include:
• 2011 CCFD Bonds
On April 12, 2011, the City issued the 2011 CCFD Bonds for $107,425,000 for the purpose of financing the acquisition, expansion, construction, reconstruction, rehabilitation, replacement, and upgrade of the San José McEnery Convention Center.
The 2011 CCFD Bonds were secured from a pledge of the Special Tax. The principal amount outstanding on the 2011 CCFD Bonds was $93.4 million as of February 28, 2022.
• 2011A Lease Revenue Bonds
On April 12, 2011, the Authority issued 2011A Lease Revenue Bonds for $30,895,000 for the purpose of financing a portion of the cost of the expansion, rehabilitation and upgrading of the San José McEnery Convention Center. The 2011A Lease Revenue Bonds are secured by revenues and a pledge of Special Taxes on a subordinate basis to the pledge to the 2011 CCFD Bonds. The principal amount outstanding on the 2011A Lease Revenue Bonds was $27.3 million as of February 28, 2022.
Commercial Paper Notes related to Convention Center to be refunded:
• Exhibit Hall Commercial Paper Notes
In 2017, the Authority issued the Exhibit Hall Commercial Paper Notes in the aggregate principal amount of $15,000,000 to assist the City with financing, on an interim basis, certain public capital improvements of the City, consisting of lighting and ceiling upgrades to the exhibit hall of the Convention Center and certain related costs. The principal amount outstanding on the Exhibit Hall Commercial Paper Notes was $8.4 million as of February 28, 2022.
• South Hall Commercial Paper Notes
In 2018, the Authority issued the South Hall Commercial Paper Notes in the aggregate principal amount of $42,400,000 to assist the City with financing, on an interim basis, the purchase of certain real property in the City commonly known as the San José Convention Center South Hall and payment of certain related costs. The principal amount
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
outstanding on the South Hall Commercial Paper Notes was $42.4 million as of February 28, 2022.
ANALYSIS
The following section addresses staff’s recommendation to adopt the resolutions and includes discussions of the plan of finance, Debt Management Policy and Municipal Code requirements related to lease financings, description of the 2022A bonds, bond financing documents, financing team participants and the financing schedule.
Plan of Finance
The 2022A Bonds are being issued to accomplish the following primary objectives:
• Current refund on a taxable basis the 2011 CCFD Bonds, 2011A Lease Revenue Bonds, Exhibit Hall Commercial Paper Notes, and South Hall Commercial Paper Notes.
• Realize overall savings in debt service by:
• Refinancing the 2011 CCFD Bonds and 2011A Lease Revenue Bonds with new bonds issued at current low interest rates.
• Improving bond ratings from the prior structure with a refunding structured as a General Fund lease. The City’s stronger lease revenue bond ratings (relative to the prior special hotel tax ratings) will lower the cost of debt service and help maximizing savings.
• Eliminate interest rate risk on future Exhibit Hall and South Hall Commercial Paper debt service at a time of anticipated interest rate increases, by fixing out and amortizing the outstanding Commercial Paper (CP) over 20 years for the Exhibit Hall Commercial Paper borrowing and 30 years for the South Hall Commercial Paper borrowing. • The City’s payments on the outstanding Exhibit Hall and South Hall Commercial Paper, inclusive of fees, are estimated to be $2.63 million in fiscal year (FY) 2022 through FY 2025 and $1.23 million in FY 2025 and beyond.1 However these amounts do not include any amortization of the CP Notes issued for the South Hall site. With the refunding, the planned near-term peak of total debt service on the refinanced obligations will be eliminated and all commercial paper will be amortized based, in part, on savings from the refunding.
• Enable the release of the debt service reserve funds of the 2011 CCFD Bonds and the 2011A Lease Revenue Bonds, to be used as a source to refund the 2011 CCFD and the
1 CP interest rates based on Bloomberg Bond Yield Forecast of changes in 3-month LIBOR for Q2 2022 through Q2 2024 plus 0.25% (25 basis points). Analysis assumes original repayment of the outstanding Exhibit Hall Commercial Paper in FY 2025 and interest only paid on the South Hall Commercial Paper. Inclusive of fees, bond Bond interest rates based on MMD as of 3/2/2022, assumed ratings of Aa3/AA/AA-, and 50 bps cushion
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
2011A Lease Revenue Bonds.
