Santa Maria City Council
December 5, 2023

City of Santa Maria
City Council Presentation
Debt Financing Overview
December 5, 2023
2054 University Avenue, Suite 300, Berkeley, CA 94704
phone 510-839-8200
A Limited Liability Company

ATTACHMENT A
Municipal Debt Overview
The Fundamental Legal Distinction:What is Debt and What is Not 22 California ConstitutionDebt LimitArticle 16, Section 18(2/3 vote generally required)Exception 1Current Fiscal Year(e.g., TRANs)Exception 2Contingent Obligations(e.g., Lease)Exception 3Special Fund Obligations(e.g., Revenue Bonds, Installment Purchase COPs)ExceptionsTo the Debt LimitException 4Obligation Imposed by Law(e.g., Judgment Bonds)General Obligation BondsTrue Indebtedness Types of Revenues and Financing Mechanisms
3 VOTER-APPROVED?TYPE OF FINANCINGREPAYMENT SOURCENoLease Revenue Bonds/Certificates of Participation (COPs)/Lease Purchase AgreementsPension Obligation BondsTax and Revenue Anticipation Notes (TRANS)PAID FROM GENERAL FUNDNoEnterprise Revenue BondsInstallment Purchase COPsPAID FROM ENTERPRISE REVENUES (WATER, WASTEWATER, ETC.)Yes General Obligation Bonds (GO Bonds)Limited Tax Bonds (Sales Tax Revenue Bonds)Special Tax or Assessment BondsPAID FROM SPECIAL TAXES Overview of Lease Obligations
$0$2$4$6$8$10$12$14$16$18$20PrincipalInterest
Key Features of Lease ObligationsContingent Obligation– do not require voter approval. General fund credit – covenant to annually budget and appropriate lease payments.Leased asset(s) – real property pledged for term of the financing.Existing City asset or project to be financed by LRB proceeds. The latter may necessitate funding interest beyond expected project completion. Key factors of asset pledge relevant to investors: essentiality, value and useful life.Subject to Abatement – lease payments are subject to the use and occupancy of pledged asset(s) and can be “abated” if asset is damaged or unable to be occupied. Requires maintaining casualty and rental interruption insurance5 millionsFiscal YearSample Lease Obligation Repayment5
Types of Lease ObligationsLease Revenue Bonds (LRBs)Certificates of Participation (COPs)LRBs and COPs are typically used in a public offeringLease-Purchase Agreement (LPA)LPA is typically used in a direct purchaseA bank “loan” most likely would be in the form of an LPAThe leased asset may be:The project being financed; orAnother asset with sufficient value and remaining useful lifeknown as an asset transferEliminates construction risk and the need for capitalized interest6 Legal Structure of LRB or COP FinancingLRBs or COPs are secured by lease payments paid by the lessee to the lessorLease payments pass from lessor to investors through a trustee Investors paid a share in the lease revenues securing LRBs or COPsTrusteePFFC Assigns Rights and Responsibilities to TrusteePublic Facilities Financing Corp(via Trust Agreement)… and in return makes lease payments from the General FundUnder the Lease Agreement, City leases the improvements …City(Issuer)InvestorsProceeds of the LRBs or COPs, used to complete the improvementsTrustee uses Lease Payments to pay debt service on the issued LRBs or COPs7 Methods of SaleUnderwriter purchases bonds from City and sells to the publicReaches a broader investor marketCompetitive SaleUnderwriter selected on sale date based on lowest bidBest with high grade, known credits and stable marketsNegotiated SaleUnderwriter selected prior to the sale dateMost commonly used for large and/or complicated financings, lower grade credits and/or less stable market conditions8 Public OfferingPrivate PlacementDirect purchase by bankTypically lower upfront costs but higher interest rate(s)Simpler process, usually doesn’t require a credit rating or an official statementMore commonly used on smaller, shorter-term financingMay be able to lock-in rate sooner The economics vs. public offering typically evaluated on the expected all-in cost of fund on a case-by-case basis and may vary with market conditions.Bank selection is typically made through a competitive proposal process City Debt Policy Excerpts
