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HomeMy WebLinkAbout03.e. Review draft Position Paper to adopt resolution recommending appointment of Financing Team for refinancing of existing 2009 outstanding debt obligations and authorize negotiated sale of refinancing bonds Pagel of 24 Item 3.e. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER DRAFT MEETING DATE: JUNE 26, 2018 SUBJECT: REVIEW DRAFT POSITION PAPER TO ADOPT RESOLUTION RECOMMENDING APPOINTMENT OF FINANCING TEAM FOR REFINANCING OF EXISTING 2009 OUTSTANDING DEBT OBLIGATIONS AND AUTHORIZE NEGOTIATED SALE OF REFINANCING BONDS SUBMITTED BY: INITIATING DEPARTMENT: PHILIP R. LEIBER, DIRECTOR OF FINANCE ADMINISTRATION-FINANCE AND ADMINISTRATION REVIEWED BY: THEAVASSALLO, FINANCE MANAGER ANN SASAKI, DEPUTY GENERAL MANAGER ROGER S. BAILEY, GENERAL MANAGER ISSUE Per Board Policy 029 - Debt Management and Continuing Disclosure Policy, Board approval is required for the selection of the financing team that will assist with the execution of the 2009 bond refinancing transaction. The financing team includes the appointment of a financial advisor, bond counsel/disclosure counsel and a senior managing underwriter to issue the bonds through a negotiated bond sale. BACKGROUND At previous Finance Committee and Board meetings, staff have discussed the potential to achieve savings through refinancing Central San's 2009 outstanding debt. The attached memo addresses current market conditions, anticipated saving from a refinancing, and recommendations on the structure for the refunding. Key issues still outstanding and included in the attached memo include: • Whether to issue Certificates of Participation or Revenue Bonds. • Whether to proceed with refinancing only on the Series 2009A bonds, or in addition, the Series 20096 bonds. In addition to seeking the Board's input on the issues listed above, staff is seeking the Board's approval on the appointment of the financing team to assist in issuance of the refunding bonds. The team is June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 100 of 156 Page 2 of 24 comprised of a Financial Advisor, Bond Counsel/Disclosure Counsel and Underwriter. • The Financial Advisor is PFM Financial Advisors LLC ("PFM"). Central San appointed PFM and Sperry Capital as financial advisors in December 2017, with P F M to serve as the financial advisor for this refinancing transaction. P F M's work on this matter will include financial analysis related to the potential refunding savings, assistance in selecting an underwriter, evaluation of bond structuring alternatives, bond document review, bond pricing, interfacing with the rating agencies, and assistance with state and federal initial and continuing disclosure compliance. P F M's fee for this work, payable from bond proceeds, will be $47,500. • The law firm of Jones Hall served as both bond counsel and disclosure counsel to Central San in the 2009 bond issuance. The District has been well served by their previous work, and staff believes it is prudent and cost effective to have this firm continue in those roles. Jones Hall drafted the documents related to the existing bonds, and they are well situated to draft new agreements on the refunding bonds. As to the disclosure counsel work, their familiarity with Central San, and the existing bond official statement will allow them to assist with constructing required disclosures for the new bonds in the most timely and cost effective manner. Jones Hall's fees for bond counsel are $60,000, and for disclosure counsel are $40,000. Both of these fees are payable from bond proceeds as a cost of issuance. • Underwriter: Staff recommends appointing [will be presented Tuesday 6/26/2018] as senior managing underwriter. PFM conducted a RFP process in early June by notifying a total of 9 underwriting firms of Central San's proposed bond refunding. The list of firms notified was comprised of three firms that approached Central San to indicate the District should consider refunding existing debt to save money, plus another six firms who are active issuers for water and wastewater bonds. These firms were asked to address several issues including the optimal bond structure and anticipated yields, marketing approach, and underwriting cost. Six firms presented written proposals: Barclays, Piper Jaffrey, Prager& Co., Raymond James, Stifel, Wells Fargo. Based on qualifications, proposed structure and cost as outlined in the informal RFP, staff and P F M narrowed the underwriter selection to two firms: Stifel and Piper Jaffrey. Final interviews to select the proposed underwriter were conducted on June 20-21, 2018. With respect to underwriter's cost, this is a specified dollar amount per bond that covers their fees (take-down fee)and a provision for other expenses including underwriter's