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HomeMy WebLinkAbout22 ASSESS DIST BONDS 08-15-94NO. 22 8-15-94 DATE: AUGUST 9, 1994 Inter-C TO: FROM: SUBJECT: BILL HUSTON, CITY MANAGER RONALD A. NAULT, DIRECTOR OF FINANCE REFUNDING ASSESSMENT DISTRICT BONDS RECOMMENDATION: Direct staff to prOceed with the proposed Assessment District 85-1 and 86-2 bond refundings per the recommendations detailed in the attached report by Bartle Wells Associates and authorize the City Manager to' negotiate an agreement appointing Bartle Wells Associates as Financial Advisor. FISCAL IMPACT: No direct fiscal impact on the general funds of the City but there is an expectation that with current market rates the individual fixed rate property owners will realize a savings on their annual assessments ranging between $48.00 to $315.00 per year. DISCUSSION: As the attached report from Bartle Wells Associates points out, there are real gains to both the City and the various property owners that can be realized by refunding the current outstanding assessment district bonds. At the present time the City is effectively administering eleven fixed rate bond issues and two variable rate issues. These thirteen issues have evolved from the two original variable rate issues completed in 1986 and 1988. The proposed refundings will consolidate all the fixed rate issues into one or two issues depending on the market as of the closing. We would also create two new districts, one for all the fixed rate assessments and one for the variable rate assessments. Interest rates have come down significantly since 1986. Even with the recent upward'movement of rates, there is the potential for savings of between 50 and 250 basis points on the fixed rate bonds. Table 5 of the Bartle Wells report displays the estimated annual savings broken down by original lien ranges. The total savings, which is the savings projected over the remaining life of the specific bonds, ranges between 19 and 21%. Page 2 August 9, 1994 The proposed refundings are well-timed to coincide with the close out of the construction funds. Staff will be working with the Financial Advisor and legal counsel to maximize the benefit accruing to the fixed rate property owners derived from the close- out of the construction funds. The schedule that Bartle Wells is proposing is sufficiently conservative to deal with the many potential complex issues that are expected to arise, yet is aggressive to take advantage of current market conditions. Because of the uniqueness of this refunding, the mix of variable rates and fixed rate bonds in the same issue, and differences in the documents between the 1986 and 1988 issues, staff feels that the selection of Bartle Wells Associates as Financial Advisors will greatly reduce the research time needed to address the potential issues and will keep the schedule on track for a successful closing in February of 1995. Bartle Wells worked very closely with the entire financing team during the Assessment District formation and the priginal bond issues. At that time no one had issued variable rate assessment debt that also included mandatory fixed rate conversions. They have thoroughly researched the issues presented in the attached staff report. Staff feels that a beneficial agreement can be negotiated and requests authorization to proceed according to the proposed schedule. Director of Finance RAN:ab August 4, 1994 Bar, lc Wells Associates 415/775-3113 F:'v\ 415/775-4123 City of Tustin 300 Centennial Way Tustin CA 92680 Attn: Ronald A. Nault Director of Finance Re: Refunding Bonds Assessment Districts 85-1 and 86-2 At your request, Bartle Wells Associates has reviewed the city's outstanding assess- ment bonds, to determine whether the bonds can be refunded economically. This letter outlines the potential savings from refunding the outstanding fixed-rate bonds, and describes the process and time schedule for such a refunding. Interest rates in the past year have been lower than the rates in many years. Rates have increased somewhat over the past few months, but the general level of rates is lower than the rates on most of the fixed-rate bonds. W..e believe that the city can meet several objectives by proceeding with a refunding of the assessment bonds: · Reduce annual and total costs