City Debt Policy Excerpts The City will plan for capital improvements and maintenance as part of its budgeting process, seeking to set funds aside in advance of need so that most capital projects can be financed on a “pay-as-you-go” basis. Debt financing will be reserved for significant, unusual, or extraordinary capital expenditures that do not have sufficient funds set aside to complete or when cost benefit analysis shows debt financing is more advantageous to the City.The City will evaluate new debt on a case-by-case basis, considering such factors as the City’s overall fiscal health, the potential impact of increased debt service on then current service levels and other long-term considerations. In general, debt may be considered to finance such projects if it meets one or more of the following minimum criteria:It meets the City’s goal of distributing the payments for the asset over its useful life so that benefits more closely match costs for both current and future residents; andThe need for the project is compelling in terms of on-going cost savings or the need for public safety or services, and the size of the project makes funding out of existing resources or near-term revenues is impractical.City of Santa Maria10 Debt Financing Pros and ConsProsSource for capital projects too large for annual budgetShares the cost of major improvements between current and future taxpayersMay accelerate project delivery vs. funding on a pay-as-you-go-basis, hence may reduce some project cost inflation.Cons/Risk FactorsAdds significant interest and financing costs over timeIs a fixed cost that competes with other expenditures in the City’s budget and cannot be deferred in any given year.Additional staff time in implementing and administering the financingCity of Santa Maria11 Best PracticesThe City’s Debt Policy, itself a recommended best practice, incorporates a number of best practices, such as:Do not use debt for operating expenses, other than to alleviate cash flow timing issues within a fiscal year. Use of debt may be considered in the event of an extraordinary event, such as a major judgment Long-term obligations should not exceed the useful lives of the projects being financed Annual debt service payments should be approximately level (individually or in aggregate)For predictability, the City will give preference to fixed rate debt. Variable rate debt may be considered to achieve certain goals, such as to provide greater call flexibilityEvaluation of General Fund debt affordability should include annual debt service as a percent of General Fund appropriations and self-imposed limits on the amount of General Fund debt should also be consideredCity of Santa Maria12 Fire Station Projects
Fire Station ProjectsFire Station #1 RenovationEstimated cost = $10 million$5 million is currently budgetedExpected to advertise for construction bids in Summer 2024Fire Station #2 ReplacementEstimated cost = $11 millionNo funds are currently budgetedSite is identified; to be transferred to City at no costExpected to be ready for construction in 2-3 yearsCity of Santa Maria14 Illustrative Financing Scenarios
15 Fire Station #1Finance $5 million unfunded portion of project cost onlyFinance full $10 million cost, thereby freeing up budget funds for other projectsFire Station # 2Finance $11 million unfunded project costPreliminary AssumptionsPublic offering of Lease Revenue Bonds30-year term; fixed rates Market conditions of 11/14/23 plus 1% cushionMedium to high grade credit rating; asset transferBonds issued June 2024 for FS #1 and June 2026 for FS #2Issuance costs = $175 – 225K; Underwriter discount = 0.7% Illustrative Financing Scenarios, continued
16 Scenarios:FS #1 FS #1FS #2Net Proceeds: $5,000,000 $10,000,000 $11,000,000All-In True Interest Cost (ATIC): 5.88% 5.74% 5.75%SourcesPar Amount: $4,850,000 $9,560,000 $10,520,000Bond Premium: 360,679 711,342 782,617 Total Sources: 5,210,679 10,271,342 11,302,617 Uses:Project Fund: $5,000,000 $10,000,000 $11,000,000Issuance/Underwriting Costs: 210,679 271,342 302,617 Total Uses: $5,210,679 $10,271,342 $11,302,617FYE 6/302025 $357,525 $706,438 - 2026 358,925 709,238 - 2027 360,025 706,438 $780,3502028 360,825 708,338 777,250 2029 356,325 704,638 778,850 2030 356,825 705,638 779,850 2031 357,025 706,038 775,250 2032 356,925 705,838 775,350 2033 356,525 705,038 779,850 2034 360,825 708,638 778,450 2035 359,525 706,338 776,450 2036 357,925 708,438 778,850 2037 356,025 704,638 775,350 2038 358,825 705,238 776,250 2039 361,025 704,938 776,250 2040 357,625 708,738 775,350 2041 358,925 706,338 778,550 2042 359,625 708,038 775,550 2043 359,725 708,538 776,650 2044 359,225 707,838 776,550 2045 358,125 705,938 775,250 2046 360,938 706,875 777,750 2047 357,813 706,250 778,750 2048 359,063 704,063 777,188 2049 359,375 705,313 779,063 2050 358,750 704,688 779,063 2051 357,188 707,188 777,188 2052 359,688 707,500 778,438 2053 360,938 705,625 777,500 2054 355,938 706,563 779,375 2055 - - 778,750 2056 - - 775,625 Total Debt Service: $10,758,013 $21,195,350 $21,770,563 QuestionsQuestions?