• Create debt service savings through FY 2042, the term of the 2011 CCFD and 2011A Lease Revenue Bonds, with more significant relief provided through FY 2025 by structuring the refunding bonds debt service to mitigate the decline in Special Taxes due to the COVID-19 pandemic and allow for more gradual return to “normal”.
• The savings achieved through the refunding of the 2011 CCFD and 2011A Lease Revenue Bonds will enable the City to refinance the outstanding Exhibit Hall and South Hall Commercial Paper Notes with fixed rate bonds amortizing over 20 years and 30 years, respectively, without exceeding the current aggregate debt service for the outstanding 2011 CCFD Bonds and 2011A Lease Revenue Bonds as illustrated below.
City of San José Financing Authority
Taxable Lease Revenue Bonds, Series 2022A
Debt Service Payments with Comparison to Existing Debt Service Payments
• Provide flexibility for the use of the facility by removing federal tax law restrictions.
Refunding the CCFD Bonds and 2011A Lease Revenue Bonds on a taxable basis eliminates constraints on private activity associated with facilities that are financed or Maximizing debt service savings
in early years to support recovery
End of Original Exhibit
Hall CP amortization
South Hall debt amortization
Prior Debt Service of Fixed Rate
Bonds (2011 and 2011A bonds)
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
refinanced with tax-exempt proceeds, including potential future development of the South Hall site. This is consistent with the prior refunding of the 2001F Lease Revenue Bonds2 in 2017 with taxable tax allocation bonds in conjunction with the refunding of all outstanding Redevelopment Agency debt.
• While the savings and flexibility associated with refinancing the South Hall Commercial Paper Notes with taxable bonds will provide the City greater opportunities for future development for convention related purposes, the special taxes that will be a source of repayment for the debt associated with South Hall requires that South Hall continue to be used for convention-related purposes. To ensure ongoing compliance, staff intends to record a memorandum on title shortly after the proposed refinancing requiring future City Council to make a determination as part of the approval of a transaction related to the South Hall site that any proposed ground lease or sale is consistent with the requirements of the ordinance and resolutions authorizing the imposition and use of Special Taxes.
• Conversion from Tax-Exempt to Taxable Bonds – For reasons stated above, the 2022A Bonds will be issued as taxable bonds, but would have been eligible to remain as tax- exempt bonds. As interest rates are generally quite low, the absolute spread between taxable and tax-exempt bonds is small. The City’s Municipal Advisors have estimated total interest cost of issuing the 2022A Bonds as taxable bonds is 3.85% and as tax- exempt is 2.99% or a net present value difference of $10.5 million.
Debt Management Policy and Municipal Code Requirements Related to Lease Financings
The proposal to issue the 2022A Bonds is subject to the City's Debt Management Policy, City Council Policy 1-15 and San José Municipal Code Chapter 4.34 related to lease financings.
Under both the Debt Management Policy and Municipal Code Section 4.34.200, approval of the issuance of the lease revenue bonds requires two-thirds vote by the City Council (8 votes).
Under Section III(C), the Debt Management Policy requires periodic review of refunding opportunities that would produce at least three percent net present value savings. Based on prevailing market rates, the refunding of the 2011 CCFD Bonds and the 2011A Lease Revenue Bonds is estimated to produce net present value savings of $27.51 million over the life of the 2022A Bonds, which represents approximately 22.7% of the refunded 2011 CCFD Bonds and 2011A Lease Revenue Bonds. These estimated savings are based on March 2, 2022 interest rates plus an interest rate cushion to reflect the potential for interest rate increases prior to pricing. The actual savings will depend on the prevailing interest rates at the time of the bond sale in April 2022.
