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HomeMy WebLinkAboutRES NO 103-11RESOLUTION NO. 10 3 - 1 A RESOLUTION AUTHORIZING THE USE OF EXCESS REVENUES IN THE WASTEWATER TREATMENT FUND OF THE CITY OF BAKERSFIELD, CALIFORNIA IN AN AMOUNT NOT TO EXCEED $19,000,000 MILLION TO REDEEM A PORTION OF THE CITY OF BAKERSFIELD, CALIFORNIA, WASTEWATER REVENUE BONDS, SERIES 2007B WHEREAS, the City of Bakersfield (the "City") is a charter city organized and existing under the laws of the State of California (the "State"); and WHEREAS, the City now owns and operates a municipal sewer system (the "Enterprise"); and WHEREAS, the City Council (the "Council") of the City, acting under and pursuant to the powers reserved to the City under Section 3, 5 and 7 of Article XI of the Constitution of the State of California and Section 33.3 of the Charter of the City, has enacted the City of Bakersfield Enterprise Revenue Bond Law (the "Law"), being Chapter 3.55 of the Municipal Code of the City, which incorporates, to the extent made applicable by the Law, the Revenue Bond Law of 1941, being Chapter 6 of Division 2 of Title 5 of the California Government Code, as enacted and as thereafter amended; and WHEREAS, the Law authorizes the City to issue enterprise revenue bonds for the purposes set forth therein; and WHEREAS, pursuant to the Master Trust Indenture, dated as of August 1, 2007 (the "Master Trust Indenture"), by and between the City and U.S. Bank National Association (the "Trustee"), as supplemented by the Second Supplemental Trust Indenture, dated as of August 1, 2007, by and between the City and the Trustee (the "Second Supplemental Indenture"), the City has previously issued $43,730,000 City of Bakersfield, California Wastewater Revenue Bonds Series 2007B (the "Series 2007B Bonds"); and WHEREAS, the City has determined that there are excess Revenues (as defined in the Master Trust Indenture) in its Wastewater Treatment Fund (as defined in the Master Trust Indenture); and WHEREAS, the Series 2007B Bonds currently outstanding are bearing interest at a Weekly Interest Rate (as defined in the Second Supplemental Indenture); and WHEREAS, pursuant to the Second Supplemental Indenture, the Series 2007B Bonds bearing interest at a Weekly Interest Rate are subject to optional redemption by the City, in whole or in part, on any Interest Payment Date (as defined in the Second Supplemental Indenture) during a Weekly Interest Rate Period (as defined in the Second Supplemental Indenture); and o~~AK~9`Pc1 4846-9392-9738.2 v Q ORIGINAL WHEREAS, the City has determined that it is appropriate and to its benefit to use excess Revenues in its Wastewater Treatment Fund to redeem a portion of the outstanding Series 2007B Bonds; and NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Bakersfield as follows: Section 1. That the City Council, does hereby approve the use of excess Revenues in the Wastewater Treatment Fund of the City in an amount not to exceed $19,000,000 million to redeem a portion of the outstanding Series 2007B Bonds. The City Council hereby directs staff to take the necessary actions, including, but not limited to, sending out the appropriate notices, in order to use excess Revenues in the Wastewater Treatment Fund to redeem the outstanding Series 2007B Bonds. Section 2. Effective Date of Resolution. This Resolution shall take effect immediately upon its passage. ~AKF9 4846-9392-9738.2 2 m r- r v d ORIGINA.!_ I HEREBY CERTIFY that the foregoing Resolution was passed and adopted by the City Council of the City of Bakersfield at a regular meeting thereof held on October 19, 2011, by the following vote: SALAS, WEIR, COUCH, HANSON, SULLIVAN, JOHNSON "t_'5' COUNCILMEMBER NOES: COUNCILMEMBER ABSTAIN: COUNCILMEMBER SE COUNCILMEMBERzP~ v City Clerk and Ex Officio erk of the Council of the City of Bakersfield APPROVED this 19' day APPROVED AS TO FORM: VIRGINIA GENNARO City Attorney B 1 )ua Rudnick Deputy City Attorney II 11 b P, 4846-9392-9738.2 3 F- v Mayor of the City of Bakersfield MEMORANDUM TO: Alan Tandy, City Manager FROM: Nelson K. Smith, Finance Director DATE: August 23, 2011 SUBJECT: Wastewater Revenue Bond (Series B) Variable Rate Debt Proposed Partial Bond Call and other Changes Backaround In 2007 the City issued two series of bonds to fund the Wastewater expansion project and other related improvements. The Series A bonds totaled $190,695,000 and were fixed rate interest bonds for a 30 year period. The Series B bonds totaled $43,730,000 and were variable rate bonds that "wrapped around" the fixed rate issue, meaning the variable rate debt was "interest only" for the first 30 years and then the principal was to be paid back in years 31, 32 and 33. This variable rate bond structure allowed us to take advantage of historically low variable interest rates and provide an opportunity to pay some debt off early if rates were to escalate and/or funds were available for early payoff during the first 10 years of the debt. The fixed rate bonds carry a 10 year "no call" provision, thus the variable rate component provided us with some early payoff flexibility. We purposely limited the variable rate series just below 20% of the total bond sale to limit our overall exposure to rising interest rates. The variable rate on the Series B bonds has a 7 day reset feature, which means that the bonds are basically remarketed/resold every week. As one of the many protections built into the bond sale, a "liquidity provider" was hired to step in and guarantee the resale of the bonds should the remarketing agent be unable to find a buyer at any given point in time. Our contract is currently with a company called Dexia Credit Local, which provides a guaranteed marketing coverage period for up to 180 days at an indexed interest rate. Dexia is a Belgian-French bank which, like most European banks, happens to have some