Agenda Item: 1
CITY OF SANTA CLARITA
AGENDA REPORT
PUBLIC HEARINGS
CITY MANAGER APPROVAL:
DATE: September 27, 2022
SUBJECT: IMPLEMENTATION AND FINANCING OF THE CITY’S ENERGY
INFRASTRUCTURE MODERNIZATION PROGRAM AND THE
SANTA CLARITA PFA LEASE REVENUE BONDS - ENERGY
EFFICIENCY PROGRAM SERIES 2022A (GREEN BONDS) AND
SERIES 2022B (GREEN BONDS)
DEPARTMENT: Neighborhood Services
PRESENTER: Darin Seegmiller
RECOMMENDED ACTION
City Council:
1. Conduct a public hearing.
2. Adopt a resolution to make certain findings and approve the implementation and financing of the City’s Energy Infrastructure Modernization Program in accordance with Government Code Sections 4217.10 through 4217.18.
3. Award the City’s Energy Infrastructure Modernization Program Installation Agreement to Climatec LLC in an amount not to exceed $35,129,467.
4. Appropriate $35,129,467 from the Facilities Fund (723) to Energy Efficiency Expenditure Account R0033723-516101.
5. Award the City’s Energy Infrastructure Modernization Measurement and Verification Agreement to Climatec LLC upon completion and acceptance of the project in an annual amount not to exceed $28,000.
6. Appropriate funding from the General Fund (100) to Neighborhood Services Expenditure Account 1007000-516102 for guaranteed savings measurement and verification in the amount of $28,000 annually in Fiscal Year 2024-25 through Fiscal Year 2026-27; contingent upon the appropriation of funds in the annual budget for such fiscal years.
7. Adopt a resolution approving the issuance of the Santa Clarita Public Financing Authority Lease Revenue Bonds (Energy Efficiency Program), Series 2022A (Green Bonds) and Lease Revenue Bonds (Energy Efficiency Program), Series 2022B (Green Bonds), in the aggregate principal amount not to exceed $25,000,000, approving the execution and delivery of an amendment to two lease agreements, a Continuing Disclosure Certificate, two Bond Purchase Agreements, a Preliminary Official Statement, a Final Official Statement and Sale Documents; approving the retention of certain professional firms; and authorizing the taking of certain actions in connection therewith.
8. Adopt a resolution declaring the intent to reimburse certain expenditures from the proceeds of tax-exempt obligations expected to be issued to finance energy efficiency improvements buildings, and facilities as required by United States Department of Treasury Regulations Section 1.150-2.
9. Adopt a resolution authorizing the application for an Energy Efficiency Loan from the California Energy Commission to implement energy efficiency measures in the amount not to exceed $3,000,000 and authorizing the execution and delivery of a loan agreement, Promissory Note and Tax Certificate; and authorizing the taking of certain actions in connection therewith.
10. Authorize the City Manager or designee to execute all documents, subject to City Attorney approval.
Public Financing Authority:
1. Adopt a resolution approving the issuance of the Santa Clarita Public Financing Authority Lease Revenue Bonds (Energy Efficiency Program), Series 2022A (Green Bonds) and Lease Revenue Bonds (Energy Efficiency Program), Series 2022B (Green Bonds), in the aggregate principal amount not to exceed $25,000,000, approving the execution and delivery of two supplemental indentures, amendments to two lease agreements, two Bond Purchase Agreements, a Preliminary Official Statement, a Final Official Statement; and authorizing the taking of certain actions in connection therewith.
BACKGROUND
As part of the Santa Clarita 2025 Strategic Plan, the City Council identified a goal of completing energy efficiency upgrades to all City of Santa Clarita (City) facilities. The intent of completing these upgrades is to save money, reduce greenhouse gas emissions, and meet growing energy demand. By investing in efficient infrastructure, the City will achieve substantial long-term energy cost savings and demonstrate environmental leadership.
To achieve this objective, a Request for Proposals (RFP) was posted on BidNet on June 14, 2021, seeking a qualified energy service company capable of developing and implementing projects that are consistent with the City’s desire to deliver the best and most cost-efficient municipal services. The RFP asked firms to identify their relevant experience in similar projects and demonstrate their implementation approach to the project.