2 City of San Jose Financing Authority Lease Revenue Bonds, Series 2001F (Convention Center Refunding Project).
City and Redevelopment Agency entered into a Reimbursement Agreement in 1986 which was subsequently amended in 1993 and 2001 in conjunction with refunding of prior bonds. Under the Amended Reimbursement Agreement, the Redevelopment Agency had an obligation to reimburse the City for its Base Rental payments to the Authority. With the sale of the 2017 taxable tax allocation bonds all amounts due were paid and discharged.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
As the savings are subject to interest rate risk between now and the pricing of the 2022A Bonds in April and further actions of the U.S. Federal Reserve are expected to raise interest rates during that interval, the estimated debt service figures for the 2022A Bonds for this memo assume current interest rates plus 50 basis points or 0.50%. Other factors that could impact the pricing of the 2022A Bonds include the supply and demand for taxable municipal bonds, general interest rates, the ratings assigned to the 2022A Bonds and commentary by rating agencies, and the prepayment features negotiated at the time of the bond sale. The exact savings will almost certainly differ from the estimates provided here and there can be no assurance the full savings reflected here can be achieved in the bond market in April 2022 given changes in international events, such as the on-going war in Ukraine, national fiscal and monetary policy, and other world events that could change bond market conditions at the time of sale.
Description of the 2022A Bonds
2022A Bonds. The 2022A Bonds will be issued on a taxable basis for federal tax law purposes to refund on a current basis all outstanding 2011 CCFD Bonds, 2011A Lease Revenue Bonds, the Exhibit Hall Commercial Paper Notes, and the South Hall Commercial Paper Notes, and pay the costs of issuing the 2022A Bonds.
Security for the 2022A Bonds and Pledge of Revenues. Under the Indenture of Trust dated April 1, 2022 (Indenture), the 2022A Bonds are payable from and secured by a first pledge of and lien on revenues received by the Authority under the Lease dated as of April 1, 2022, between the Authority, as lessor, and the City, as lessee, consisting primarily of (i) Lease Payments made by the City under the Lease, (ii) Special Taxes paid by the City, on behalf of the CCFD, and received by the Trustee pursuant to the Pledge Agreement for the purpose of satisfying the City’s obligation to make Lease Payments under the Lease, and (iii) all interest derived from the investments in any fund or account established under the Indenture. The 2022A Bonds are also secured by certain funds on deposit under the Indenture.
Refunding Plan. The 2022A Bonds will be sold on a negotiated basis and the proceeds will be used to refund on a current basis the 2011 CCFD Bonds and the 2011A Lease Revenue Bonds, refund the Exhibit Hall and the South Hall Commercial Paper Notes, and pay the issuance costs of the 2022A Bonds. Interest on the 2022A Bonds accrues from the date of delivery and is payable semiannually on May 1 and November 1 of each year, commencing November 1, 2022 until final maturity on November 1, 2052.
Existing Debt Service Reserve Funds Release. The funds on deposit in the respective debt service funds for the 2011 CCFD Bonds and the 2011A Bonds will be used as a source to refund the 2011 CCFD and the 2011A Lease Revenue Bonds.
No New Debt Service Reserve Requirement. Based on the City’s high ratings and rating agencies’ and investors’ changing requirements for such reserves, the financing documents do not require the City to establish a debt service reserve fund to successfully market the 2022A
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Bonds. Given the relatively low interest earnings available on such reserves, the City does not anticipate funding a Debt Service Reserve Fund in connection with the 2022A Bonds.
Available Authorized Debt. On March 10, 2009, the City Council adopted Resolution No. 74827, the “Resolution Deeming it Necessary to Incur Indebtedness”, authorizing the City Council to issue, over the life of the Convention Center Facilities District, bonds in a principal amount not to exceed $750,000,000, and stating that the authorization to finance the acquisition and construction of the facilities includes, among other things, the issuance of debt.
The remaining authorization is net of any outstanding lease revenue bond issued by the San José Financing Authority, and hotel special tax bond, including parity debt, issued by the City of San José on behalf of the Convention Center Facility District. On the closing date of the 2022A Bonds, an estimated $560,880,0003 principal amount will remain authorized that can be issued or incurred by the City in the future, for and on behalf of the Convention Center Facilities District, under the Resolution Deeming it Necessary to Incur Indebtedness.
2022A Bonds Good Faith Estimates. The City’s Municipal Advisor, PFM Financial Advisors LLC, in consultation with Morgan Stanley and Stifel, the Booking Running Senior Manager and Co-Senior Manager respectively of the 2022A Bonds, has provided the good faith estimates to the City with respect to the 2022A Bonds in compliance with Section 5852.1 of the California Government Code.
