TO: HONORABLE MAYOR
AND CITY COUNCIL AND CITY
OF SAN JOSE FINANCING
AUTHORITY BOARD
FROM: Maria Öberg
Jeffrey Provenzano
SUBJECT: Subordinate Wastewater
Commercial Paper Program
DATE: September 8, 2026
Approved Date:
9/15/26
CO
UNCIL DISTRICT: (Citywide)
RECO
MMENDATION
(a) City Council adopt a resolution approving the issuance and sale of the City of San José Financing Authority Subordinate Wastewater Revenue Commercial Paper Notes from time to time in an aggregate principal amount not to exceed $200 million outstanding at any one time, approving in substantially final form a Commercial Paper Offering Memorandum, one or more Commercial Paper Dealer Agreements, an Issuing and Paying Agent Agreement, a Subordinate installment Purchase Contract, a Reimbursement Agreement, and a Fee Agreement and authorizing the City Manager and other authorized officers of the City to execute and deliver these documents and any other related documents as necessary in connection with the issuance and sale of the Commercial Paper Notes from time to time, and authorizing the negotiation, execution and delivery of documents necessary or advisable from time to time to provide for one or more extensions of the Letter of Credit supporting the Commercial Paper Notes, provided that no such extension shall require the payment of a facility fee rate (as defined in the fee agreement) of more than 1.00% based on the obligor ratings (as defined in the Reimbursement Agreement) in effect as of the date of any such extension.
(
b) City of San José Financing Authority Board adopt a resolution authorizing the issuance and sale of its Subordinate Wastewater Revenue Commercial Paper Notes from time to time in an aggregate principal amount not to exceed $200 million outstanding at any one time, approving in substantially final form a Commercial Paper Offering Memorandum, one or more Dealer Agreements, an Issuing and Paying Agent Agreement, a Subordinate Installment Purchase Contract, a Reimbursement Agreement, and a Fee Agreement, and authorizing the Executive Director and other authorized officers of the Authority to execute COUNCIL/SJFA AGENDA: 9/29/26
FILE: 26-1007
ITEM: SJFA1
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
and deliver these documents and any other related documents as necessary in connection with the issuance and sale of the Commercial Paper Notes from time to time, and authorizing the negotiation, execution and delivery of documents necessary or advisable from time to time to provide for one or more extensions of the Letter of Credit supporting the Commercial Paper Notes, provided that no such extension shall require the payment of a Facility Fee Rate (as defined in the Fee Agreement) of more than 1.00% based on the obligor ratings (as defined in the Reimbursement Agreement) in effect as of the date of any such extension.
SUMMARY AND OUTCOME
Approval of these recommendations will authorize the issuance and sale of the City of San José Financing Authority (Authority) Subordinate Wastewater Commercial Paper Notes (CP Notes) from time to time in an aggregate principal amount not to exceed $200 million outstanding at any one time and the execution and delivery of related documents, including a three-year Reimbursement Agreement with Bank of America, N.A. (BofA) pursuant to which BofA will issue an irrevocable transferrable direct-pay letter of credit (LOC) to support payment of principal of and interest on the CP Notes at maturity. The proceeds of the CP Notes will refinance the outstanding Subordinate Wastewater Revenue Notes, Series A (tax-exempt) (Revenue Notes) and provide interim financing for capital improvements and related costs of the San José-Santa Clara Regional Wastewater Facility and other City wastewater system projects.
Approval of these recommendations will also authorize the authorized officers of the Authority and the City to negotiate and deliver documents necessary to extend the term of the LOC in the future, as long as the Facility Fee Rate under the Fee Agreement is not more than 1.00% as of the date of the extension.
BACKGROUND
Wastewater System Overview
The Environmental Services Department, in partnership with the Transportation Department and the Public Works Department, is responsible for operating the sewer collection and conveyance system (Sanitary Sewer Collection System) and the San José-Santa Clara Water Pollution Control Plant
1 (Treatment Plant), a regional
wastewater facility serving eight South Bay cities and unincorporated areas of the Santa Clara County. The Sanitary Sewer Collection System is owned and operated by the City, and together with the Treatment Plant, forms the City’s Wastewater System.