counsel. The proposed fees are as follows: [Will depend on selected firm] The costs of the debt to Central San would include those fees, plus the yield on the bonds, which are typically quoted as a spread over a benchmark(called MMD, for Municipal Market Data) index of "AAA" tax exempt bonds. This spread is to be negotiated with the assistance of P F M near the time of issuance. This spread is to allow the underwriter to market the bonds to investors after the underwriter purchases the bonds from the District. Setting this spread too high could result in the District paying a higher interest cost than necessary and setting it too low could result in the underwriter losing money on the bonds if they are unable to resell them to investors at a price equal or higher than they paid Central San. The anticipated savings related to the refinancing are net of the cost of issuing the new bonds, and the steps necessary to defease the existing debt. The direct costs to refinance the Series 2009A bonds apart from underwriter costs are anticipated to be approximately$200,000, consisting of: Financial Advisor Fee $47,000 Bond Counsel $60,000 Disclosure Counsel $40,000 June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 101 of 156 Page 3 of 24 Moody's Rating $24,000 S&P Rating $24,000 Other miscellaneous cost $55000 Total costs without underwriter costs $200,000 If the Series 2009B bonds are also refinanced, certain additional minor costs may also be incurred by Central San. An updated cost schedule will be provided at the July meeting if it appears likely the Series B bonds will be refinanced. Schedule and Next Steps An initial financing schedule was prepared by PFM in May and provided to the Finance Committee on May 213 2018. An updated version of the schedule is provided as Attachment 2, with some of the mid-course milestones dates updated. The targeted issuance date remains early to mid-September, but with targeted pricing in August. The next key milestone for Board and Finance Committee involvement will be approval of several key documents related to the Financing in July, as noted below: 1. Adoption of the Refinancing Resolution, authorizing the refinancing of existing debt to take advantage of interest cost savings. 2. Approval of draft Preliminary Official Statement for the refunding obligations 3. Approval of other necessary documents to authorize and implement the refinancing At the July Finance Committee and related Board meetings, Financing Team members will available to answer any questions the Board may have. ALT ERNAT IVES/CONSIDERATIONS Do not refinance the bonds. FINANCIAL IMPACTS The 2009 obligations, whether Series A alone, or also with Series B, will be refinanced only if cost effective and will result in savings to Central San. Preliminary indications are that savings on the order of $1 million to $1.4 million are possible for the Series A bonds, and potentially another$100,000 or so for the Series B bonds. This is anticipated to result in a potential reduction in the Sewer Service Charge of approximately 75 cents per year through 2029 (ranging from about$1 per year in the first five years and declining to about 20 cents in 2029 as the amount of bonds outstanding declines). COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on June 26, 2018 and recommended that the Board: RECOMMENDED BOARD ACTION Staff recommends that the Board: 1. Adopt the proposed resolution appointing the financing team proposed for the refinancing of 2009 obligations consisting of PFM Financial Advisors LLC as financial advisor, Jones Hall as disclosure and bond counsel, and as senior managing underwriter; and June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 102 of 156 Page 4 of 24 2. Authorize that the refunding securities be sold on a negotiated basis with the senior managing underwriter. Strategic Plan Tie-In GOAL THREE:Be a Fiscally Sound and Effective Water Sector Utility Strategy 2- Manage costs ATTACHMENTS: 1. Memo To General Manager 2. Updated Transaction Calendar June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 103 of 156 Page 5 of 24 CENTRALSAN CENTRAL CONTRA COST, SAN I TART`DISTRICT June 22, 2018 TO: ROGER S. BAILEY, GENERAL MANAGER VIA: ANN SASAKI, DEPUTY GENERAL MANAGER FROM: PHILIP R. LEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION SUBJECT: EVALUATION OF REFINANCING OF EXISTING 2009 BONDS As an update to our May 21, 2018 presentation to the Finance Committee regarding our plans to refinance our existing 2009 Bonds, the following describes the current market conditions and anticipated saving from the refinancing and recommendations on the structure of the refunding and refunded debt. Central San's Debt Management and Continuing Disclosure Policy (BP 029) (Extract at Attachment 1) specifies that the Board should be provided with