The full good faith estimate appears as Appendix A to the Resolution approving issuance of the 2022A Bonds, but has been summarized below. The following are estimates only, all of which are subject to changing market conditions and may be higher or lower than estimated which the bonds are sold in April 2022:
• True interest cost for the 2022A Bonds is approximately 3.98%, which assumes interest rates based on market conditions as of March 2, 2022, plus 50 basis points (0.50%). • Finance charges of the 2022A Bonds are estimated to be $1,107,835 (assumes $758,177 in Costs of Issuance for Bond Counsel/Disclosure Counsel fees and expenses, Municipal Advisor fees and expenses, rating agency fees, title insurance, trustee fees and expenses, printing costs and other ancillary costs, and $349,658 for underwriters’ discount.) • Estimated proceeds of the 2022A Bonds expected to be received by the Trustee assuming that the Estimated Principal Amount of the 2022A Bonds is sold plus net premium and
3 Preliminary; subject to change based on the final results of this financing. Estimate based on the following:
CCFD Au thorization Amount $750,000,000
2011 CCFD Bonds (107,425,000)
2011A LRB Bonds (30,895,000)
CP - Exhibit Hall (8,400,000)
CP South Hall (42,400,000)
Balance Remaining $560,880,000
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
based on market interest rates prevailing at the time of preparation of such estimate, less the finance charge of the 2022A Bonds, as estimated above, is $164,607,165. • Total payment amount is estimated to be $$271,288,294 to the final maturity of the 2022A Bonds.
2022A Bonds Estimated Sources and Uses of Funds.
The estimated sources and uses of the 2022A Bonds and other funds for the financing are shown below:
City of San José
Taxable Lease Revenue Refunding Bonds, Series 2022A
Estimated Sources and Uses of Funds (1)
Sources of Funds:
Bond Proceeds – Par Amount $ 165,715,000
Release of Prior 2011 CCFD Reserve Fund 8,237,023
Release of Prior 2011A Lease Revenue Reserve Fund 2,292,757 Total Sources $ 176,244,780
Uses of Funds:
Refunding Escrow Deposit (2011 Bonds) 96,203,132
Refunding Escrow Deposit (2011A Bonds) 28,067,012
Refunding Deposit Exhibit Hall Commercial Paper 8,438,480 Refunding Deposit South Hall Commercial Paper 42,428,321 Cost of Issuance (2) 758,177
Underwriter’s Discount 349,658
Total Uses $ 176,244,780
___________________________________
(1) Preliminary; subject to change.
(2) Estimate of Bond Counsel/Disclosure Counsel fees and expenses, Municipal Advisor fees and expenses, rating agencies fees, trustee fees and expenses, and printing costs.
Obligation to Pay. Under the Lease Agreement, the City agrees to pay to the Authority, its successors and assigns, the lease payments in the amounts specified in the lease, to be due and payable in immediately available funds on the interest payment dates. The Authority will assign the City’s Lease Payments to the Trustee. The Lease Payments will be remitted by the City to the Trustee on each of the lease payment dates specified in the Lease Agreement.
Any amount held in the Bond Fund, the Interest Account, and the Principal Account on any Lease Payment date will be credited towards the lease payment then required to be paid under the Lease Agreement. The City is not required to deposit any Lease Payments with the Trustee on any Lease Payment date if the amounts then held in the Bond Fund, the Interest Account and the Principal Account are at least equal to the Lease Payment then required to be deposited with the Trustee.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Limited Pledge of Special Taxes and Revenue Stabilization Reserve. Under the Pledge Agreement dated as of April 1, 2022, between the City, for and on behalf of the Convention Center Facilities District, and the Authority (the Pledge Agreement), the City has pledged a lien and security interest on the Special Taxes for the benefit of the Authority as security for the City’s obligations to make Lease Payments. The City’s obligation to remit Special Taxes to the Trustee, to the extent such taxes are available are not subject to abatement under the Lease Agreement.
