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HomeMy WebLinkAbout03.b. Review draft Position Paper authorizing the General Manager to execute two contracts with (1) Public Financial Management (PFM) and its associated firms and (2) Sperry Capital, Inc.Page 1 of 4 Item 3.b. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER DRAFT MEETING DATE: NOVEMBER 21, 2017 SUBJECT: REVIEW DRAFT POSITION PAPER AUTHORIZING THE GENERAL MANAGER TO EXECUTE TWO CONTRACTS WITH (1) PUBLIC FINANCIAL MANAGEMENT (PFM)AND ITS ASSOCIATED FIRMS AND (2) SPERRY CAPITAL, INC. IN AMOUNTS NOT TO EXCEED $462,000 AND $100,000, RESPECTIVELY, TO PROVIDE FINANCIAL ADVISORY SERVICES OVER A PERIOD OF FIVE YEARS SUBMITTED BY: INITIATING DEPARTMENT: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION -FINANCE ADMINISTRATION REVIEWED BY: THEA VASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER ISSUE Subject to Board approval, Central San's financial plan anticipates use of external financing for a substantial portion of projected capital needs. Expert financial advisory services provided by consultants will ensure Central San executes these financings in a cost-effective and efficient manner. Proposed contracts with two financial advisors, PFM (which includes the following associated firms: 1) PFM Financial Advisors LLC, 2) Public Financial Management, Inc., and 3) PFM Asset Management) and Sperry Capital, will ensure expert advice is available to staff and the Board on financing needs and other complex financial matters. BACKGROUND The Comprehensive Wastewater Master Plan projects the need for capital spending of $873 million over 10 years ($1.017 million inflated). Central San's financial plan anticipates funding nearly half of these costs through external financing, which could include bonds, State Revolving Fund (S RF) loans, or other forms of long-term financing. Capital raising events are anticipated every other year, commencing in early Fiscal Year (FY) 2019-20. While these spending plans are still subject to future Board consideration, it is prudent to begin preparing for these events. RFP and Selection Process In September 2017, Central San released a Request for Proposal (RFP) for financial advisory November 21, 2017 Regular FINANCE Committee Meeting Agenda Packet - Page 83 of 219 Page 2 of 4 services. Six firms responded to the RFP, and Central San evaluated the proposals against the criteria noted in the "Selection" section below. Services requested in the RFP included: 1. Financial advisory services for bond issuances, proposed at a fixed cost per issuance 2. Reporting on bond arbitrage rebate requirements 3. Other as -needed financial advisory services Selection The selection criteria was based on the following: 1. Firm Qualifications, Experience 35% 2. Proposal Approach 25% 3. Cost 20% 4. References 5% 5. Exception to Proposal 5% 6. Executive Summary 10% Total: 100% Central San interviewed two finalists (PFM and Sperry Capital, Inc.) whose proposals scored the highest by a panel of four Central San staff. PFM is a highly regarded national firm that has advised Central San on a variety of financial matters in recent years. Sperry Capital, Inc. is a Bay Area based firm (located in Sausalito) that has advised clients since 1994. Both firms, through proposals and interviews, demonstrated strong experience and credentials, and that they were well qualified to perform the services requested. PFM scored the highest overall, with strengths noted in breadth of resources, competitive pricing, and expertise. Sperry Capital, Inc. scored highly on approach, cost, and expertise. Central San sees value in establishing relationships with both finalist firms, for services as denoted below. 1. Financial advisory services for bond issuances, proposed at a fixed cost per issuance. Awarded to PFM. 2. Reporting on bond arbitrage rebate requirements (fixed price per report), Awarded to PFM. 3. Other as -needed financial advisory services (hourly/task order). Awarded to both PFM and Sperry Capital, Inc. Sperry Capital, I nc. would be awarded a contract for other as -needed financial advisory services for work that may include advice on bond structuring (including novel ideas, approaches, and advice on complex structures), advice and assistance on state revolving fund loan applications, P3 matters, and other miscellaneous financial advice. Term The RFP requested, and the contracts provide for a five-year term. Services can be terminated by Central San at any time. Costs are discussed in the Financial I mpact section of this paper. Next Steps Staff will begin planning for capital needs for FY 2019-20 and beyond with an anticipated bond funding event in early FY 2019-20. Consideration will be given to the availability of low cost SRF funding, or other forms of financing. The viability of refinancing existing debt then, or earlier, will also be assessed with the assistance of the financial advisor. November 21, 2017 Regular FINANCE Committee Meeting Agenda Packet - Page 84 of 219 Page 3 of 4 ALT ERNAT IVES/CONSIDERAT IONS Financial advisory services are typically used by issuers who need expert advice on capital market issues to ensure bonds are sold at the lowest possible long-term cost to the issuer. Alternatively, staff could provide some of these services, but best practice is to supplement staff knowledge with experts who are involved in bond issuances on a full time basis and have a level of expertise which cannot be realistically replicated by staff who are involved in bond offerings only once every several years. Similarly, for financial advice on miscellaneous financial topics, the Board could rely on staff for these services. However, for complex matters where a knowledge of best practices is important, supplementing staff expertise with outside expert advice has been the preference of the Board in the past, and is advisable prospectively. FINANCIAL IMPACTS The costs for financial advisory work for a five-year period are estimated at $562,000 comprised of the following elements: Bond advisory: The fixed price Financial advisory services are quoted on a per -bond issuance basis; no costs are payable unless the bond issuance is executed. Financial Advisory fees for three issuances are assumed, at an initial cost of $47,500 escalated at 2.5% (per issuance/per year), for a total cost of $150,000. Such fees should be seen in the context of external financings over the next five years projected at $285,000,000. The $150,000 of fees for bond offering financial advisory service represents 0.05% of the total bond issuance amount. Allocated to: PFM: $150,000 2. Arbitrage rebate reports: The costs of $1,500 per bond arbitrage report will depend on the number of bond series issued. For planning purposes, we assume a maximum of $12,000 for eight separate bond series. Allocated to: PFM: $12,000 3. Other Financial Advisory Projects: We assume a total funding pool over five years of $400,000. This represents funding for approximately three projects per year, at 90 hours per project. Hours to be billed in accordance with hourly rate schedules (with costs range from $225 for Analyst to Managing Director $350). Total projected cost is $80,000 per year. Total projected cost over the 5 years is $400,000. The other financial consulting advice includes expert advice on a variety of matters such as liability management (pension, and OPEB), investment management, debt policy issues, additional advice on bond structuring matters, P3 matters, etc. Allocated to: PFM: $300,000, Sperry Capital: $100,000. Contracts with each firm specify a not to exceed amount of $462,000 and $100,000 for PFM and Sperry Capital, respectively, for a total of $562,000. Task orders will be issued for each bond advisory event, arbitrage rebate report, and other financial advisory projects. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on November 21, 2017, and recommended that the Board approve the proposed contracts with PFM and Sperry Capital for financial advisory services in an amount not to exceed $562,000. November 21, 2017 Regular FINANCE Committee Meeting Agenda Packet - Page 85 of 219 Page 4 of 4 RECOMMENDED BOARD ACTION Authorize the General Manager to execute contracts with PFM and Sperry Capital, Inc. in amounts not to exceed $462,000 and $100,000, respectively, to provide financial advisory services over a five-year period. GOAL THREE: Be a Fiscally Sound and Effective Water Sector Utility Strategy 1 - Conduct Long -Range Financial Planning, Strategy 2 - Manage Costs November 21, 2017 Regular FINANCE Committee Meeting Agenda Packet - Page 86 of 219