1 On March 26, 2013, the City Council approved changing the name of the Treatment Plant to the San José-Santa Clara Regional Wastewater Facility for use in public communications and outreach.
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
The Sanitary Sewer Collection System consists of over 2,000 miles of sewer mains, 17 pump stations, and other critical infrastructure that conveys sewage to the Treatment Plant. The Sanitary Sewer Collection System Capital Improvement Plan (CIP) is guided by several interrelated plans, and chief among them is the Envision San José 2040 General Plan (General Plan). The General Plan provides a guide for all capital improvement programs to align public infrastructure investment with San José’s plans for future growth. This means that the projects included in the Sanitary Sewer Collection System CIP ensure adequate sewer capacity and reliability to safely convey sewage city-wide, as well as within those areas designated for future development. The land uses and growth included in the General Plan were also used in the development of the Sanitary Sewer Master Plan – Phase II and Update of Phase I, which was completed in April 2013, and in the development of Phase III and Update of Phase II, which was recently completed. The 2027-2031 CIP consists of over $300 million in investment into the Sanitary Sewer Collection System.
The Treatment Plant is jointly owned by the cities of San José and Santa Clara and is administered and operated by the City of San José Environmental Services Department. The tributary agencies include the City of Milpitas, West Valley Sanitation District (Campbell, Los Gatos, Monte Sereno, and Saratoga), Cupertino Sanitary District (Cupertino), County Sanitation District 2-3 (unincorporated County), and Burbank Sanitation District (unincorporated County). Historically, the City utilized the San José- Santa Clara Clean Water Financing Authority as the issuer of bonds to finance improvements at the Treatment Plant, where one or more tributary agencies and/or the City of Santa Clara participated in the financing. In recent years, the tributary agencies and Santa Clara have financed their shares of the capital costs independently. The City utilizes the Authority for financing its share of capital costs.
The Treatment Plant CIP is guided by the updated Plant Master Plan (PMP). The original planning-level document
2 focused on long-term rehabilitation and modernization of the Treatment Plant. The PMP originally recommended approximately $2.0 billion in capital improvement projects to be implemented over 30 years, through 2040. The PMP was approved by both the San José and Santa Clara City Councils in late 2013. In 2025, a technical update to the PMP was completed. The projects in the PMP were updated to reflect current conditions, regulatory requirements, changing market conditions, and lessons learned from past project delivery. The technical update refined priorities, phasing, scopes, schedules, costs, and delivery methods for recommended capital improvements over the next 25 years (through 2050). To date, the Treatment Plant CIP has completed approximately $1.2 billion of work and estimates approximately $1.6 billion of investment over the next 10 years, and an additional $1.1 billion through 2050. This work will rehabilitate and modernize the Treatment Plant while meeting future regulatory requirements and capacity needs.
2 Plant Master Plan: https://www.sanjoseca.gov/home/showpublisheddocument/206/636611441889800000
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
Subordinate Wastewater Revenue Notes
The Subordinate Wastewater Revenue Notes Credit Agreement (Revenue Notes Agreement) was originally executed on October 19, 20173, by and among the City, the Authority, and Wells Fargo Bank, N.A. (WF), as an interim financing facility for the City’s portion of CIP projects for the Treatment Plant.
Since its inception, the Revenue Notes Agreement has been amended periodically, with the most recent amendment approved on June 20, 2023
4. The Revenue Notes
Agreement is scheduled to expire on October 16, 2026. As of the date of this City Council meeting, the City has outstanding Revenue Notes in the principal amount of $90,097,862.
In anticipation of the Revenue Notes Agreement expiring, City staff, in coordination with the City's municipal advisor, Public Resources Advisory Group, engaged WF to negotiate an extension of the Revenue Notes Agreement. WF proposed extension terms would lead to a significant cost increase in short-term borrowing.