Under the Pledge Agreement, the City will also maintain a Revenue Stabilization Reserve equivalent to the maximum annual amount required to pay the Lease Payments required to be paid by the City (which equal the interest and principal due on the 2022A Bonds) and debt service on any future debt issued on behalf of the CCFD to the extent there are insufficient Special Taxes for such purpose. The proposed 2022A Bond refunding will require that the 2011 CCFD Revenue Stabilization Fund on deposit with the trustee, consisting of special taxes with an estimated balance of $10,284,561 along with any interest earned through closing, be liquidated and returned to the City to fund the Revenue Stabilization Reserve. Amounts held in the Revenue Stabilization Reserve are not pledged as security for the City’s obligations hereunder or any other obligations, including without limitation, the Bonds.
While the 2022A Bonds are outstanding, if on May 2, the amount in the Revenue Stabilization Reserve is less than the requirement under the Pledge Agreement and the Additional Special Tax is not being levied, the City Manager shall formally request the City Council to consider levying the Additional Special Tax (1%) for the following fiscal year. If on any May 2 in which the Additional Special Tax is currently levied, the amount in the Revenue Stabilization Reserve is less than the requirement, the City Council shall levy the Additional Special Tax for the following fiscal year. If on May 2 in a fiscal year in which the Additional Special Tax is being levied and the amount in the Revenue Stabilization Reserve is less than the requirement, the City Manager may formally request the City Council to appropriate in the budget for the following fiscal year, the portion of the City’s transient occupancy tax special fund available for the City’s operating subsidy to the convention and cultural facilities.
The establishment and maintenance of the Revenue Stabilization Reserve and mechanisms available to the City Council to raise additional funds are critical to minimize the likelihood of appropriation from the General Fund for the Lease Payments and assists in mitigating this risk due to the impact of future volatility in hotel special tax revenue.
Source of Payments; Covenant to Budget and Appropriate. Under the Lease Agreement, the Lease Payments are payable from any source of legally available funds of the City, subject to the provisions of the Lease Agreement regarding abatement of Lease Payments. During periods that the City does not have beneficial use of the Convention Center due to physical damage or destruction, the Lease Agreement provides that there is an abatement of Lease Payments.
Subject to the provisions of the Lease Agreement regarding abatement, the City covenants in the Lease Agreement to take all actions required to include the lease payments in each of its budgets
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
during the term of the Lease and to make the necessary appropriations for all lease payments and additional rental payments annually. This covenant of the City constitutes a duty imposed by law and each and every public official of the City is required to take all actions required by law in the performance of the official duty of such officials to enable the City to carry out and perform the covenants and agreements agreed to be carried out and performed by the City under the Lease.
The City will in no event be obligated to pay any Lease Payments or additional rental payments due under the Lease in any rental period for any succeeding rental period.
2022A Bond Financing Documents
Both the City Council and the Authority Board must adopt resolutions authorizing the issuance and sale of the 2022A Bonds (City Authorizing Resolution and the Authority Authorizing Resolution, collectively, the Authorizing Resolutions) and other related actions. The Authorizing Resolutions authorize the issuance and sale of the 2022A Bonds in the principal amount not to exceed $175,000,000 with a final maturity of May 1, 2052. Both Authorizing Resolutions will be posted to the agenda webpage for this joint meeting of the City Council and Authority Board on March 29, 2022.
There are bond financing documents that require City Council and/or Authority Board approval to proceed with the issuance of 2022A Bonds. Staff recommends that the City Manager, Director of Finance, or their authorized designees and the Authority’s Executive Director, Treasurer, or their authorized designees (Authorized Officers) be authorized to execute the agreements on behalf of the City and the Authority as described below. As modifications may be required prior to the closing, staff also recommends that the Authorized Officers each be authorized to execute the final version of each of these agreements as may be modified upon consultation with the City Attorney’s Office. In addition to these agreements, there are other agreements or documents that will be executed in connection with the issuance of the 2022A Bonds and the refunding of the 2011 CCFD Bonds, the 2011A Lease Revenue Bonds, the Exhibit Hall, and the South Hall Commercial Paper Notes. Staff recommends that the Authorized Officers each be authorized to execute these other agreements and documents upon consultation with the City Attorney’s Office.