Fifty-three consulting firms downloaded the RFP, and the City received proposals from five consultants on July 29, 2021. An evaluation team consisting of five City staff members, representing divisions across the organization, reviewed the proposals and scored the firms.
Climatec LLC’s (Climatec) proposal, interview, and references demonstrated their reputable qualifications for the project. Furthermore, Climatec demonstrated that it can provide quality service, sustained efficiencies, and energy cost savings expected by the City.
On November 9, 2021, the City Council awarded a Professional Services Agreement to Climatec for the development of comprehensive energy and water infrastructure modernizations throughout City facilities and parks. The objectives of the program are to:
• Revitalize aging infrastructure
• Enhance economic vitality by mitigating rising utility and operational costs • Promote sustainability through renewable energy and smart technologies
Over the past nine months, staff has been working with Climatec to analyze the City’s utility usage and conduct a Citywide assessment of aging infrastructure in the following areas:
• Heating, Ventilation and A/C (HVAC) • Water conservation • Interior and Exterior Lighting • Irrigation
• Sports Field Lighting • Pools
• Building Automation Systems (BAS) • Solar
• Windows • Backup power
• Roofing • Battery storage
Program Benefits
Staff recommends implementing this program for operational, financial, and environmental reasons. Operationally, many of the proposed projects will address critical infrastructure that is past its useful life. The program also promotes operational efficiencies by modernizing and centralizing the outdated systems that control irrigation equipment at City parks and HVAC equipment at City facilities.
This proposed program maximizes operational efficiency by addressing infrastructure needs much faster than the City’s typical Capital Improvement Program. If the City were to manage these projects through its typical Capital Improvement process, staff anticipates that it would take approximately five years to complete. However, through this program, all of the projects will be managed by Climatec and be completed within 18 to 24 months.
Financially, this program will result in utility savings that will generate a guaranteed return on investment. The energy savings realized by solar will generate approximately 66 percent of the project’s guaranteed savings. Additionally, installation of solar infrastructure at City facilities now will allow the City to be grandfathered into the Net Energy Metering (NEM) 2.0 program, which allows the City to receive bill credits for the excess electricity that the solar panels will produce.
Beyond its operational and financial benefits, this program demonstrates the City’s commitment
to environmental stewardship. If implemented, this project will result in the reduction of greenhouse gas emissions (CO2) by 3,322 metric tons per year, which is the equivalent of 716 gas-powered cars taken off the road each year.
Detailed Scope of Work
The analysis of City facilities identified opportunities for Energy Conservation Measures (ECM) at 36 different sites. Most of the sites are proposed to receive high efficiency HVAC modernizations, modern BAS, and lighting upgrades. Some of the sites will receive solar energy generating structures in the parking lots. In addition to those improvements, The Cube will receive a new roof and high efficiency improvements to the ice refrigeration system. Below is a summary of the detailed scope of work throughout all of the facilities:
• High Efficiency HVAC at 15 sites • Ventilation and filtration improvements • BAS at 24 sites • Existing BAS integration at one site • Sports field LED lighting at seven sites • Interior LED lighting at 27 sites • Exterior LED lighting at 36 sites • Occupancy sensors at 30 sites • Roof replacement at one site • Window film at two sites • Solar at six sites • Solar thermal water heating at three sites • Battery storage systems at two sites • Smart irrigation controllers at 24 sites • Efficient water heaters at one site • Upgraded ice rink refrigeration • New dehumidification system • Ice Purification System • Efficient transformers at 14 sites
Each ECM has a cost associated with it as shown in the table below. The total cost, inclusive of financing, is $46,538,667, compared to estimated utility and operational savings of $46,592,955, of which $35,129,467 is contractually guaranteed by Climatec over the useful life of the equipment. Guaranteed savings will be measured and verified annually as identified in the proposed Measurement and Verification Agreement.
