Department of Finance
Reference: 2022 Water Activity Enterprise Bond Ordinance
To: Mayor Gregory Mills and Members of City Council
Through: Michael P. Martinez, City Manager
Prepared By: Catrina Asher, Director of Finance
Date Prepared: September 20, 2022
PURPOSE
To allow for the borrowing of funds to finance the City’s Water Treatment Plant.
STRATEGIC FOCUS AREA
Supportive, Sustainable Infrastructure
Financially Responsible
BACKGROUND
In June 2022, City Council took action that initiated the construction of a new Water Treatment Plant. That action included approval of updates to water charges, the approval of awarding a construction contract for the project, and the approval of a reimbursement resolution allowing future bond proceeds to be utilized for construction costs incurred prior to the issuance of bonds. The groundbreaking for the new facility occurred on July 26, 2022.
The financial plan for this project, as has been previously presented and discussed, includes the issuance of bonds secured by the future revenues of the City’s Water Activity Enterprise. The ordinance presented provides for parameters of those bonds, including the maximum amount to be borrowed, maximum interest rates, and the maximum final payment date. The ordinance also approves the form of certain documents that will be executed in connection with the financing.
The borrowing itself will occur through a competitive sale, which means that underwriters will bid on the City’s debt offering and the City will award the bonds to the underwriter with the most competitive offer. This means that the exact interest rate and payment schedule will not be known until the bonds are sold. Therefore, the ordinance provides for maximums allowed rather than specific amounts and delegates to the City Manager and the Finance Director the authority to determine the final amounts, subject to the maximums.
The issuance of bonds is a legal process and is accomplished through a series of legal documents, all of which are being prepared by the City’s Bond Counsel (Butler Snow, LLP) and reviewed by City staff and the City’s Municipal Advisors (Hilltop Securities Inc.). These documents include the following:
• Preliminary Official Statement - Informational document describing the proposed bond issuance, including underlying projects, assets, and funding sources, which is used to market the bonds
• Notice of Public Sale - Announcement of the sale of municipal bonds
• Paying Agent Agreement - Agreement with the paying agent who will pay the bondholders
• Continuing Disclosure Certificate - Document setting forth the ongoing obligations for the City to provide disclosures required by the Securities and Exchange Commission for municipal borrowings
These documents will be used throughout the issuance process and are considered approved as to form with the approval of the Bond Ordinance. The ordinance authorizes the Mayor to sign the final Official Statement upon completion. The Preliminary Official Statement is substantially complete and will be provided in the packet for the final reading of the ordinance.
These documents in draft form are on file with the Finance Department and can be reviewed through the following link: 2022 Water Activity Enterprise Bonds <https://docs.google.com/document/d/1yBo16l5piHTs6dv5EG8dcEf3Sx-b4lZD/edit?usp=sharing&ouid=114957747010563629216&rtpof=true&sd=true>
General Parameters and Delegations in the ordinance
The ordinance provides for the following maximum amounts:
• Maximum bond principal shall not exceed $81,000,000
• Net effective interest rate shall not exceed 5.25%
• The bonds shall mature no later than June 1, 2052
The ordinance delegates authority to the City Manager and Finance Director to accept the best bid to purchase the bonds and to execute the Sale Certificate.
Consistent with the existing Water Activity Enterprise Bonds, the fund must maintain rates and charges sufficient to generate Net Revenues equal to at least 125% of the total debt service requirements of the existing bonds and the new bonds.
Bond Issuance Timeline
Key dates in the issuance timeline are as follows with BOLD items being those that require City Council action:
• September 20 Bond Ordinance (first reading)
• September 22 & 23 Rating Agency Calls
• October 4 Bond Ordinance (final reading)
• October 5 Ratings made available
• October 12 Preliminary Official Statement & Notice of Public Sale posted
• October 25 Bond Sale
• November 8 Bond Closing and Delivery of Proceeds
CRITERIA BY WHICH COUNCIL MUST CONSIDER THE ITEM
The language in the ordinance is driven primarily by the legal nature of a municipal bond issuance. The parameters are set at maximums allowed which means interest rates and to the total bond principal is expected to be slightly lower than those outlined in the ordinance. The amount of the borrowing coincides with the spending needs of the Water Treatment Plant project, with a second borrowing planned for 2024.
Approval of the ordinance will support the timeline moving forward as scheduled.
FINANCIAL IMPACT
The borrowing will provide $80 million in funds to finance the first phases of the Water Treatment Plant project. The repayment of the bonds will be phased in with lower payments in early years to allow for the impact of the payments to be spread over several years. An estimate payment schedule is included with this packet.
The borrowing is secured by the revenues of the Water Activity Enterprise, and the ordinance includes a Rate Maintenance Covenant stating that the city will ensure that rates are set to provide sufficient revenue to meet the operational needs of the fund as well as to cover 125% of the combined debt service requirements of the fund. Failure to provide for sufficient revenue to meet the covenants would result in default of both this bond as well as the existing Water Activity Bonds in the fund.
STAFF RECOMMENDATION
Staff recommends approval of the 2022 Water Activity Bond Ordinance as presented.
OPTIONS FOR COUNCIL CONSIDERATION
Ø Approve the ordinance as presented.
Ø Do not approve the ordinance.
Ø Request additional information.
Attachments:
Ø Ordinance
Ø PowerPoint Presentation