Additionally, staff recommends that the Authorized Officers each be authorized to take actions as are necessary or advisable to obtain a municipal bond insurance policy for the 2022A Bonds if it is determined, upon consultation with the underwriters (defined below in Financing Participants) and the municipal advisor to the City, that such policies will facilitate the issuance of the bonds and/or reduce the true interest costs of the 2022A Bonds.
On or about March 17, 2022, the following principal financing documents for the 2022A Bonds described below, in substantially final form, will be posted to the City’s agenda website for the March 29, 2022 joint meeting of the Authority Board and City Council. City Council approval requires the affirmative vote by two-thirds of the City Council members (8 votes). These documents are required to be approved by City Council and Authority Board in order for the Authority to issue the 2022A Bonds.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Official Statement. The draft Preliminary Official Statement (POS) will be reviewed and approved for transmittal to the City Council by the Disclosure Working Group on or about March 10, 2022. The distribution of the POS by the City is subject to federal securities laws, including the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require the POS to include all facts that would be material to an investor in the 2022A 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 2022A Bonds. If the City Council concludes that the POS includes all facts that would be material to an investor in the 2022A Bonds and authorizes staff to proceed with the issuance of the 2022A Bonds, then one of the actions the City will take in the Authorizing Resolution is to authorize staff to execute a certificate to the effect that the POS has been “deemed final.”
The Securities and Exchange Commission (SEC) has issued guidance as to the duties of the City with respect to its approval of the POS. The SEC stated that, if a member of the authorizing board has knowledge of any facts or circumstances that an investor would want to know about prior to investing in the 2022A Bonds, whether relating to their repayment, tax status, undisclosed conflicts of interest with interested parties, or otherwise, they should endeavor to discover whether such facts are adequately disclosed in the POS. The SEC has stated that the steps that a member of the City Council could take include becoming familiar with the POS and questioning staff and consultants about the disclosure of such facts concerning the following areas:
Purpose of Financing Risks Relating to Repayment of the 2022A Bonds, as applicable
Documents for Approval; Security for the 2022A
Bonds
Requested Approvals
The information to address these areas in the Preliminary Official Statement can be found in body of the document in the INTRODUCTION section which describes the purpose of the 2022A Bonds and the source of repayment, among other things. More detailed information on these topics and on the risks related to repayment of the 2022A Bonds can be found in CERTAIN RISK FACTORS as well as in Appendix A. Appendix A provides demographic, economic, and financial information about the City. Appendix B, which provides detailed information regarding the retirement plans, is included in order to give investors an understanding of the impact of retirement costs on the City’s budget.
Staff recommends that City Council approve the POS in substantially the form posted to the agenda webpage for this meeting, with such additions thereto or changes therein as any of the Authorized Officers, acting alone, shall deem necessary, desirable, or appropriate upon consultation with the City Attorney. Staff further recommends that each Authorized Officer be authorized and directed, for and on behalf of the City and the Authority, to execute all certificates necessary to deem final the POS as of its date, with the exception of certain final pricing and related information. Staff has carefully reviewed the information contained in the
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
draft POS and believes it to be accurate and complete in all material aspects. Staff further recommends that the Authorized Officers be authorized and directed, each acting alone for and on behalf of the City, pursuant to the Authorizing Resolutions, to execute and deliver the Official Statement with such additions thereto or changes therein, as necessary.
If any councilmember has any personal knowledge that any of the material information in the Preliminary Official Statement is false or misleading, the councilmember must raise these issues prior to approval of the distribution of the document to potential investors in the 2022A Bonds.
City staff, representatives of Jones Hall, A Professional Law Corporation, the City’s bond and disclosure counsel for the 2022A Bonds, and representatives of PFM Financial Advisors LLC, the City’s municipal advisor for the bonds, will be available at the City Council meeting on March 29, 2022 to address any questions, issues, and/or concerns.
Legal Documents
Indenture of Trust. The Indenture is to be entered into by and between the Authority, as the issuer of the 2022A Bonds, and Wilmington Trust, National Association, as the Trustee for the 2022A Bonds. This agreement sets forth terms of the 2022A Bonds and contains the responsibilities and duties of the Trustee and the rights of the bondholders. Wilmington Trust was selected based on prior City experience with Wilmington Trust acting as trustee on other bond issues, and its proposed fees; Wilmington Trust serves as Trustee on other lease revenue bonds of the Authority.
