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HomeMy WebLinkAbout11. Authorize 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, to provide financial advisory servicesPage 1 of 13 Item 11. CENTRAL SAN BOARD OF DIRECTORS ' POSITION PAPER MEETING DATE: DECEMBER 7, 2017 SUBJECT: AUTHORIZE THE GENERAL MANAGER TO EXECUTE TWO CONTRACTS WITH (1) PUBLIC FINANCIAL MANAGEMENT (PFM)AND ITS ASSOCIATED FI RMS AND (2) SPERRY CAPITAL, I NC. I N AMOUNTS NOT TO EXCEED $462,000 AND $100,000, RESPECTIVELY, TO PROVIDE FINANCIAL ADVISORY SERVICES OVER PERIOD OF FIVE YEARS. REVIEWED BY FINANCE COMMITTEE. SUBMITTED BY: INITIATING DEPARTMENT: PHILIP LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION -FINANCE ADMINISTRATION REVIEWED BY: THEA VASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER Roger S. Bailey 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, Inc. 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 December 7, 2017 Regular Board Meeting Agenda Packet - Page 183 of 240 Page 2 of 13 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 (SRF) 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 services. Six firms responded to the RFP, including Wulff, Hansen & Co.; NHAAdvisors; Fieldman/Rolapp & Associates; KNN Public Finance; Sperry Capital, Inc.; and PFM. All of the proposals were of high quality and responsive to Central San's needs. 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, I nc. 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 December 7, 2017 Regular Board Meeting Agenda Packet - Page 184 of 240 Page 3 of 13 San at any time. Costs are discussed in the Financial Impact 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. ALTERNATIVES/CONSIDERATIONS 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, December 7, 2017 Regular Board Meeting Agenda Packet - Page 185 of 240 Page 4 of 13 arbitrage rebate report, and other financial advisory projects. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on November 21, 2017. The staff recommendation that the Board approve the proposed contracts with PFM and Sperry Capital for financial advisory services in an amount not to exceed $562,000 received a split vote. Finance Committee Chair Nejedly noted his opposition to the use of debt for financing the capital program. RECOMMENDED BOARD ACTION Authorize the General Manager to execute contracts with PFM and Sperry Capital, I nc. 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 ATTACHMENTS: 1. Financial Advisory Services Presentation 2. PFM Status Update December 7, 2017 Regular Board Meeting Agenda Packet - Page 186 of 240 CONTRACTS FOR FINANCIAL ADVISORY SERVICES PHILIP R. LEIBER Emu, IRECTOR OF FINANCE AND ADMINISTRATION DECEMBER 7, 2017 PENDING FINANCIAL ADVISORY NEEDS New Money Needs: $1.017 billion potential capital needs over next decade, estimated 50% debt financed Refunding: Potential savings opportunity with existing debt II. Bond ComplianM Arbitrage Rebate Calculations and Analysis 111. Ad Hoc Financial Advice Debt management and bond pricing Rating agency and credit advisory Investment and liability advisory (Pension/OPEB Trusts) Policy matters (fiscal reserves, debt policy, investments, etc.) State debt disclosure requirements Financial modeling matters Public -Private Partnerships (P3s) Millions 1FORECASTYEAR Amount w/o Amount with Fiscal Year Inflation Inflation Proposed CIP Total Proposed Bond Issuance 18-19 (now 19/20) 20-21 22-23 24-25 Subtotal Proposed Cash Financing :Y $872,667 $1,017,720 60,000 100,000 125,000 228,000 Proposed issuances that Financial Advisors will assist with $513,000 50.4% $504,720 49.6% (Per Model - assumes 3% inflation) 17-18 $42,774 $42,774 18-19 40,839 42,064 19-20 92,828 98,579 20-21 96,330 105,257 21-22 96,693 108,825 22-23 99,586 115,440 23-24 95,378 113,881 24-25 99,205 122,005 25-26 101,051 128,005 26-27 107,983 140,890 Proposed Bond Issuance 18-19 (now 19/20) 20-21 22-23 24-25 Subtotal Proposed Cash Financing :Y $872,667 $1,017,720 60,000 100,000 125,000 228,000 Proposed issuances that Financial Advisors will assist with $513,000 50.4% $504,720 49.6% PROPOSED CONTRACT FUNDING Area of Work W PFM Sperry Capital q1 1. • • - $150,000 $150,000 II. Bond Compliance 12,000 ** 12,000 (Arbitrage Rebates/Analysis) III. Ad Hoc Financial Advice 4005000 ** 3007000 1001000 Total $5629000 $4629000 $100,000 Paid from bond proceeds ** Items II. and III. are O&M costs *** Includes debt structuring and specialized expertise as needed UPDATE ON REFUNDING OPPORTUNITY Existing bonds may be refunded for a cost savings depending on interest rates. Because these bonds are not callable until 2019, would need to execute a "cross-over" refunding. Complex due to Build America Bond subsidy Requires continued debt payment till Sept 2019 call date No cost saving until after call date/cross over date Benefit and ability to do so may be affected by pending tax legislation. Factors affecting timing: Do it sooner: Lock in low interest rates. Wait: Avoid additional issuance costs for refunding. C1t-1 -- -----1-1— l— I-- — -- ---1--1 I-- - r%rn A. —.—— — — ----�:.-- RECOMMENDED BOARD ACTION Authorize the General Manager to execute two contracts with the following: (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 five-year period. QUESTIONS? [,*Cw,. Proposed Federal Tax Reforms . The House and Senate tax reform bills include provisions that would directly affect certain types of municipal bond financings • Both the House and Senate bills would eliminate tax-exempt advance refundings • The House bill would also eliminate the tax exemption on private activity bonds (bonds used to fund various types of facilities including airports, seaports, nonprofit hospitals, etc.) •Also, according to the Bond Buyer, the National Association of Bond Lawyers, and other sources, Build America Bond subsidy payments could potentially be eliminated if OMB determines the tax reforms ultimately adopted will increase the deficit over the next 10 years • If adopted, these changes could have an impact on the District • The District has been evaluating an advance refunding of its outstanding 2009A&B Certificates of Participation • The District currently receives Build America Bond subsidy payments © PFM December 7, 2017 Regular Board Meeting Agenda Packet - Page 194 of 240 1 The District's 2009A& 20096 Certificates of Participation *The District's outstanding 2009A (Build America Bonds) and 2009B Certificates of Participation are callable at par on September 1, 2019 • If tax-exempt advance refundings are eliminated by Congress, the District may be unable to refinance its outstanding 2009 COPs until 2019 • Interest on the 2009A COPs is currently $1.19 million per year and the District receives a federal subsidy of approximately $389,000, resulting in a net interest cost of $802,000 • The current subsidy reflects the 2018 federal sequestration rate of 6.6% • If the subsidy were eliminated, the District would incur the full cost of the interest on the 2009A COPs • It is unclear whether an elimination of the subsidy in connection with tax reform would enable the District to refinance the Series A Bonds under the extraordinary optional redemption provisions included in the 2009 COP legal documents © PFM December 7, 2017 Regular Board Meeting Agenda Packet - Page 195 of 240 2