ANALYSIS
Request for Proposals Process
On June 18, 2026, the Finance Department issued a Request for Proposals, inviting qualified financial institutions to respond with proposals to support either a Commercial Paper Program or a Revolving Line of Credit. The City received three proposals. The evaluation team analyzed the proposed terms and determined that an LOC-backed CP program would be more favorable to the City for its attractive pricing and lower interest cost. To improve pricing and other terms, two firms were selected to provide a Best and Final Offer. On July 24, 2026, the evaluation team selected BofA to provide an LOC to support a new CP program to provide an interim financing facility for the Sanitary Sewer Collection System’s CIP and the City’s share of CIP projects for the Treatment Plant, which is subject to negotiation and execution of definitive agreements with the City and the Authority.
Financing Plan
Pursuant to the Reimbursement Agreement, BofA will issue an LOC in the principal amount of $200,000,000, commensurate with the current commitment under the Revenue Notes Agreement. The LOC commitment contains an interest component calculated at the rate of 12% per annum for a period of 270 days (calculated on the basis of a 365-day year), which, when added to the principal commitment, results in a
3 October 3, 2017 Joint Council/Authority Meeting: October 3, 2017 Joint Council/Authority Meeting 4 June 20, 2023, Joint Council/Authority Meeting: June 20, 2023, Joint Council/Authority Meeting:
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
total commitment of $217,753,425. Concurrently with the issuance of the LOC, CP Notes will be issued, and the proceeds will be used to fully prepay the outstanding Revenue Notes in the amount of $90,097,862 plus interest thereon.
Under the Fee Agreement, the Authority and the City are required to pay BofA a Facility Fee equal to 0.31% of the full capacity of $200,000,000, due quarterly. The Facility Fee may be increased if the 2022B Bonds credit rating is downgraded. The Authority and the City will also be required to pay Draw Fees of $250 per draw. Interest on the CP Notes is calculated on the actual principal amount of CP Notes issued or re-issued at each maturity date. The rate of interest is market-dependent and may not exceed 12%.
The CP Notes will provide needed flexibility and liquidity as the City funds Wastewater System capital improvements. As the amount of CP Notes outstanding grows (up to a maximum of $200 million), the Authority will periodically issue long-term wastewater revenue bonds to refinance all or a portion of the notes. Potential risks associated with the CP Program include market risk, variable interest rate risk, potential credit downgrade of the senior wastewater revenue bonds, and the bank providing the LOC. (See Attachment A for the technical aspects of the CP process.)
Source of Repayment
The Amended and Restated Master Resolution was adopted by City Council on November 15, 2022, and governs the use of Wastewater System Revenues, including the terms and conditions under which the City may pledge Net System Revenues to the payments of Wastewater System obligations.
The CP Notes will be limited obligations of the Authority and payable from the installment payments to be paid by the City under a Subordinate Installment Purchase Contract to be executed by the Authority and the City. Pursuant to the Amended and Restated Master Resolution, the City’s obligation to make installment payments for the CP Notes from Net System Revenues will be subordinate to the City’s obligation to make installment payments that support the Authority’s 2022B Bonds.
There is no pledge of funds from the City’s General Fund.
Document Approvals Related to CP Program
There are a number of agreements and financing documents that require approval by either the Authority, the City Council, or both, to establish the CP Program. The documents are described below.
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
• Bank of America, N.A. Reimbursement Agreement. The Reimbursement Agreement with BofA authorizes the issuance of an irrevocable direct pay letter of credit to support payment of the principal of and interest on the CP Notes at maturity.
See Attachment B for additional BofA LOC Rate Terms
• Fee Agreement. BofA requires the City and the Authority to execute a Fee Agreement specifying the Facility Fee and other fees payable by the City and the Authority in connection with the BofA LOC. The Facility Fee is 0.31% based on ratings of current long-term, unenhanced 2022B Bonds, which are secured by a pledge of the Wastewater Net System Revenues currently rated AAA by all three rating agencies. Total annual fees for the first year are estimated at $743,226, consisting of the Facility Fee of $658,905, Dealer Fee of $43,321, and annual cost for rating agencies and issuing and paying agent of $41,000. Additionally, it is projected that the first year of interest will be approximately $2,329,070.
If ratings assigned by the three rating agencies appear in more than one level in the table below and two of the ratings are equivalent, the LOC fee shall be based on the two equivalent ratings. If ratings assigned by the three rating agencies appear in more than one level in the table below and none of them are equivalent, the LOC fee shall be based on the lower of the highest two ratings.