Project Costs
Heating, Ventilation and A/C $5,527,360
Building Automation Systems 1,112,286
Interior and Exterior Lighting 3,046,768
Sports Field Lighting 5,534,786
Building Envelope (Window Film) 181,118
Building Envelope (New Roof) 2,562,040
Smart Irrigation System 831,300
Ice Rink Refrigeration 4,671,218
Transformers 752,865
Solar PV 8,541,583
Energy Storage 2,004,379
Pool Solar Thermal 363,764
Climatec Project Cost $35,129,467
Financing Cost 11,409,200
Total Cost of Project $46,538,667
Projected Savings
Utility Savings (Energy Efficiency Measures) 7,942,787 Utility Savings (Solar) 23,039,330
Operational Savings 10,452,230
Inflation Savings for Capital Projects 5,158,608
Total Estimated Savings $46,592,955
In the event that the annual savings does not meet the Guaranteed Project Savings in accordance with the Measurement and Verification Agreement, then Climatec is obligated to repair, replace, or substitute the ECM that is not performing to the required level at Climatec’s sole expense within twelve months. If, after the opportunity to make corrections, the verified savings are less than the Guaranteed Project Savings, then Climatec must pay the City the shortfall amount.
The action today by the City is to hold a public hearing regarding the proposed implementation and financing of the City’s Energy Infrastructure Modernization Program, the cost of which is less than the anticipated marginal cost of thermal, electrical, or other energy that would have been consumed in the absence of the program. At the conclusion of the public hearing, City Council will consider adoption of the resolution to make certain findings, and approve the implementation and financing of the City’s Energy Infrastructure Modernization Program.
Program Financing
Staff is recommending entering into the agreement with Climatec to implement and manage the $35 million Energy Efficiency Program. The City’s intent is to finance the energy efficiency improvements for City buildings and facilities, including but not limited to, HVAC, lighting, water conservation, solar, and refrigeration improvements (the “Project”), through a combination of cash, tax-exempt bond financing and a $3 million California Energy Commission (CEC) loan.
Additionally, with the recent passage of the Federal Inflation Reduction Act, the Clean Electricity Tax Credit Provisions are being closely monitored by staff and Climatec. Depending on the final rules, the City may be able to access funds that would reduce the City’s capital outlay.
California Energy Commission (CEC Loan)
Staff is recommending the City approve a resolution authorizing the application for an energy efficiency loan from the CEC to implement energy efficiency measures in the amount not to exceed $3 million, and authorizing the execution and delivery of a Loan Agreement, Promissory Note and Tax Certificate, and other actions related thereto. If approved as expected, the loan proceeds of $3 million will be available to reimburse a portion of the cash contributed to the cost of the Project. The CEC loan is advantageous since it offers a 20-year fixed one percent low interest rate when compared to the current market interest rate of 4.27 percent.
Bond Issuance
The structure of the proposed tax-exempt bond financing will be identical to the City’s other General Fund backed bond debt. The City’s Public Financing Authority (PFA) will issue lease revenue bonds secured by a lease of City property. Staff reviewed all available City facilities and it was determined that The Cube and City Hall would be best since both properties already have
lease secured bond financing and there are provisions under both bond issues that allow for additional bonds. Additionally, a significant amount of the energy efficiency improvements will benefit and improve these two properties. Existing financing include the Recreational Facility Lease for the tax-exempt and taxable lease revenue bonds issued in 2020 for acquisition of The Cube (the “2020 Bonds”) and the City Hall Lease for the lease revenue bonds for Golden Valley Road related judgment refinanced in 2016 (the “2016 Bonds”). The 2020 Bonds will mature in 28 years, in June 2050 and the 2016 Bonds will mature in 13 years, in December 2035.
