A proposed refinancing of three bonds — two for sewer and one for water projects — could save ratepayers as much at $7,333,959 in interest.
The City Council will consider a process known as “refunding” to take advantage of lower interest rates when they meet on Tuesday, Nov. 1, at 7 p. m.
The savings would be reflected in slighty lower rate increases that are anticipated when new rate studies are completed for the water and sewer enterprise funds to cover ongoing maintenance, bond repayment, operations, and set aside for future improvements to the city’s aging systems.
The City’s Municipal Financial Advisor identified an opportunity for the City to save significantly on its total debt service costs for its outstanding 2009 Sewer, 2012 Sewer, and 2012 Water Revenue Bonds by refinancing the debt. Restrictions on when all three bonds can be refinanced together makes time of the essence.
The staff report notes in June of 2009, the City (through its Financing Authority) issued its $19,000,000 Sewer Revenue Bonds, of which $19,000,000 is currently outstanding (the “2009 Sewer Bonds”).
In December of 2012, the City issued its $22,690,000 Sewer Revenue Refunding Bonds, of which $11,265,000 is currently outstanding (the “2012 Sewer Bonds”), and its $35,840,000 Water Revenue Refunding Bonds, of which $23,160,000 is currently outstanding.
The 2012 Sewer Bonds are callable at any time on or after December 1, 2022. The 2012 Water Bonds are currently callable on any date. The 2009 Sewer Bonds are currently callable on any interest payment date with the next such date being December 1, 2022.
Based on current market interest rates, the City may refinance (refund) the Prior Obligations with a new debt issuance (the “2022 Loan”) and generate a total debt service savings of as much as $7,333,959 over the remaining term of the Prior Obligations.
The final term dates of the 2022 Loan will match the final term date of the Prior Obligations.
The total estimated debt service savings is generated by a combination of current market interest rates that are lower than the interest rates on the Prior Obligations, and the use of the cash funded debt service reserve funds from the Prior Obligations. The 2022 Loan will not require cash funded reserve funds to be set aside.
The 2022 Loan will be issued pursuant to a loan agreement with J.P. Morgan Chase Bank. The Lender was selected from multiple bids from interested lenders, based on the lowest proposed interest rate. The rate will be locked on or about November 2, 2022.
In case there are unforeseen increases in market rates prior to November 2, the City may use one of the competing bids, as such rates have already been “locked”. If it is necessary to revert to another lender, the estimated total debt service savings based on those slightly higher interest rates would be the minimum savings of $6,099,527.
The 2022 Loan is scheduled to close on or about November 17, 2022, at which time the loan proceeds will be placed into the redemption fund held by the Prior Trustee (U.S. Bank), and will be used to redeem all outstanding Prior Obligations on December 1, 2022.
There is no fiscal impact on the General Fund.
All costs of issuing the 2022 Loan will come from the proceeds of the loan, so there is no immediate fiscal impact. By issuing the 2022 Loan at lower interest rates, a total interest cost savings of as much as $7,333,959 ($2,448,129 from Water and $4,885,830 from Sewer) will be generated over the remaining term of the loans, net of issuance costs. Repayment of the new loan will be from existing user service charges and connection fees in the Water and Sewer (Wastewater) Funds, pursuant to Government Code Section 5451.