certain information about any proposed debt issuance, including savings, rate impact, and proposed structure. Market Conditions Over the past two years, long-term municipal interest rates have seen several sharp movements - from near all-time lows in the summer of 2016 following Britain's vote to exit the European Union ("Brexit") to dramatically higher rates following the 2016 Presidential election, more moderated drifts lower through much of 2017, and sharply higher rates again following the introduction and eventual passage of federal tax reform legislation in late December 2017. In the first half of 2018, Treasury and municipal market yields have continued trending upwards from historic lows, in line with Federal Reserve rate increases and an improving economy. The short end of the yield curve in particular has been rising (see blue line below), in part due to increasing inflation expectations. Based on the Federal funds futures trading, the market correctly priced in a 100% chance of a 25-basis point June rate increase, which directly affected the short end of the yield curve. At the same time, the long-term rates remain relatively stable amid uncertainties surrounding the country's changing trade policies and role in the global market, resulting in a materially flatter yield curve. For the municipal market, there is strong demand from investors, as evidenced by net positive flows into municipal bond mutual funds for nine of the last 12 months, totaling $25 billion. At the same time, issuance volume has been down, particularly in California, with year-to-date 2018 long- term national municipal issuance down roughly 20% from the same period in 2017, and long-term California issuance down by roughly 40%, in part due to the loss of tax- exempt advance refunding's as a result of the 2017 tax reform bill. These technical factors of demand exceeding supply provide for favorable interest rates for municipal issuers. As a result, while day-to-day volatility remains, rates remain relatively low from June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 104 of 156 Page 6 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 2 a historical perspective: municipal yields for longer maturities have been lower than current levels less than 25% of the time since 1993. The chart below illustrates the extent of interest rate volatility present over the past few years for a range of highly rated municipal bonds with 1, 5, and 10-year maturities. AAA-RATED GENERAL OBLIGATIOI--�._ TAX-EXEM T RATES 5.00 4.00 3.00 2.00 1.00 0.00 - -- IT � � � � � � � TM M � � �. 1 Year MMD — 5 Year MMD 1 O Yeas MM D Refinancing of Existing Debt and Structuring Issues Several potential underwriters have approached Central San over the past 18 months with proposals to refinance our current outstanding debt with potential projected interest savings in the order of$1-2 million on a present value basis. Interest rates have risen over this period and may continue to do so in the coming month as the economy continues to perform well. Central San's existing 2009 debt consists of two series of Certificates of Participation: Series 2009A (Build America Bonds), which were issued on a federally taxable basis, and Series 2009B, which were issued on a more traditional tax-exempt basis. The 2009A bonds have an outstanding principal amount of$19.635 million with a weighted average coupon of 6.06% (ranging from 5.20% to 6.55%). The high average coupon reflects issuance on a federally taxable basis. The bonds have a call date of September 1, 2019. Refunding the bonds more than 90 days in advance of that date requires the use of an advance refunding structure, where new bond proceeds are received and placed in an escrow account to defease the 2009A bonds until they can be called (September 1, 2019). As noted above, the 2009A bonds were issued in the form of taxable Build America Bonds, where the investor receives taxable interest. The C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 105 of 156 Page 7 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 3 Federal Government pays a subsidy (initially 35% of interest costs, but now reduced by approximately 7% due to Federal Government budget sequestration funding limitations) to Central San as the issuer. There were concerns about whether the 2017 Tax Legislation would permit refinancing of this debt prior to the call date in 2019; however our bond counsel is now willing to provide a tax opinion that this is possible so long as the issuer no longer receives the subsidy payment while the bonds are still outstanding. The proposed refinancing of this debt would yield a True Interest Cost of approximately 2.35% (as of June 2018), resulting in a Net Present Value savings of approximately $1.35 million. The savings is net of all issuance costs including