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    8.    
City Council Regular Joint
Meeting Date: 10/22/2019  

SUBJECT:
APPROVE ISSUANCE OF REVENUE REFUNDING BONDS (COMMUNITY FACILITIES DISTRICT BOND PROGRAM)
RECOMMENDATION:
That the Board of Directors adopt a Resolution entitled:  A RESOLUTION OF THE BOARD OF DIRECTORS OF THE CHINO HILLS FINANCING AUTHORITY AUTHORIZING THE ISSUANCE OF REVENUE REFUNDING BONDS (COMMUNITY FACILITIES DISTRICT BOND PROGRAM), SERIES D, IN AN AGGREGATE PRINCIPAL AMOUNT OF NOT TO EXCEED $10,000,000, AUTHORIZING THE EXECUTION AND DELIVERY OF A FOURTH SUPPLEMENTAL INDENTURE, A BOND PURCHASE AGREEMENT, AN ESCROW AGREEMENT AND A CONTINUING DISCLOSURE CERTIFICATE, AUTHORIZING DISTRIBUTION OF AN OFFICIAL STATEMENT, APPOINTING CERTAIN PROFESSIONALS IN CONNECTION WITH THE ISSUANCE OF THE BONDS, AUTHORIZING THE SELECTION OF A MUNICIPAL BOND INSURER FOR ALL OR ANY PORTION OF THE BONDS,  AND AUTHORIZING THE EXECUTION OF NECESSARY DOCUMENTS AND CERTIFICATES AND RELATED ACTIONS
BACKGROUND/ANALYSIS:
In 2006, the City issued six series of Special Tax Bonds relating to six of the City’s eight Community Facilities Districts (CFDs) to provide a portion of the funding for the City’s Government Center complex. The Special Tax Bonds were acquired by the Chino Hills Financing Authority (Authority) and used to secure repayment of the Authority’s Revenue Bonds (Community Facilities District Bond Program), Series B (2006 Bonds). Using this financing structure allowed the City to pool the CFDs and market them as one bond issue rather than each separate CFD’s Special Tax Bonds being sold to the public.
 
This structure was used in 2015 as well when the City refinanced its 2007 Certificates of Participation with CFD Special Tax Bonds and used the Special Tax Bonds of CFD No. 2 and CFD No. 5 to secure repayment of the Authority’s Revenue Bonds (Community Facilities District Bond Program), Series C (2015 Bonds). 
 
At this time, interest rates make a refinancing of the 2006 Bonds cost effective. Although there were originally six series of Special Tax Bonds securing the 2006 Bonds, two series of those Special Tax Bonds have matured (CFD No. 4 and CFD No. 8 Special Tax Bonds). In addition, another two series are close to maturity or have enough funds on hand to fully redeem them prior to their scheduled maturity (CFD No. 1 and CFD No. 6 Special Tax Bonds). Therefore, a refinancing of only the 2006 Bonds relating to CFD No. 2 and CFD No. 5 are recommended at this time, and the 2006 Bonds relating to CFD No. 1 and CFD No. 6 will be redeemed early from funds on hand. 
 
 
Currently, the 2006 Bonds are outstanding as shown below:
 
CFD No. 1    $     745,000
CFD No. 2        2,075,000
CFD No. 5        8,645,000
CFD No. 6           310,000
                    $11,775,000
 
Refinancing Analysis
 
The average interest rate on the 2006 Bonds is 4.33% and they mature by 2030. Based on an expected interest rate of approximately 2% on the 2019 Bonds, there is a projected savings of $1 million (or a 7% reduction) in debt service payments over the life of the 2006 Bonds as a result of the refinancing and early redemption. These savings will accrue to the CFDs and be available for additional local capital improvements within each CFD. Further, it will accelerate the CFD funding available for regional improvements.
 
In order to refinance $11.775 million of 2006 Bonds that are outstanding, the City will need to raise approximately $8.47 million from the sale of the 2019 Bonds. Based on current market conditions, the par amount of the Bonds is estimated to be $8,470,000, issued with an original issue premium of $933,000, and will provide total funding of $9,403,000. A reserve fund for the 2019 Bonds is anticipated to be funded with Bond proceeds. The following table provides the anticipated size of the bond issue, including funding of the costs of issuance, use of funds on hand from CFD No. 1 and CFD No. 6 to redeem 2006 Bonds, and application of the reserve fund held for the 2006 Bonds to the cost to redeem the 2006 Bonds.
 
Cost of Issuance $   222,000
2019 Reserve Fund 847,000
Prepay 2006 Bonds 11,978,000
Total Refunding Requirement 13,047,000
Less 2006 Bonds Reserve Fund (3,416,000)
Less CFD No. 1 Special Taxes (47,000)
Less CFD No. 6 Special Taxes   (181,000)
Total Net Bond Proceeds 9,403,000
Original Issue Premium   (933,000)
Par Amount of Bonds Issued $ 8,470,000
 
The estimated par amount will be subject to prevailing market conditions at the time of sale. Therefore, a par amount of $8,470,000 is being estimated ($650,000 for CFD No. 2 Special Tax Refunding Bonds and $7,820,000 for CFD No. 5 Special Tax Refunding Bonds) but the actual issue size may be higher if the 2019 Bonds are priced with a lower original issue premium or with an original issue discount based on investor preference at the time of sale. 
 
Professional Services
 
Regarding the sale of the 2019 Bonds, staff recommends a negotiated sale. This recommendation is based on the credit analysis required for each of the underlying CFDs, which does not lend itself well to a competitive sale. A negotiated sale allows the underwriter to pre-market the bonds to their investors, which reduces their risk of holding an inventory in the bonds, which in turn, allows the underwriter to offer lower rates for the City. Further, the market for land-secured bonds, without credit enhancement, is mainly composed of investors who must complete additional due diligence before committing to purchase the bonds, and therefore need more time to analyze each transaction. This reinforces the need to select one underwriter who can work with such investors and obtain the lowest interest rates possible. 
 