Level Rating Facility Fee Rate
I AA- / AA – or above 0.31%
II A+ / A+ 0.51%
III A / A 0.71%
IV A- / A- 0.91%
V BBB+ / BBB+ 1.26%
VI BBB / BBB 1.61%
VII BBB- / BBB- or below 3.11%
Draw Fees $250 per draw
Bank Counsel Fee $45,000
Amendments, transfers, standard waivers, or consents $2,500
• Issuing and Paying Agent Agreement. The City and the Authority will enter into an agreement with U.S. Bank Trust Company, National Association, as the issuing and paying agent for the CP Notes.
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
• Dealer Agreement. The Authority has agreements in place with a pool of CP Dealers and expects to assign the CP Notes Dealer from the pool. The Authority and the City will enter into a Dealer Agreement with each dealer for the CP Notes.
• Offering Memorandum. The Offering Memorandum is used by the Dealers of the CP Notes to provide information to potential investors of CP Notes, including financing structure, maximum principal amount, BofA, and other information relating to the CP program.
Financing Team
The financing team participants consist of the following:
City's Municipal Advisor Public Resources Advisory Group Bond Counsel Orrick, Herrington & Sutcliffe LLP
Disclosure Counsel Anzel Galvan LLP
Bank Counsel Kutak Rock LLP
EVALUATION AND FOLLOW-UP
Staff from the Finance Department will be available at the joint meeting of the City Council and the City of San José Financing Authority Board on September 29, 2026, to answer questions regarding the establishment of the CP Program, including the Reimbursement Agreement, Fee Agreement, and other CP program documents and matters. Staff from the Environmental Services Department will be available to address questions regarding the Sanitary Sewer Collection System and Treatment Plant.
COORDINATION
This memorandum was coordinated with the City Attorney’s Office and the City Manager’s Budget Office.
PUBLIC OUTREACH
This memorandum will be posted on the City Council Agenda website for the September 29, 2026 City Council meeting.
HONORABLE MAYOR AND CITY COUNCIL
September 8, 2026
Subject: Subordinate Wastewater Commercial Paper Program
BOARD, COMMISSION, COMMITTEE RECOMMENDATION AND INPUT
No board, commission, or committee recommendation or input is associated with this action.
CEQA
Not a Project, File No. PP17-003, Agreements/Contracts (New or Amended) resulting in no physical changes to the environment.
PUBLIC SUBSIDY REPORTING
This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution.
/s/
MARIA ÖBERG JEFFREY PROVENZANO
Director of Finance Director of Environmental Services
For questions, please contact Qianyu Sun, Deputy Director of Debt and Treasury Management, Finance Department at [email protected] or (408) 535-7832.
ATTACHMENTS:
Attachment A – Technical Aspects of Commercial Paper Notes Attachment B – Additional Letter of Credit and Reimbursement Agreement Rate Terms
ATTACHMENT A
Technical Aspects of Commercial Paper Notes
The M
echanics of Commercial Paper Notes
Co
mmercial Paper (CP) Notes are a form of debt that is sold with a maturity of between 1 and 270 days. The maturity of CP Notes is determined by the CP dealer and the issuer at the time it is sold. CP Notes bear interest at a fixed rate for the period it is outstanding; or is sold at a discount, and such interest or discount is payable when the note matures. The procedures for the payment of interest on the CP Notes are described below under “Payment of Principal and Interest on Commercial Paper Notes” section.
M
unicipal CP programs typically require the issuer to obtain credit support through one of more letters of credit provided by a commercial bank. Upon each CP Note maturity, the paying agent is authorized and required to draw on the supporting letter of credit in the amount of principal and interest due on that date. The issuer may then “roll over” the CP Notes by issuing renewal notes and using the proceeds of the renewal notes to reimburse the draw on the letter of credit. To the extent that the CP dealer is unable to find an investor for the renewal notes, the draw on the letter of credit remains unreimbursed, and the issuer is responsible for repaying the bank or banks that provided the letter of credit. The terms and conditions governing the letter(s) of credit and the reimbursement process are memorialized in a reimbursement agreement entered into between the issuer and the bank or bank(s) that provided the letter of credit.