bond/disclosure counsel, underwriter fees, financial advisor fees, and rating agency fees. Assuming interest rates increase by about 25-basis points reduces the savings by about 24%, from $1.35 million to $1.03 million. The chart above on recent rate volatility indicates that interest rate movements of that magnitude are possible between now and the targeted mid-August issuance. Refunding Debt Service Savings Estimate for Series 2009A Bonds Rates as of Current Current April 2018 Market Market+ 25 bps Refunding Savings $1,114,483 $113511442 $110331220 True Interest Cost (TIC) 2.34% 2.35% 2.59% of New Debt All-In-TIC of new Debt 2.52% 2.53% 2.78% % Savings of Refunded 5.68% 6.88% 5.26% Bonds Provided by PFM. Current market rates are as of June 11, 2018. Central San received proposals from six potential underwriters on June 5, 2018. In their proposals, they were asked to provide their best estimate of refunding savings. As shown below, the net present value savings estimates for the Series 2009A bonds ranged from $1.03 to $2.02 million, depending on various structuring assumptions. C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 106 of 156 Page 8 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 4 Firm Estimated Refunding Savings Piper $1.03 million (5.27%) to $1.34 million (6.81%) Jaffray. N Raymond $1.146 million (5.83%) James: Stifel: $1.38 million (7.03%) Wells Fargo: $1.2 million 6.24% Barclays: $1.4 million (7%) Prager &Co: $2.02 million (10.28%) This data illustrates that the savings estimates in recent months have been relatively steady, and there is a general consensus that savings of at least $1 million is possible. The 2009B bonds have an outstanding principal amount of$9.46 million (a principal payment of$2.48 million is due on September 1, 2018 and an additional $2.58 million principal payment is due on September 1, 2019, leaving $4.4 million outstanding after the September 1, 2019 call date) at coupon interest rates of 4.0% to 5.0%. These bonds are traditional tax-exempt debt. While Central San could use an alternative structure, such as the issuance of taxable refunding bonds, to comply with the prohibition on advance refunding of tax exempt debt per the 2017 Tax Legislation, it may not be cost effective to pursue this refunding at this time. Currently, the potential refunding savings are just below the 3% threshold specified for triggering a refunding in Central San's Debt and Continuing Disclosure Policy (BP 029). We will continue to review opportunities and structures for refunding this debt through July. If it is not pursued now, it would still be possible to refinance this debt along with the contemplated new money issuance in 2019 (where a current refinancing can take place within ninety days of the September 1, 2019 call date of the outstanding bonds, or anytime thereafter). That would enable the relatively small refunding ($4.4 million of callable par) to share transaction costs with a larger issuance, be issued on a tax- exempt basis, and also avoid the inefficiency associated with the negative arbitrage (estimated at $34,000) from issuing taxable bonds and placing the proceeds in an escrow account until September 1, 2019, when the 2009B bonds can be called. C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 107 of 156 Page 9 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 5 Refunding Debt Service Savings Estimate for Series 20098 Bonds Current Market Refunding Savings $129)000 True Interest Cost (TIC) 3.14% of new Debt All-In-TIC of new Debt 3.45% % Savings of Refunded 2.94% Bonds Provided by PFM. Assumes rates as of June 11, 2018. The proposals submitted by the six potential underwriters on June 5, 2018, showed net present value savings estimates for the Series 2009B bonds ranging from less than $0 to $345,000, depending on various structuring assumptions and whether non-callable maturities were targeted for refunding. Firm Estimated Refunding Savings and Recommendation Piper Jaffray $80,000 (1.82%). Recommend monitoring only, no refunding at this time. Raymond $122,000(1.76%), taxable refunding. Recommend James refunding now. Stifel $345,000 (4.94%), taxable refunding. Recommend N refunding now. But could wait until 2019. Wells Fargo $74,000(1.68%), taxable refunding. Recommend refunding next year with new money issuance. Barclays $135,000(1.9%). Recommend monitoring only, no refunding at this time. Prager &Co Negative savings; Recommend refunding next year with new money issuance. As to the impact of the expected savings on sewer service charge rates, staff have calculated an indicative rate impact using the following assumptions: • Debt service is paid currently from Central San's "Net Revenues" (consisting of Ad Valorem Taxes as well as rates and charges), and a reduction in debt service would make