to the property owners in the fixed-rate districts · Close out the construction funds for the assessment district projects · Separate the security of the fixed and variable-rate bonds · Reduce administrative costs by reducing the number of outstanding bond issues · Allow the Irvine Company to retain variable rate assessments on its property The net result from a refunding would be savings to the fixed-rate property owners , from reduced interest rates and assessments, savings to the city from reduced admin- istrative costs, and savings to the variable rate property owners from any reduction in the assessments such as from the application of surplus construction funds. Meeting these objeztives will probably require that all of the outstanding bonds, both fixed and variable, be refunded, and new districts created. A significant amount of legal and financial research and work will be required to accomplish all of these objectives. Background Tustin issued a total of over $130 million of assessment bonds for Assessment Districts 85-1 and 86-2 in 1986 and 1988. The bonds were originally issued as variable-rate bonds. Since the bonds were issued, portions of the variable-rate bonds have been converted to fixed rate as property was sold for development. As a result of these conversions, there are now 11 outstanding fixed-rate series of bonds, with interest rates averaging from 8.1 percent to 5.8 percent, depending on the date of the con- versions. The final maturities of the AD 85-1 bonds and the AD 86-2 bonds are in 201! and 2013, respectively. The proposed refunding would not extend the maturi- ties. The outstanding bonds currently total $106.5 million, of which $51.8 million are fixed-rate and the remaining $64.7 million are variable-rate. Table 1 summarizes the outstanding bonds. City of Tustin August 4, 1994 Page 2 Estimated Savings Savings from the refunding would accrue to the owners of property with fixed rate assessments. Assessments which remain variable rate would continue to be subject to the same conditions which currently establish the interest rates on the variable-rate bonds. The amount of fixed rate bonds outstanding (following the September 2, 1994 princi- pal payment) is $51.8 million. The refunding bonds must produce enough money, along with other available funds, to pay off the bonds, plus a 2.5 percent call pre- mium, establish a bond reserve fund, and pay the costs of issuing the refunding bonds. Other funds available consist of the existing fixed-rate reserve fund, required to be about $2.6 million, and remaining amounts in the construction fund, estimated at $16 million, which would be prorated between the fixed- and variable-rate issues. As shown in Table 2, refunding the fixed rate assessment bonds would require a new bond issue of about $49.715 million. The debt service savings on the refunding bonds would be about $700,000 per year and $5.5 million over the life of the bonds. Table 3 shows annual debt service on the outstanding bonds and estimated debt service on the refunding bonds, based on todafs interest rates. A refunding issue of about $64.5 million would be required for the variable-rate bonds, as shown in Table 4. There are several reasons for the potential savings, in addition to the general decrease in interest rates. The application of surplus construction funds allows the overall as- sessments to be reduced (this reduction could take place whether or not the bonds were refunded). The security of the fixed rate bonds have improved substantially since their conversion, because property ownership is dispersed and property has been developed. The ratio of assessed valuation to the current assessment liens is more than 15 to 1. Delinquencies in the fixed rate assessments are Iow. These savings calculations are estimates, based on what we believe to be conservative interest rates on the refunding bonds, cost estimates, and estimates of the available construction funds. All of the numbers will change as the refunding process proceeds. Savings to Individual Property Owners The savings to individual property owners will depend on a variety of factors, includ- ing the amount of his assessment and the interest rate on the assessment. Table 5 surmuarizes the annual and total savings on representative