It is estimated that the total cost of the Project is $35.129 million. Approximately $15 million will be funded with cash initially with $3 million to be reimbursed from a CEC Loan, if approved. The remaining amount of approximately $20 million would be financed through the issuance of tax-exempt lease revenue bonds under the two existing Recreational Facility Lease and the City Hall Lease. The City’s PFA will issue its lease revenue bonds (Energy Efficiency Program) (the “Bonds”) in two bond series, one series as additional bonds under the Recreational Facility Lease, designated as “Lease Revenue Bonds (Energy Efficiency Program) Series 2022A” (the “2022A Bonds”) and one series as additional bonds under the City Hall Lease, designated as “Lease Revenue Bonds (Energy Efficiency Program) Series 2022B” (the “2022B Bonds”). The 2022A Bonds would be parity to the 2020 Bonds and payable from increased base rental payments under the Recreational Facility Lease. The 2022B Bonds would be parity to the 2016 Bonds and payable from increased base rental payments under the City Hall Lease.
The proposed debt structure of the Series 2022A and B Bonds is designed to match the existing debt maturity of the prior 2020 Bonds and the 2016 Bonds. The Series 2022A Bonds and the 2020 Bonds will both mature in 2050 and the Series 2022B Bonds and the 2016 Bonds will both mature in 2035. Debt service on all bonds will be level. In 2035 the City Hall, which is encumbered by the 2016 Golden Valley Road debt, will be free and clear of all debt.
Proceeds of the Bonds will be held by the bond trustee and used to pay Climatec for a portion of the Project. The PFA and the City will enter into a first amendment to each existing lease (each a “First Amendment to Lease”) which will increase the base rental payments to pay for the increased debt service due to the additional Series 2022 A and B bonds. Under the PFA bond structure, the City has leased the Recreational Facility to the PFA pursuant to a Site and Facility Lease, and the PFA has lease-backed the Recreational Facility to the City pursuant to a Lease Agreement. The City will make Base Rental Payments from the City’s General Fund for use of the Recreational Facility. The new Base Rental Payments will be equal to the debt service on the 2022A Bonds and the 2020 Bonds. Likewise, under the PFA bond structure, the City has leased the City Hall to the PFA pursuant to a Site and Facility Lease, and the PFA has lease-backed the City Hall to the City pursuant to a Lease Agreement. The City will make Base Rental Payments from the City’s General Fund for use of the City Hall. The new Base Rental Payments will be equal to the debt service on the 2022B Bonds and the 2016 Bonds. The PFA transfers the Base Rental Payments to the bond trustee to pay bond holders. No bond reserve fund is contemplated for either the 2022A Bonds or the 2022B Bonds. The PFA bond structure is widely used in California and is identical to the structure used in the City’s other general fund financings, including the issuance of the Sheriff’s Station Project, Series 2019 Bonds, the 2020 Recreational Facility Project Bonds, and the 2016 Golden Valley Road Bonds discussed herein.
The proposed Bonds are expected to be rated by Standard and Poor’s Corporation and are
expected to be sold with “AA+” category bond ratings. A Request for Proposal (RFP) was sent out to bond underwriters with relevant experience and four proposals were received. The City’s Financing Team reviewed the proposals and scored the firms. The firm, Stifel, Nicolaus & Company, Incorporated, was selected as their proposal demonstrated their reputable qualifications including California lease revenue bond experience, bond structuring, and staffing for the project. Bonds are proposed to be sold through a negotiated sale with the selected underwriter in October with closing scheduled for later in that month. The proposed term of the 2022A Bonds is 28 years and the payments are expected to be level. The proposed term of the 2022B Bonds is 13 years and the payments are expected to be level. The final interest cost on the Bonds will depend on market interest rates at time of sale.
The current estimated all in true interest cost for the 2022A Bonds is 4.43 percent. The estimated all in true interest cost for the 2022B Bonds is 3.69 percent. The bond markets have been relatively stable at the present time but final bond interest rates may be higher or lower depending on interest rates at time of sale. The Bonds are expected to be sold with the standard eight years of bond call protection and will be redeemable beginning in 2030.
The public disclosures required under SB 450, effective January 1, 2018, are incorporated herein.
The estimates have been determined as of September 12, 2022. Specifically:
Energy Efficiency Program - 2022A Bonds
1) The all-in true interest cost of the bonds, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds is estimated to be 4.43 percent. 2) The finance charge of the bonds, which means the sum of all fees and charges paid to third parties is estimated to be $241,073. Bond insurance premiums, which lower interest cost in excess of the fees charged, are estimated to be $0. Such insurance is not expected to be cost effective.
