Successor Agency to the Manteca Redevelopment Agency Agenda
Memo to: Manteca City Council
From: Jeri Tejeda, Finance Director
Date: September 17, 2019
Subject: Refunding of Tax Allocation Bonds issued by the former Manteca Redevelopment Agency.
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Adopt the resolution approving the Successor Agency's Issuance of Tax Allocation Refunding Bonds and taking related actions.
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Background:
The former Manteca Redevelopment Agency issued multiple issues of bonds to finance and refinance its redevelopment activities. A portion of these bonds remain outstanding. After the upcoming principal payment on October 1, 2019, the remaining outstanding principal amount will be $99,370,000.
Due to the dissolution of redevelopment agencies, the Successor Agency is now responsible for paying the bonds. The Successor Agency is authorized to issue bonds to refund (i.e., refinance) these remaining bonds, with the approval of the San Joaquin Countywide Oversight Board and the State Department of Finance.
Urban Futures, Incorporated (the Municipal Advisor to the Successor Agency), in consultation with RBC Capital Markets, LLC (the underwriter), has prepared the attached Savings Report. Based on market conditions as of August 21, 2019, the issuance of refunding bonds will generate savings of approximately $24.8 million, or approximately $1.08 million a year. The final savings amount will depend on the market interest rates in effect when the refunding bonds are sold, which is anticipated to be in December 2019.
Discussion:
Estimated Savings to Successor Agency, Taxing Entitles (including the City of Manteca).
Principal and interest payments on the bonds are payable from a portion of the property tax revenues collected in the former Redevelopment Agency’s redevelopment project area. This portion of the property tax revenues is commonly referred to as “tax increment.” After the former Redevelopment Agency’s dissolution, tax increment is no longer distributed to the Successor Agency directly. Instead, the County Auditor Controller maintains a fund for the Successor Agency, known as the Redevelopment Property Tax Trust Fund. The County Auditor-Controller deposits all tax increment into the Redevelopment Property Tax Trust Fund, and disburses from it twice a year. Disbursements not needed to pay for other obligations are paid to taxing entities, including the City of Manteca.
As shown in the Savings Report, the proposed refunding is estimated to generate annual savings of approximately $1,078,000, which will result in an increase of such residual payments to the taxing entities, including the City. The City’s general fund share of residual redevelopment tax revenues is approximately 16.27 percent (which would be $175,390 in annual additional residual payments, assuming $1,078,000 total to all taxing entities).
Refunding of 2002, 2004 and 2006 Bonds
The outstanding bonds to be refunded include bonds issued by the former Redevelopment Agency in 2002, 2004, 2005 and 2006. Among them, the 2005 Bonds carry variable interest rates, while all of the other bonds were issued at fixed interest rates.
The Successor Agency is authorized to issue refunding bonds to provide debt service savings. The estimated debt service savings to be generated by the refunding of each of the prior issues of the fixed rate bonds are shown in the attached Savings Report.
Refunding of 2005 Bonds; Letter of Credit and Swap Termination
The 2005 bonds were issued as variable rate bonds. In connection with the 2005 bonds, the former Redevelopment Agency entered into: (i) an agreement with State Street Bank and Trust Company, for State Street’s issuance of a letter of credit, and (ii) an interest rate swap agreement with Piper Jaffray Financial Products, Inc.
The interest rate on the 2005 bonds resets daily. As typical for such variable rate bonds, bondholders have the option to “tender” (or put back) a 2005 bond to the Successor Agency with short notice. Upon a successful remarketing, a tendered bond would be sold and transferred to another bond investor. So long as the letter of credit is in effect, the bond trustee draws on the letter of credit to pay periodic principal and interest payments on the 2005 bonds. The Successor Agency reimburses State Street for such draws. If a 2005 bond is put back to the Successor Agency and the remarketing agent is unable to remarket the 2005 bond, the trustee would draw on the letter of credit to buy the tendered 2005 bond. The Successor Agency pays fees to State Street in accordance with the terms of the agreement with State Street.
A bank’s letter of credit supporting variable bonds generally has a term of only a few years. The current term of State Street’s letter of credit expires in May 2020. There is no guarantee that State Street will renew the letter of credit or, if not, the Successor Agency will be able to find a substitute on a timely basis, and there is no certainty with respect to the related costs.
The issuance of fixed rate refunding bonds to refinance the 2005 bonds will eliminate the risk of debt service spike which accompanies the letter of credit expiration.