assessments. Overall, esti- mated annual savings range from $48 to $315, and total savings from $766 to $5,675. The reduction in annual savings averages about 12 percent. The actual savings will, of coume, depend on the final bond amount and the interest rates on both the refund- ing bonds and the property's original assessment. Refunding Process Assessment bonds are refunded under the Refunding Act of 1984, which sets forth the process for refunding 1915 Act bonds. The refunding act requires the city to notify each assessed property owner and hold a public hearing unless the refunding can meet three tests: City of Tustin August 4, 1994 Page 3 · Each annual installment on the reassessment is less than the corresponding original assessment installment; · The term of the refunding bonds is not longer than the term of the original bonds; and · The original assessments are reduced pro rata. The city should require that a refunding meet these tests so that it qualifies for a simplified, summary proceeding. Refunding Alternatives Refunding these issues will be complex, because of the interrelationship between the fixed- and variable-rate issues. There are two basic options to be examined: a con- ventional assessment bond refunding, and a refunding using a Marks-Roos pool. · Conventional Assessment Bond Refunding: An assessment bond refunding under the 1984 act is similar to any other municipal bond refunding with one signifi?.nt exception. In o. rder to qualify as a summary refunding, the principal amount ox me new refunding issue cannot be greater than the principal amount of the refunded bonds. The c~.sts of the refunding will exceed the amount of outstanding bonds, because the city must pay a prepayment premium on the bonds which are called, as well as pay the costs of issuing the new bonds. Therefore, an alternate source of funds rather than the new bonds must be used to pay these additional expenses. This source of funds can be funds remaining in the construction fund or redemption fund. · Marks-Roos Pool: With this approach, the city creates a financing authority with its redevelopment agency. The authority issues revenue bonds in the amount nec- essary to purchase the refunding assessment bonds and to pay the call and issuance costs. The JPA buys the refunding assessment bonds at an interest rate sufficient to cover debt service on the JPA bonds. Both of these approaches should be explored with the bond counsel and underwriter, to determine which will provide the best solution in this case. Many technical questions will arise during this refunding. The bond issues are com- plex to begin with, because of the complex relationship between the fixed- and variable- rate bonds and assessments. Very few variable-rate assessment bonds have been issued, and fewer have been refunded. Bond Sale Method Due to the complexity of the issue, we recommend that the bonds be sold by negoti- ated sale. Negotiated sales are beneficial to issuers in cases of complex debt struc- tures with unique security provisions. As discussed earlier, a refunding of the type proposed will be a unique transaction. We are anticipating two simultaneous bond issues, one fixed and one variable, both of which will be complex. The size of the issues is unusual in the assessment bond market, so a successful bond sale will require that the issues appeal to purchasers other than traditional assessment bond purchasers. These complexities can be best addressed with a negotiated sale. An underwriter should be selected based on both qualifications and fees, through a request for proposal. City of Tustin August 4, 1994 Page 4 Recommendations We believe that the estimated savings are sufficient to warrant proceeding with the refunding. We recommend the following course of action: · Authorize staff to proceed with the refunding. · Retain financial advisor. · .Select bond counsel and underwriter. Because of the complexiw, of the refun.d- rog, the city should carefully select a bond counsel and underwater with specffic experience in both assessment and variable-rate bonds. Both the legal and mar- keting requirements of assessment bonds differ from other bond issues, and the city will need that specialized experience. · Retain assessment engineer. An assessment engineer will be needed