3) The amount of proceeds received by the public body for sale of the bonds less the finance charge of the bonds described and any reserves or capitalized interest paid or funded with proceeds of the bonds is estimated to be $13,081,473. 4) The total payment amount, which means the sum total of all payments the borrower will make to pay debt service on the bonds plus any finance charge of the bonds not paid with the proceeds of the bonds. The total payment amount calculated to the final maturity of the bonds is estimated to be $22,675,950.
Energy Efficiency Program -2022B Bonds
5) The all-in true interest cost of the bonds, which means the rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new issue of bonds is estimated to be 3.69 percent. 6) The finance charge of the bonds, which means the sum of all fees and charges paid to third parties is estimated to be $109,412. Bond insurance premiums, which lower interest cost in excess of the fees charged, are estimated to be $0. Such insurance is not expected to be cost effective.
7) The amount of proceeds received by the public body for sale of the bonds less the finance charge of the bonds described and any reserves or capitalized interest paid or funded with proceeds of the bonds is estimated to be $6,484,672. 8) The total payment amount, which means the sum total of all payments the borrower will make to pay debt service on the bonds plus any finance charge of the bonds not paid with the proceeds of the bonds. The total payment amount calculated to the final maturity of the bonds is estimated to be $8,299,395.
At the conclusion of the public hearing, City Council and the PFA will consider adoption of the resolutions authorizing the issuance of the Bonds. A resolution for each of the City and the PFA is attached and would authorize the issuance of a not to exceed amount of $25,000,000 in aggregate 2022A Bonds and 2022B Bonds. Final sizing will be determined at time of bond sale.
The Bonds will be sold on a negotiated basis. The resolution also approves the various documents in connection with the issuance of the Bonds. The City resolution also approves the appointment of a) Columbia Capital Management LLC, as Municipal Advisor, b) Norton Rose Fulbright US LLP, as Bond and Disclosure Counsel, (c) U.S. Bank National Association, as Trustee, and (d) Digital Assurance Certification as dissemination agent.
General Summary of Security: The Bonds are secured by the revenues from the Base Rental Payments payable from the City’s General Fund. The City covenants in each Lease to make annual appropriations for the Base Rental Payments under each Lease, subject to abatement for nonuse of the project. Potential investors will look closely at the strengths and weaknesses of the City’s General Fund and essentiality of the project. The financing documents are described below.
First Supplemental Indentures and Indentures: Key legal document that lays out the legal structure and terms of the financing of the 2022A Bonds and the 2022B Bonds, as applicable.
Revenues received from each Lease Agreement are assigned to the trustee to make debt service payments on the applicable Bonds. The First Supplemental Indenture and Indenture specifies payment dates, maturity dates of the applicable Bonds; revenues and accounts specifically pledged to the repayment of the applicable Bonds; the project fund; flow of funds, default and remedy provisions; redemption and defeasance provisions in the event the applicable Bonds are prepaid or redeemed early; and covenants of the issuer. It is drafted by Bond Counsel and executed by the PFA and U.S. Bank National Association, as trustee.
First Amendment to Lease Agreements and Lease Agreements: Document in which the City agrees to leaseback the site and facility from the PFA. It specifies amount and dates of the Base Rental Payments, including the increased Base Rental Payments relating to the additional bonds; covenant to appropriate the Base Rental Payments; flow of funds; default and remedy provisions; prepayment provisions; and covenants of the City regarding use of the project and funds pledged to the payment of the Base Rental Payments. The document is drafted by Bond Counsel and executed by the City and PFA.
Continuing Disclosure Certificate: This undertaking outlines the updated information related to the security that the City will agree to provide to the bond markets. Disclosure is required annually and on an exceptional basis for any major “material” event. This document is drafted by Bond Counsel and executed by the City.