The former Redevelopment Agency entered into the swap to hedge against spikes in the variable interest rate of the 2005 bonds. The swap was structured so that the former Redevelopment Agency (and now the Successor Agency) would pay, effectively, a fixed interest rate of approximately 3.63 percent - assuming that the fluctuation of the 2005 bonds variable interest rate and the fluctuation of a benchmark rate would continuously parallel each other.
If the swap is terminated before the final maturity of the 2005 bonds, a termination fee (calculated using certain market rates) will be due. The Savings Report shows that, when the swap termination fee is taken into account, and a present value discount is applied (where the savings of the transaction are discounted to a “today’s” dollars equivalent, using an assumed discount rate based on interest rates of new bond issues), the refunding of the 2005 bonds would result in slightly negative present value savings. However, in light of currently favorable low interest rates, the estimated savings for the refunding of the 2005 bonds (after taking into account the recurring letter of credit fees and remarking agent fees), in actual dollars, is approximately $4.9 million.
The refunding of the 2005 bonds will alleviate the constant expenditure of resources for the monitoring and administration of the fluctuating variable interest rates, the letter of credit and the swap - in a manner consistent with the Successor Agency’s wind-down of the former Agency’s affairs.
Next Steps
By adopting the attached Resolution, the Successor Agency Board will:
• authorize the issuance of the refunding bonds,
• approve the substantial form of an indenture (which will govern the terms of the refunding bonds) and authorize the execution and delivery of the indenture,
• authorize the engagement of RBC Capital Markets, LLC, as the underwriter;
• affirm the appointment of: (a) Urban Futures, Incorporated, to serve as the municipal advisor and fiscal consultant, (b) Richards, Watson & Gershon, A Professional Corporation, to serve as bond counsel and disclosure counsel, and (c) U.S. Bank National Association, to serve as trustee under the Indenture.
• request the Oversight Board to approve the issuance of the refunding bonds.
The issuance of the refunding bonds must also be approved by the Oversight Board. Staff is working to present the item to the Oversight Board at its next available meeting. The Oversight Board’s resolution is subject to review by the State Department of Finance. Assuming the Oversight Board adopts its resolution by the end of September, Staff expects to receive the determination from the State Department of Finance by the end of November 2019.
During the State Department of Finance review period, the finance team members will assist Successor Agency Staff with the preparation of a Preliminary Official Statement, which will contain information about the Successor Agency, the redevelopment project area, and the refunding bonds. It is anticipated that the form of the Preliminary Official Statement will be presented to the Successor Agency Board for consideration of approval in November 2019.
The underwriter will use the Preliminary Official Statement for the marketing of the refunding bonds. It is expected that, after the marketing period, the “pricing” of the refunding bonds (i.e., when the final principal amount and interest rates will be determined) will take place in December. The closing of the transaction will be two or three weeks thereafter.
Fiscal Impact:
The issuance of the refunding bonds is currently estimated to generate a total debt service savings amount of approximately $24.8 million. The costs of issuance will be paid from bond proceeds. The repayment of principal and interest on the refunding bonds will be secured solely by available property tax revenues deposited in the Redevelopment Property Tax Trust Fund. The refunding bonds will not be a debt of the City’s general fund.
The following estimates regarding the refunding have been compiled by the Urban Futures, Inc., the Successor Agency’s Municipal Advisor, in consultation with the underwriter, based on market conditions as of August 21, 2019.
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Information to be disclosed per Government Code Section 5852.1: |
Estimates as of August 21, 2019* |
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True interest cost of the bonds |
2.74% |
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Finance charge of the bonds (the sum of fees and charges paid to third parties) |
$2,603,877 (includes underwriter’s discount, costs of issuance, bond insurance premium, and reserve surety premium). In addition, a swap termination fee estimated at $12,150,000 will be required to pay-off of the 2005 bonds. |
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Bond proceeds received by the Successor Agency |
$91,689,173 |
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Total payment amount |
$138,847,954 (total principal and interest payments), Plus $2,500 annual trustee fee as long as the refunding bonds are outstanding |
* These are good faith estimates only. Final results will likely differ based on market conditions as of the actual sale date and other factors.
Documents Attached:
1. Attachment 1 - Resolution
2. Attachment 2 - Exhibit “A” to Resolution: Form of Indenture
3. Attachment 3 - Municipal Advisor’s Savings Report
4. Attachment 4 - Presentation