Site Lease. The Site Lease is between the City (lessor) and the Authority (lessee). The City will lease the Convention Center (excluding the South Hall site) to the Authority. In exchange the Authority will make an upfront payment (the amount of the 2022A Bonds) that will be applied, among other costs to the refunding of the 2011 CCFD Bonds, the 2011A Lease Revenue Bonds, the Exhibit Hall, and the South Hall Commercial Paper Notes.
Lease Agreement. Under the Lease Agreement, the City will lease the Convention Center back from the Authority. The City has agreed to pay semiannual Lease Payments for the beneficial use of the Convention Center. The Lease Agreement also provides that lease payments are reduced or eliminated when there is substantial interference with the City’s use and occupancy of the facilities, such as damage or destruction from “abatement events.”
Pledge Agreement. Under the Pledge Agreement, the City, for and on behalf of the Convention Center Facilities District, will, among other things, agree to levy and collect Special Taxes to make lease payments required to be paid by the City to the Authority under the Lease Agreement, as permitted under to Section 14.32.300 of the Chapter and Section 53313.5(g) of the Mello-Roos Act, and pledge a lien and security interest in Special Taxes that are collected by the City to the payment of such lease payments for the benefit of the Authority under Section 5451 of the California Government Code to the extent provided in the Pledge Agreement.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Bond Purchase Agreement. The Bond Purchase Agreement is an agreement by and among the Authority, the City, and the underwriters as the initial purchasers of the 2022A Bonds. The Bond Purchase Agreement specifies the representations and warranties of the Authority and the City, the documents to be executed at closing, the final debt service schedule for the 2022A Bonds and the conditions that allow the underwriters to cancel the purchase of the 2022A Bonds. The Bond Purchase Agreement also specifies the amount of the underwriters’ discount on the 2022A Bonds, which the Authorizing Resolutions state shall not exceed 0.4% of the par amount of the 2022A Bonds.
Continuing Disclosure Certificate. Pursuant to the Continuing Disclosure Certificate, the form of which is appended to the POS, the City will covenant for the benefit of owners of the Bonds to provide to the Electronic Municipal Market Access System certain financial information and operating data relating to the City by not later than April 1 after the end of each fiscal year of the City, commencing on April 1, 2023 with the report for the 2021-22 Fiscal Year (Annual Report), and to provide notices of the occurrence of certain listed events. The specific nature of the information to be contained in the Annual Report or the notices of listed events is summarized in Continuing Disclosure Certificate. These covenants in the Continuing Disclosure Certificate will be made by the City in order to assist the underwriters of the 2022A Bonds in complying with SEC Rule 15c2-12(b)(5).
Financing Team Participants
• City’s Municipal Advisor: PFM Financial Advisors LLC
• Bond and Disclosure Counsel: Jones Hall, A Professional Law Corporation • Underwriters of 2022A Bonds Senior Manager (Book Runner): Morgan Stanley & Co.
Co-Senior Manager: Stifel Nicolaus & Co.
Co-Manager: Jefferies LLC
• Trustee for 2022A Bonds Wilmington Trust, N.A.
• Trustee for 2011 CCFD Bonds
and 2011A Lease Revenue
Bonds:
U.S. Bank National Association
• Trustee for Exhibit Hall and
South Hall Commercial Paper
Notes
Wells Fargo Bank, N.A.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
Financing Schedule
City Council/Authority Board Approval: March 29, 2022
Bond Pricing (expected): April 7, 2022
Bond Closing (expected): April 21, 2022
CONCLUSION
Approval of these recommendations will authorize the issuance and sale of the 2022A Bonds in an amount not to exceed $175,000,000 to refinance certain public capital improvements of the City consisting of the expansion and renovation of the San José McEnery Convention Center.
EVALUATION AND FOLLOW-UP
This memorandum presents a recommendation for the City Council’s approval of various actions related to the issuance of the 2022A Bonds and requires no follow-up to the City Council. The Finance Department will submit an informational memorandum on the pricing results after the closing of the 2022A Bonds.