to prepare the reassessment report and diagrams required by the refunding bond law and to respread the assessments based on the refunding bond issues. Other professional services may also be required, such as an appraiser and a verification agent. A trustee bank will also be needed. · Recommend refunding approach. Once bond counsel and underwriter have been selected, the financing team of financial advisor, bond counsel, underwriter, and 'staff will analyze the refunding options in detail and recommend the best approach. · Sell refunding bonds. The fixed-rate bonds can be called on any September 2 or March 2, with a premium of 2.5 percent. A call notice must be published 40 days before the call date. · Call outstanding bonds. Following issuance of the refunding bonds, the outstand- ing bonds can be called on the first call date. Schedule A calendar of the major events leading up to a call of the outstanding bonds on March 2, 1995 is attached. The schedule is reasonable, if the council provides authorization to proceed promptly. The schedule provides for status reports to council at periodic inter- vals throughout the process. A more detailed schedule of bond sale activities will be prepared when the financing team has been assembled and the refunding approach selected. Conclusion We will be happy to meet with city staff and council to discuss our recommendations and the process. We believe that the refunding offers an opportunity both to save money for the proper, ty owners in the assessment districts and to reduce and simplify the city's administrauve burden. Very truly yours, BARTLE WELLS ASSOCIATES ~ra J. S'('dvall, CIPFA Principal MS:mt Enc. TABLE1 · City of Tustln Summary of Fixed-RateAssessment Bonds Average Conversion Outstanding Interest Conversion Date Amount 9/3/94 Rate Assessment District No. 85-1 February 1987 .................... $ 4,699,000 February 1988 .................... 8,217,000 February 1990 .................... 230,000 August 1993 ...................... 2,662,520 February 1994 .................... 1,035,177 Total ............................ Remaining variable rate bonds ..... Final maturity: 9/2/2011 Assessment District No. 86-2 February 1989 .................... $15,664,963 August 1989 ...................... 9,401,439 August 1990 ...................... 4,735,400 August 1991 ...................... 6,802,334 August 1993 ...................... 549,223 February 1994 .................... 2,881,200 Total ............................ -Remaining variable rate bonds ..... Final maturity: 9/2/2013 $ 3,965,000 7.0362~ 7,165,000 8.0885 210,000 7.7137 2,570,000 6.2637 1,035,177 5.7911 14,945,177 24,990,000 $14,135,000 7.5195% 8,505,000 7.2284 4,365,000 7.4899 6,390,000 7.7166 535,000 6.4788 2,881,200 5.9833 36,811,200 39,744,000 BARTLE WELLS ASSOCIATES 8/4/94 I TABKE 2 · City of Tustin Sources and Uses of Refunding Bonds - Fixed Rate Bonds Refunding Bonds AD 85-1 AD 86-1 Sources of Funds Par amount of refunding bonds ......... $49,715,000 Prior fixed rate reserve funds ........ 2,618,720 Construction fund balances ............ 7,053,000 Total sources of funds ................ 59,386,720 Uses of Funds Purchase refunding assessment bonds: Par value ........................... 51,756,377 Call premium (2.5~) ................. Costs of issuance allowance ......... Underwriters discount allowance (1%/ Bond reserve fund (max ann debt svc} Insurance premium (1~ debt svc) ..... Contingency/rounding .................. Total uses of funds ................... 59,386,720 1,293,909 500,000 497,150 4,512,600 829,820 (3,136) Average Annual Debt Service Outstanding bonds ..................... 5,219,800 Refunding bonds ....................... 4,508,384 Difference ............................ 711,416 Total Debt Svc Through Final Maturity Outstanding bonds ..................... 96,032,714 Refunding bonds ....................... 83,435,830 Difference ............................ 12,596,884 Less construction funds applied ....... (7,053,000) Net debt service savings .............. $ 5,543,884 $ 786,870 $ 1,831,850 2,245,000 4,808,000 14,945,177 36,811,200 373,629 920,280 1,566,400 3,653,400 1,338,626 3,169,757 227,774 483,643 26,625,791 69,406,923 I BARTLE WELLS ASSOCIATES 8/4/94 I - TABLE B · Tustin Assessment Districts Savings from Refunding Fixed-Rate Bonds Year Current Debt Service Estimated Ending New Sept.2 AD 85-1 AD 86-2 Total Debt Svc Savings 1995 ............ $ 1,530,619 $ 1996 ............ 1,562,335 1997 ............ 1,569,915 1998 ............ 1,573,740 1999 ............ 1,573,708 2000 ............ 1,565,113 2001 ............ 1,568,168 2002 ............ 1,562,220 2003 ............ 1,572,375 2004 ............ 1,567,610 2005 ............ 1,563,195 2006 ............ 1,569,060 2007 ............ 1,569,133 2008 ............ 1,567,833 2009 ............ 1,570,413 2010 ............ 1,571,018 2011 ............ 1,569,340 2012 ........... -- 2013 -- 3,563,773 $ 5,094,391 $ 4,959,221 3,663,700 5,226,035 4,510,915 3,660,320 5,230,235 4,507,164 3,661,095 5,234,835 4,510,478 3,660,185 5,233,893 4,511,642 3,652,158 5,217,270 4,504,133 3,657,368 5,225,535 4,503,620 3,654,293 5,216,513 4,510,117 3,663,148 5,235,523 4,507,587 3,647,563 5,215,173 4,505,780 3,653,428 5,216,623 4,508,880 3,658,633 5,227,693 4,510,755 3,657,403 5,226,535 4,510,520 3,659,770 5,227,603 4,507,259 3,658,725 5,229,138 4,505,030 3,654,543 5,225,560 4,507,547 3,660,798 5,230,138 4,515,007 3,660,808 3,660,808 3,170,945 3,659,218 3,659,218 3,169,230 $96,032,714 $83,435,830 Totals ........... $26,625,791 $69,406,923 Construction fund contribution .... Net savings ....... $ 135,170' 715 120 723 071 724.357 722251 713 137 721 915 706 396 727 936 709 393 707 743 716 938 716.015 720 344 724 108 718 013 715 131 489 863 489,988 $12,596,884 7,053,000 $ 5,543,884 *Savings on one-half year's debt service, March 2 through September 2, 1995. t BARTLE WELLS ASSOCIATES 8/5/94 [ TABLE 4 · Gity of Tustln Sources and Uses of Refunding Bonds - Variable-Rate Bonds Refunding Bonds AD 85-1 AD 86-1 Sources of Funds Par amount of refunding bonds ......... $64,500,000 Prior variable rate reserve funds ..... 5,760,130 Construction fund balances ............ 8,946,133 Total sources of funds ................ 79,206,263 Uses of Funds Purchase refunding assessment bonds: Par value ........................... 64,734,000 Call premium (2.5~)~ ................ 1,618,350 Costs of issuance (0.854) ............. 548,250 Underwriters discount (0.54) .......... 3,225,000 Bond reserve fund (6,) ................ 3,870,000 Other funds, expenses (8~o)2 ........... 5,160,000 Contingency/rounding .................. 50,663 Total uses of funds ................... $79,206,263 $ 2,707,980 $ 3,052,150 3,754,585 5,191,548 24,990,000 39,744,000 624,750 993,600 I - Call premium may be avoided if bonds are purchased on a remarketing date. 2 - Includes remarketing cost account, conversion costs fund, interest reserve fund. BARTLE WELLS ASSOCIATES 8/4/94 TABLE S · Tusfin FLxed-Rme Assessments Savhgs to Property Owners Based on Ranges of Assessments Current Estimated Assessment Annual Annual Annual Total Range Payment Payment Savings Savings $ 4,000 .......................... $ 528 $ 460 $ 48 $ 766 6,000 .......................... 683 635 94 1,684 $10,000 .......................... $1,047 $ 912 $ 95 $1,517 12,000 .......................... 1,392 1,192 200 3,197 $23,000 .......................... $2,241 $1,979 $261 $4,706 27,000 .......................... 2,702 2,387 315 5,675 I BARTLE WELLS ASSOCIATES 8/4/94 I CITY OF TUSTIN REFUNDING ASSESSMENT BONDS PRELIMINARY BOND SAI.E SCHEDULE Presentation to council, council considers authorization to proceed... Aug 15, 1994 Retain f'mancial advisor, assessment engineer, trustee ........... Aug 19 Select bond counsel Distribute request for proposals ......................... Aug 19 Proposals due ..................................... Sep 14 Select bond counsel ................................. Sep 27 Select underwriter Distribute request for proposal ......................... Sep 2 Receive proposals .................................. Sep 30 Select underwriter .................................. Oct 14 Status report to council ................................ Nov 12 Price bonds (week of) ................................ Jan 17 Publish call notice (last day) ............................ Jan 20 Status report to council ................................ Jan 17 Closing ........................................... February Call refunded bonds .................................. Mar 2, 1995 L BARTLE WELLS ASSOCIATES 814194 [