Bond Purchase Agreements: Each Bond Purchase Agreement is the contract among the PFA, the City and the Underwriter, pursuant to which the Underwriter agrees to buy the applicable Bonds when issued, subject to certain termination events, for resale to investors. The bond sale is scheduled for October, with a closing in the latter part of October. The document is drafted by underwriter’s counsel, reviewed by City staff, City Attorney and Bond Counsel, and executed by the City, PFA and the underwriter, Stifel, Nicolaus & Company, Incorporated.
Preliminary Official Statement (POS): The POS is the “offering document” for the Bonds. The City and the PFA have an obligation to ensure that the POS includes all information that would be material to a prospective investor’s decision whether to purchase the Bonds. The POS describes the terms of the bonds, the pledged revenues, the PFA and City, investor risk and other information for potential investors. While the City’s legal counsel, consultants, and the staff have participated in preparing the POS, the City/PFA and staff are ultimately responsible for ensuring that the POS is accurate, contains no misleading information, and does not omit any information necessary to make the POS not misleading to investors.
Reimbursement Resolution: The City, or its related entity, the Santa Clarita Public Financing Authority, intends to issue one or more series of tax-exempt bonds (the “Obligations”), to finance a portion of the Project. Certain expenditures with respect to the Project are expected to be paid by the City prior to the date of issuance of the Obligations. The proposed resolution would allow for the City to be reimbursed for such expenditures. Section 1.150-2 of the Treasury Regulations (the “Treasury Regulations”) promulgated under the Internal Revenue Code of 1986, as amended, requires that for an allocation of proceeds of tax-exempt obligations to a capital expenditure paid prior to the issuance of the obligations to be respected by the Internal Revenue Service, the City generally must no later than sixty (60) days following such expenditures have declared their reasonable official intent to reimburse the City for such payment out of the proceeds of the obligations. The proposed resolution would evidence the City’s reasonable official intent for purposes of the Treasury Regulations. The resolution is adopted only for the purpose of establishing compliance with the requirements of the Treasury Regulations. It does not obligate the City to make any expenditure or proceed with the Project or obligate the City to issue any Obligations.
More specific details of the financing can be found in the drafts of the documents referenced above. The documents being recommended for approval are available in the office of the City Clerk.
ALTERNATIVE ACTION
Other action as determined by the City Council.
FISCAL IMPACT
Upon approval of the recommended action, $35,129,467 will be available in Energy Efficiency Expenditure Account R0033723-516101 for the City’s Energy Infrastructure Modernization Program Installation, funded by bond proceeds ($19,775,512) and cash ($15,353,955). Climatec
contractually guarantees savings in the amount of $35,129,467 over the useful life of the equipment. These savings will be measured and verified per the Measurement and Verification agreement. The total estimated operating budget savings is expected to offset the bond debt service.
ATTACHMENTS
Notice of Public Benefit Hearing
Resolution Energy Infrastructure Modernization Program
Resolution City Approving Bond Issuance
Resolution Public Financing Authority Approving Bond Issue Resolution Reimbursement
Resolution California Energy Commission Loan
Energy Infrastructure Modernization Program Installation Agreement (available in the City Clerk’s Reading File)
Energy Infrastructure Measurement and Verification Agreement (available in the City Clerk’s Reading File)
Form of CEC Loan Agreement (available in the City Clerk’s Reading File) Form of First Supplemental Indenture along with copy of 2020 Indenture – Series 2022A (available in the City Clerk’s Reading File)
Form of First Supplemental Indenture along with copy of 2016 Indenture – Series 2022B (available in the City Clerk’s Reading File)
Form of First Lease Amendment along with copy of CUBE Lease – Series 2022A (available in the City Clerk’s Reading File)
Form of First Lease Amendment along with copy of City Hall Lease – Series 2022B (available in the City Clerk’s Reading File)
Form of Bond Purchase Agreement – Series 2022A Bonds (available in the City Clerk’s Reading File)
Form of Bond Purchase Agreement – Series 2022B Bonds (available in the City Clerk’s Reading File)
Form of Continuing Disclosure Certificate (available in the City Clerk’s Reading File) Form of Preliminary Official Statement (available in the City Clerk's Office)