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Home My WebLink About101-Refunding Summary Report.pdf SARATOGA CITY COUNCIL MEETING DATE: August 17, 2011 AGENDA ITEM: DEPARTMENT: Finance & Administrative Services CITY MANAGER: Dave Anderson PREPARED BY: Mary Furey DIRECTOR: Mary Furey SUBJECT: General Obligation Bond Refunding Summary Report RECOMMENDED ACTION: 1. Review 2001 General Obligation Bond Refunding Summary Report, refunding documents and schedules, and new 2011 GO Bond Debt Payment Schedule. 2. Present Mayor Howard A. Miller with a commendation from the City for initiating the General Obligation Bond refunding. BACKGROUND INFORMATION: On August 1, 2011, the City of Saratoga saved its residents $2,677,041 through a refunding of the 2001 Series General Obligation Bonds. A brief summary of the bond’s history and purpose unfolds as follows: In 2001, the City of Saratoga issued $15,000,000 of voter-approved General Obligation (GO) Bonds to improve, renovate, and expand the Saratoga Community Library Building. GO Bonds are tax-exempt debt obligations secured by the City’s power and statutory authority to levy ad valorem taxes on real and personal property located within city boundaries for payment of the bond’s principal, interest, and administrative expenses. The County of Santa Clara collects the GO Bond levy along with property taxes, and subsequently remits the assessments to the City. The City in turn, dispenses payments on behalf of the bond debt. The City does not receive revenue for this administrative obligation, nor expend any City funds for the bond debt. At the time the GO Bonds were issued, competitive interest rates ranged between 5 - 6%. Under the terms of the issuance, the bonds became eligible for redemption on the anniversary of the ninth year, August 1, 2010. However, from August 1, 2010 through July 31, 2011, the redemption price was equal to the principal amount plus a 1% premium (approximately $126,500). When the bonds passed the ten-year anniversary date of August 1, 2011, the premium was eliminated and the bond redemption price became equal to the outstanding principal amount. With interest rates falling to historic lows over the last two years and the bonds becoming eligible for redemption, it became financially advantageous for the City to refund the outstanding bond debt; therefore, in September of 2010, Council directed staff to pursue refunding of the bonds. REPORT SUMMARY: As debt issuance is a specialized financial field requiring expertise and access to market information, staff was directed to hire a financial advisor to negotiate the bond refunding. This was particularly important in light of the recent changes in the municipal bond market with the collapse of the bond insurers and new regulations. An RFP was issued for a Financial Advisor in October of 2010, and seven very qualified firms’ submitted proposals. Sarah Hollenbeck of Public Financial Management in San Francisco was selected, and Council approved the Financial Advisor contract in January of 2011. Over the next several months, the City’s Financial Advisor made the necessary arrangements to obtain Bond Counsel (Hawkins, Delafield & Wood of San Francisco); obtain updated bond credit ratings from both Standard & Poor and Moody’s; and establish an escrow and paying agent agreement with Bank of New York Mellon for the reissuance. Together with City staff, the bond consultants prepared the required legal documents such as the paying agent agreement, the continuing disclosure certificate, the Preliminary Official Statement, and other necessary documents for the bond offering. The team worked with the two major bond rating agencies which both subsequently assigned the highest ratings to the bonds: AAA from Standard and Poor’s, and Aaa from Moody’s. The historically low interest rates held throughout the spring, and PFM set the refunding bond’s date of sale to registered brokers (underwriters) for June 29, 2011. On the date of sale, six competitive bids were received from various underwriters. PFM determined the lowest net cost came from Citigroup Global Markets, Inc. with a True Interest Cost (TIC) of 3.420074%. PFM then worked with the bond counsel and underwriter to complete the required documents and bond sale by July 14, 2011. The reissued bond funding was then held in escrow until the 1% premium was eliminated on August 1, 2011. On that date, the original bonds were redeemed and the new refunding bonds were issued. Two bond refunding issuance documents are attached for your reference: Attachment A is the Official Statement for the 2011 refunded bond issue and Attachment B is the Conditional Notice of Full Redemption for the 2001 original bond issue. Attachment C, the closing wire instructions, and Attachment D, titled Sources and Uses of Funds illustrate how the winning bid’s net proceeds of $12,454,738, were applied: $12,235,000 paid off the principal balance of the bonds on August 1st; $100,000 went to the cost of issuance fund (for the financial advisor, bond counsel, credit rating agencies, advertising, printing, etc.); $116,446 was applied to the underwriter’s discount, and $3,292 refunding proceeds remained on hand. Under a bond issuance or bond refunding, the underwriter pays the issuer an agreed upon price to purchase the entire bond issue, and then places the bonds with public investors at a higher price. The difference, known as the gross spread, is the primary source of an underwriting firm’s profits. With the bond refunding sale close, the underwriter issued $11,995,000 of refunded bond debt, meaning bond principal was reduced by $240,000. This principal reduction factored into the True Interest Cost lowering the overall cost of the bid. Attachment E illustrates that there is more than $130,000 of annual debt payment savings each year as a result of the bond refunding, with a total savings of $2,677,041. A summary of the original bond issuance costs and the net savings generated by the refunding is shown in Attachment F. The new 2011 GO Bond Debt Payment Schedule is illustrated in Attachment G. Overall the refunding resulted in an 8.9% savings to Saratoga property owners. FISCAL IMPACTS: Refunding the General Obligation Bond saved the City’s residents $2,677,041. As General Obligation Bonds are a debt assumed by the whole of Saratoga property owners; it is not a debt of the City of Saratoga. Therefore all principal, interest, and administrative payments, as well as the savings generated from this refunding belong to the residents and do not fiscally impact the City. The City merely acts in a fiduciary manner to provide administrative oversight. The $100,000 cost of issuance, the $116,446 for underwriter’s discount, $3,292 of additional proceeds, and the additional $240,000 principal payment were all funded through the premium paid as part of the refunding issuance. CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION: N/A ALTERNATIVE ACTION: N/A FOLLOW UP ACTION: N/A ADVERTISING, NOTICING AND PUBLIC CONTACT: Pursuant to Government Code 54954.2, this item was properly posted as a City Council agenda item and included in the packet made available on the City’s website in advance of the meeting. A copy of the agenda packet is also made available at the Saratoga Branch Library each Monday in advance of the Council meeting. ATTACHMENTS: Attachment A – Official Statement Attachment B – Conditional Notice of Full Redemption Attachment C – Closing Wire Instructions Attachment D – Source and Use of Funds Attachment E – Refunding Savings Attachment F – Bond Debt Summary Schedule Attachment G – 2011 GO Bond Debt Payment Schedule Attachment H – Commendation – to be provided at August 17, 2011 meeting