CLIMATE SMART SAN JOSE
The recommendation in this memorandum has no effect on Climate Smart San José energy, water, or mobility goals
PUBLIC OUTREACH
On March 1, 2022, the Capital Facilities Advisory Committee for the Convention Center met as required under Resolution 74783 which states, that the City Council will, “before ordering the financing of any additional Convention Center Facilities, consult with the Capital Facilities Advisory Committee to consider its views on whether any of the Convention Center Facilities should be financed.” The plan of finance includes the refunding of the commercial paper notes issued for the Exhibit Hall and the South Hall with long-term bonds which are expected to be repaid from Special Tax revenues, so the Committee was convened. The Committee consists of four members from the City (Deputy City Manager, Budget Director, Finance Director and Assistant Director of OED/Cultural Affairs) and four members from the hotel industry. City staff presented the proposed plan of finance and the committee indicated its unanimous support.
This memorandum will be posted on the City’s Council Agenda website for the March 29, 2022 Council Meeting, along with all the referenced financing documents.
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
COORDINATION
This report was prepared by the Finance Department in compliance with the City’s Debt and Disclosure Policies and Procedures and in coordination with the City Manager’s Budget Office, the City Attorney’s Office, and the financing team participants.
COMMISSION RECOMMENDATION/INPUT
There is no commission recommendation or input associated with this action.
FISCAL/POLICY ALIGNMENT
The proposed financing plan is consistent with the City’s Debt Management Policy which establishes objectives in order to obtain cost-effective access to the capital markets, which includes minimizing debt service and issuance costs (including producing estimated net present value savings that are greater than 3% of the refunded debt); achieving a desired debt service profile; maintaining access to cost-effective borrowing; and ensuring compliance with applicable state and federal laws.
The proposed financing plan is consistent with the City Council-approved Guiding Principles for Budget and Financial Management for the City to meet its legal commitments and requirements with respect to repayment of bonds, and is consistent with the City Debt Management Policy, which establishes the following equally important objectives in order to obtain cost-effective access to the capital markets:
• Minimize debt service and issuance costs
• Maintain access to cost-effective borrowing
• Achieve the highest practical credit rating
• Full and timely repayment of debt
• Maintain full and complete financial disclosure and reporting • Ensure compliance with applicable state and federal laws
COST SUMMARY/IMPLICATIONS
The refunding of the 2011 CCFD Bonds and the 2011A Lease Revenue Bonds is projected to generate approximately $27.5 million in net present value savings. Refinancing the bonds will enable the City to create near-term savings to mitigate the reduction in special hotel tax revenue, create more operating flexibility for the Convention Center by issuing low-cost taxable bonds, and reduce the risk of increases in the interest rates of the Exhibit Hall Commercial Paper Notes and the South Hall Commercial Paper Notes by refinancing these Notes with the 2022A Bonds with a fixed interest rate and amortizing repayment over 20 and 30 years, respectively. In
HONORABLE MAYOR AND CITY COUNCIL AND CITY OF SAN JOSE FINANCING AUTHORITY BOARD March 14, 2022
Subject: City of San José Financing Authority Taxable Lease Revenue Bonds, Series 2022A
addition, by structuring the refunding transaction as General Fund lease, the refinancing of the 2011 CCFD Bonds will benefit from the City’s stronger lease revenue bond ratings relative to the existing special hotel tax ratings, thereby lowering the cost of debt service and maximizing savings.
Professional services (bond/disclosure counsel fees, municipal advisor fees, and rating agency fees) and other related costs are estimated to be approximately $758,177 and will be paid from cost of issuance proceeds from the 2022A Bonds. The bond proceeds will be net of the underwriters’ discount of approximately $349,658. The underwriters, municipal advisor, and bond/disclosure counsel work on a contingent basis and are only paid from the bond proceeds upon the successful closing of the 2022A Bonds.
Appropriation actions will be brought forward at the end of the fiscal year for the corresponding budget adjustments in the Convention Center Facility District Revenue Fund once the refunding has completed.
CEQA
Not a Project, File No. PP17-004, Government Funding Mechanism, or Fiscal activity with no commitment to a specific project which may result in a potentially significant physical impact on the environment
/s/
JULIA H. COOPER
Director of Finance
For questions, please contact Nikolai J. Sklaroff, Deputy Director of Finance, Debt & Treasury Management Division at (408) 535-7832.