17 Appendix
Financing Process (Public Offering)Assemble TeamDrafting and Review of Bond Documents Authorizing Resolution Legal Documents and Disclosure DocumentsPreliminary Official Statement (“POS”), Site Lease, Lease Agreement, Trust Agreement, Bond Purchase Agreement or Notice Inviting Bids, Continuing Disclosure CertificateCity Council Approval of Resolution and DocumentsCredit Rating Agency MeetingsMeeting to assign credit rating based on financial performance, management, debt, tax base, economyDue DiligenceUnderwriter counsel interviews District on disclosure issuesPost Preliminary Official Statement (POS)Underwriter begins marketing the Bonds to potential investorsDate of Sale Bond priced sold through either competitive or negotiated sale Final Official StatementPreliminary Official Statement updated to incorporate the results of the bond saleClose Transaction19 Financing Process (Direct Purchase)Assemble TeamDrafting and Review Bond DocumentsAuthorizing Resolution Legal DocumentsSite Lease, Lease Agreement, Assignment Agreement, bank doc??Distribute Formal Request for Proposal for Bank FinancingSelect Financing ProviderRate could be locked in shortly after selection, depending on circumstances and the providerDue Diligence/Credit Review Call with BankFormal Credit Approval by the BankCity Council Approval of Resolution and DocumentsClose Transaction20 Financing ParticipantsCity – City of Santa MariaBond CounselRenders the legal opinion as to the validity and tax status of the bondsDisclosure CounselPrepares the Official Statement and Continuing Disclosure Certificate. Also provides advice and guidance on disclosure obligationsMunicipal AdvisorCity’s fiduciary providing advice on issuance of municipal securitiesUnderwriterSells bonds to investors in public offeringRating AgencyProvides a rating opinion on the relative credit quality of the bondsTrusteeEstablish and hold funds and accounts, pay principal and interestTitle InsurerInsures real property title21 Credit RatingCredit rating impacts interest rates and investor interestIndependent assessment by each agencySmaller issues typically have a single ratingEach financial obligation has specific rating methodologyGeneral Obligation BondsCertificates of ParticipationRating have time horizonsShort term – I year or lessLong term High rating get better interest ratesRatings are annually reviewed Moody’s and S&P changed methodology in recent years impacting ratingsS&P and Fitch rate the City’s Water and Wastewater Bonds22 Long-term Rating LevelsFitchS&PMoody'sRating DescriptionAAAAAAAaaHighest credit quality; issuer has strong ability to meet its obligationsInvestment GradeAA+AA+Aa1Very high credit quality low risk of defaultAAAAAa2AA-AA-Aa3A+A+A1High credit quality, but more vulnerable to changes in the economyAAA2A-A-A3BBB+BBB+Baa1Adequate credit quality for now, but more likely to be impaired if conditions worsenBBBBBBBaa2BBB-BBB-Baa3B+B+B1Below investment grade, but a good chance the issuer can meet commitmentsNon-Investment GradeBBB2B-B-B3CCCCCC+Caa1Significant credit risk, but issuer is presently able to meet obligationsCCC+Caa2CCC-Caa3CCCCCaHigh default riskCCDDCIssuer failed to meet scheduled interest or principal payments Illustrative Calendar for LRB SaleResponsibilityActivityDateBC, DCDraft Authorizing Resolution and legal documents: Lease, Site Lease, and Bond Purchase Agreement (“BPA”) BPA, Escrow Agreement, and Paying Agent Agreement, Preliminary Official Statement(s) (POS) Monday, July 10th C, BCDC, MA, UWConference call for LRB structure and debt serviceThursday, July 13th AllComments due on documentsMonday, July 24th C, BDCAgenda deadline for August 15thCouncil meetingTuesday, August 1st MA, CRating callWednesday, August 16th C, BDC, MACity Council Meeting Approval of Resolution and LRB documentsTuesday, August 15th C, MA, BCDC, UWRating Call Receive RatingThursday, August 24thThursday, August 29/30th C, BCDC, UW, MADue DiligencePOST POSFriday, September 18th10:00 AMC, UW, MAC, UW, MAPre-pricingPricingMonday, September 25thTuesday, September 26th BC/DCPost Final Official Statement(s) Tuesday, October 24th AllClosingTuesday, October 18th 23