The City’s municipal advisor solicited a proposal to underwrite the 2019 Bonds from Piper Jaffray & Company. Piper Jaffray & Company is one of the leading underwriters in California for financings secured by Special Taxes. Piper Jaffray & Company was the underwriter for the 2015 Bonds and is familiar with the structure and the underlying CFD credit characteristics. 
 
Assisting the staff on the issuance of the 2019 Bonds is the City’s regular financing team of Norton Rose Fulbright US LLP, bond counsel; Jones Hall, disclosure counsel; Willdan Financial Services, special tax consultant; and Harrell & Company Advisors, municipal advisor.
 
Authorization Process
 
In order to authorize the issuance of the 2019 Bonds, the City Council and the Authority Board have been presented with resolutions for their consideration. 
 
The Authority resolution authorizes the sale of the 2019 Bonds by the Authority Executive Director or Treasurer, within certain parameters. These parameters are: (1) the par amount of the bonds cannot exceed $10,000,000, (2) the effective interest rate cannot exceed 3%, and (3) the underwriters’ discount cannot exceed 0.7% of the par amount of the 2019 Bonds. The Authority resolution also approves the forms of the following documents:
  • A Fourth Supplemental Indenture;
  • A Bond Purchase Agreement;
  • An Escrow Agreement;
  • A Preliminary Official Statement; and
  • A Continuing Disclosure Certificate (appended to the Preliminary Official Statement).
These documents are attached hereto, in draft form, and may be modified to reflect the terms of the actual sale of the 2019 Bonds.
 
The resolution also approves the distribution of the Preliminary Official Statement relating to the Bonds and the engagement of the bond counsel, disclosure counsel and underwriter.
 
Companion resolutions are being presented to the City Council for their consideration. The City Council resolutions authorize the issuance of the CFD Special Tax Refunding Bonds which will be purchased by the Authority with 2019 Bond proceeds and used as security for the repayment of the 2019 Bonds.
 
It is anticipated that the 2019 Bonds will be issued on December 12, 2019 and the 2006 Bonds will be redeemed on March 1, 2020, the next optional redemption date. 
ENVIRONMENTAL (CEQA) REVIEW:
This proposed action is exempt from review under the California Environmental Quality Act (California Public Resources Code §§ 21000, et seq., “CEQA”) and CEQA regulations (14 California Code Regulations §§ 15000, et seq.) because it constitutes an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. Accordingly, this action does not constitute a “project” that requires environmental review (see specifically 14 CC § 15378 (b)(4-5)).





 
FISCAL IMPACT:
There is no General Fund liability associated with the issuance of either the 2019 Bonds or the CFD Bonds. The 2019 Bonds are payable from amounts received by the Authority as the owner of the CFD Bonds. The CFD Bonds are payable from Special Taxes of the CFDs. The refinancing of 2006 Bonds is expected to save the CFDs over $1 million in interest costs which will now be available for capital projects. 
 
The Costs of Issuance associated with the 2019 Bonds, including fees and expenses of the City’s counsel, consultants and advisors, printing costs, rating fees and trustee fees, will be paid from proceeds of the 2019 Bonds. The costs are outlined below.
 
Bond Counsel + Expenses (Norton Rose Fulbright) $   53,500
Disclosure Counsel (Jones Hall) 17,500
Municipal Advisor + Expenses (Harrell & Company Advisors) 52,100
Special Tax Consultant (Willdan Financial Services) 7,500
Rating Fees (Standard & Poor’s) 16,500
Trustee (U.S. Bank) 5,500
Printing 1,500
Staff Time 7,500
City Attorney 5,000
Contingency          400
Total Fixed Costs $ 167,000
Underwriting (Piper Jaffray & Company)     55,000
Total Expected Issuance Expenses $ 222,000
 
These costs represents approximately 2.62% of the bond amount. The combined fees for the 2019 Bonds are consistent with fees paid by other CFDs for similar sized financings with similar credit ratings. The Municipal Advisor provided the City with a comparison of total fees paid for Special Tax Bonds since January 1, 2018, and those bonds in the range of $8 million to $9 million generally had total costs is excess of 2.6% of the bond size.
 
All fees except for the staff time reimbursement, City Attorney time, the rating fee and the special tax consulting fee are paid contingent on the bond closing. If the 2019 Bonds are not issued, the cost of the non-contingent fees can be charged to the CFD and paid from the Special Taxes.  There is no financial impact on the General Fund operations. 
 
The 2019 Bonds will mature in 2030, the same year that the 2006 Bonds were scheduled to mature. The Municipal Advisor has estimated the 2019 Bonds debt service based on current interest rates. Using those estimates, the effective interest rate (called the “true interest cost”) is approximately 2.00%. The total debt service payable through maturity is anticipated to be $10,095,000, with annual trustee fees and other bond administrative costs totaling approximately $30,000 through the maturity of the 2019 Bonds. This excludes the savings in trustee costs from the redemption of the 2006 Bonds. It also excludes the cost to administer and levy the special taxes, which are currently a component of the special tax levy. The overall net present value savings are an average 6.8%.











 
REVIEWED BY OTHERS:
This agenda item has been reviewed by the City Attorney, the City’s bond counsel and the City’s Municipal Advisor.
Attachments
Resolution
Fourth Supplemental Indenture
Bond Purchase Agreement
Escrow Agreement
Preliminary Official Statement

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