significant exposure to governmental debt with the country of Greece. ~~,AKF9 S.n m r O ORIGINAL Recent Issue Impacting our Bonds- Standard & Poor's rating agency has recently warned investors of a possible downgrade of Dexia and as a result many investors are no longer interested in holding paper (bonds) associated with Dexia in any form. This international reaction in the bond market has driven up interest rates on Dexia backed paper and caused many investors to divest, including a portion of our 2007B bonds. The concern is limited to Dexia paper as overall variable rate market interest rates remain at historic lows. Dexia was a significant participant in the U.S. bond market for many years thus fear of its problems has caused a remarketing problem for many public agencies across the nation. A recent news article from the Wall Street Journal (June 18-19, 2011) describes the public agency impacts across the United States (copy attached). The above notwithstanding, Dexia to date continues to perform all of its obligations on our 2007B bonds. The divesting of a portion of our bonds ($31 million of the $43 million) back in June 2011 only lasted a couple of weeks and those bonds have now been successfully remarketed, but at a higher interest rate. Our rates jumped from 0.5% to about 3.0% as a result of the Dexia name being associated with our bonds. Additional Information - I have been in discussions with our bond underwriter (GK Baum & Co.) on several occasions over the past couple of months regarding various forward looking options and/or solutions to this issue. Their general suggestion is that we take an action to bid out our liquidity services and contract with a new liquidity provider to separate ourselves from Dexia. Banks without Dexia's issues currently provide liquidity services to the market and, though many Dexia impacted issuers are seeking their services, may be interested in serving Bakersfield. Opportunity to Redeem Bonds - Additionally, I have been reviewing the fund balance information in the Sewer Enterprise fund looking for other options and solutions to this issue, including the use of reserve funds we have been accumulating to deal with unforeseen issues such as this one (spreadsheet attached). The wastewater enterprise has a fund balance of approximately $83 million. Some of these funds are designated for capital projects; some are set aside as a debt service reserve; and the balance is available for new capital projects and/or unforeseen system maintenance or repair issues, including emergency or catastrophic events. Since the issuance of the bonds in 2007 we have enjoyed a very low variable rate. Historic averages in 2007 were in the 2.5% to 3.5% range, yet for most of 2009 and 2010 we were paying actual rates in the 0.5% range. During this time frame the wastewater enterprise has "saved" (budget vs. actual) approximately $4.5 million due to the lower `~4gAKF9~ -r t._ r c7 O ORIGINAL than normal interest costs, which is one reason why the fund balance is at its current level. Other reasons for the current fund balance level include our historic conservative manner in which we budget, including the set aside over the past three years of the $16 million debt reserves to address variable rate fluctuations and unforeseen issues such as this global bond market Dexia issue. Recommendation - My recommendation is to use the debt service reserve funds of $16 million along with an additional $2,730,000 of the wastewater fund balance and pay down the variable rate debt from the original $43,730,000 to a balance of $25 million. We have anticipated doing something like this from the beginning and now is an appropriate time both because of our accumulated savings and for the Dexia situation. As a concurrent action we would work with our bond underwriter to solicit proposals from other banks to serve as our new "liquidity provider" on the remaining variable rate debt. Based on current market conditions we expect the fees charged by the new provider to be higher than that of Dexia, but changing providers will also allow us to remarket the remaining bonds at "normal" market rates and get back to a "business as usual" status from week to week. Please note the process of changing liquidity providers is rather complex and will require the involvement of bond attorneys and disclosure counsel as well as re- certifying our bond rating with Moody's rating agency. This "process" will cost about $200,000 to $250,000; but as you will see below the positive change should pay for itself in about one year. Therefore the proposed budgetary action to facilitate both the bond call and the change in liquidity provider would involve an appropriation of approximately $19 million of Wastewater fund balance ($18,730,000 for the bond call and an estimated $250,000 for the legal and other costs associated with the selection and disclosure of a new liquidity provider). Analysis of options - We have prepared cost analysis on a variety of options and solutions in developing the above recommendations. These are summarized as follows: - Bond Call redemption of the $18 million in variable rate bonds will save the City approximately $571,500 per year in reduced interest costs. - Changing the Liquidity Provider from Dexia to another Bank is estimated to save the City approximately $244,000 per year in lower interest costs. - The combined savings of taking both actions is estimated to save approximately $815,500 per year in reduced interest costs the City AK,9q H- m 0 ORIGINAI Based on your direction and feedback on this topic we will bring forward a report to the City Council for their consideration. Attachments - Copy of Wall Street Journal article from June 2011 on Dexia - Wastewater Fund Balance history cc: Steven Teglia File name: nks:/p:/bond issues/memo-sewer proposed partial bond call 2011 doc A KF9~ m r ORIGINAL