The r
enewal CP Notes may be sold through a CP dealer either to a new investor or to the investor who held the maturing note. The process of rolling over new CP Notes is not considered to be the issuance of additional debt if the amount of CP Notes outstanding is not increased as a result of the “roll over.” Through the “roll over” mechanism, CP Notes can be kept outstanding indefinitely, as individual commercial paper notes continually mature and new CP Notes are issued.
CP No
tes are considered a form of variable-rate debt. Even though the interest rate on each CP Note is fixed at the time such CP Note is issued, the rate on each CP Note will be based on market conditions at the time. The rates on new CP Notes will thus vary from one issuance or roll to another. The actual cost of the program to the issuer will be the average rate on all its outstanding CP Notes over time. Most issuers project such average rates on a quarterly or annual basis. Overall, CP rates tend to be among the lowest available in the tax-exempt and taxable markets for municipal debt.
The buy
ers of CP Notes are considered short-term investors because their investments in CP Notes mature in 270 days or less. One of the attractive features of CP Notes is the ability of the investor to match the CP Note maturity to the specific timing needs of their cash flow (such as 27 days or 112 days). This helps an investor invest amounts for a very precise period until such funds are needed for a specific, known payment obligation in the future. Buyers of CP Notes include major corporations and money market funds. CP Notes are attractive to money market funds because they comply with the maturity limitations imposed on such funds, and the flexibility in setting the maturity 1 of CP Notes may help the fund achieve or maintain the average maturity it is seeking.
Money market funds are likely to continue to buy a given issue of CP Notes as it rolls over and thus may own an issue for an extended period.
P
ayment of Principal and Interest on Commercial Paper Notes A CP No
te is not sold with a fixed principal repayment schedule. Instead, the issuer maintains almost complete flexibility with respect to the timing and amounts in which the principal amount of a CP Note will be repaid. The issuer can repay a CP Note on any date on which it is scheduled to mature by providing the funds to repay such CP Note to the paying agent. The paying agent uses such funds to pay the holder of the CP Note.
At the same time, the issuer instructs its CP dealer not to attempt to sell new CP Notes to roll over the paper that is maturing. Hence, when such steps are taken, the amount of CP Notes outstanding at the end of the day is reduced.
The i
ndividual CP Notes are likely to have different maturities, so an issuer repaying a CP program would do so in a series of steps as the individual CP Notes mature.
However, since each CP Note would have a maximum maturity of 270 days, an entire program could be repaid at the option of the issuer in not more than 270 days from the time the issuer decided to commence such a repayment. It is likely that an issuer planning to repay an amount in the near future would instruct its CP dealer to issue the paper with short maturities as it rolls over, so that the issuer could retire the CP Note quickly when it begins the repayment process.
A
s noted above under “The Mechanics of Commercial Paper Notes,” interest or discount is payable on each CP Note as it matures. During the construction period for a project, the interest payable can be “capitalized” by adding the amount of interest due on the maturing CP Note to the amount of new paper being sold. If this approach is used, the principal amount of the CP Note outstanding over time will increase as additional interest is capitalized (subject to the maximum authorized amount of CP Notes permitted to be outstanding at any one time under the program).
I
nterest on tax-exempt debt generally cannot be capitalized following completion of the projects financed with Commercial Paper Notes. At that point, the issuer must provide to the paying agent the interest due at the time each CP Note matures. The paying agent then pays such interest to the investor together with the proceeds received from rolling over the principal amount of the CP Note. Since the interest at that point is being paid by the issuer, and not by increasing the amount of the CP Note being rolled over, the principal amount of the CP Notes outstanding will stay constant after the projects are completed. That principal amount outstanding could either be reduced in the future if the issuer decides to repay some or all of the program, or increased if the issuer decides to undertake additional projects (which may require an increase in the authorized amount of the program).
2 A
TTACHMENT B
Additional Letter of Credit and Reimbursement Agreement Rate Terms O
ther material terms of the Letter of Credit Agreement include the following:
Base Rate Highest of:
(i) Bank of America’s Prime Rate + 1%;
(ii) the Fed Funds Rate +2%; or
(iii) 7%
Default Rate Base Rate + 4.0%