available those revenues for other purposes (including reducing debt issuances or using such funds for the capital program). C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 108 of 156 Page 10 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 6 • We assume $1.35 million of Net Present Value of refunding savings through 2029, allocated proportionate to interest paid over those years. • We assume bond issuance amounts are held constant, and that Net Revenues no longer needed for debt service are made available to fund capital, thereby reducing the amount of sewer service charge that is allocated to the Capital program. The result is a reduction of about $1 per REU per year for the first five years, declining to about 20 cents in 2029. Interest costs decline over time as the debt is amortized each year, so the savings from lower interest costs also decline. Bond Structure An analysis as to the optimal structure of the refunding bonds is still underway. Certain issues are generally settled, while other aspects are subject to additional discussion with the underwriter. Settled Structuring Issues: The repayment term for the refunding debt is proposed to be generally the same as for the refunded debt--amortization payments through a final maturity date of September 1, 2029 (or through September 1, 2023 for the Series B refunding bonds). Fixed rate vs. floating rate or synthetic fixed rate bonds: At times, an issuer may benefit from issuing an instrument that provides for something other than fixed interest rates, with the potential tradeoff between simplicity/risk and in many cases, lower interest costs. The anticipated refunding transaction will utilize standard fixed rate bonds. No use of credit enhancement: Lower rated entities can benefit from obtaining third party credit enhancement typically in the form of bond insurance. With Central San's strong AAA and Aa1 ratings, this is unnecessary and not cost effective. Structuring Issues Still Under Consideration: • Certificates of Participation or Revenue Bonds. In 1994, the Central Contra Costa Sanitary District Facilities Financing Authority was created to assist with the financing of new debt. The 2009 financing, in the form of Certificates of Participation and a governing Installment Sale Agreement, was conducted in this manner. Continued use of this structure is possible, but an alternative is the issuance of revenue bonds. Refunding revenue bonds could be issued directly by Central San, or through a joint powers authority (new money bonds C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 109 of 156 Page 11 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 7 can only be issued through a joint powers authority). Additional discussions with the underwriter on the benefits of this structure will take place in the coming days, however preliminary indications are that this structure may offer advantages for future sales. • Coupon rates on the bonds (and whether bonds would be issued at par, a premium, or a discount). It is likely that the bonds will be sold at a premium to offer investors a desired coupon in the range of 5%. • Whether to proceed with refinancing only on the Series 2009A bonds, or in addition, the Series 2009B bonds. Given the Series 2009B bonds would need to be issued on a federally taxable basis, the savings from such issuance would be reduced. However, it likely makes sense to proceed with the refunding of 2009B bonds based on current savings estimates. • Call provisions of the new debt. Given that the bonds have a final maturity in 2029, a standard 10-year call provision will not be of value. Forgoing a call feature altogether may result in the most attractive yield for Central San. • Whether a debt service reserve structure will continue to be used as is the case on the 2009 bonds. Initial conversations with underwriters indicate a debt service reserve is not needed for a highly rated entity like Central San. • Whether to change the amortization schedule of the debt to relieve rate pressure in the next few years. Staff will discuss this option with the Finance Committee. • Whether to have the bonds rated by two rating agencies (as has been past practice) or just one, potentially saving about $24,000. Competitive versus Negotiated Sale There are three methods in which bonds can be issued - a competitive sale, negotiated sale, or a private placement. This issue is relevant now as it affects whether an underwriter or lender(s) are appointed early in the process (for a negotiated sale or private placement, respectively) or whether the bonds are structured and made available to all underwriters on a particular date (a competitive sale). The District has used both competitive and negotiated transactions in the past, as illustrated below: Central San Issuance Type 1998 bonds Negotiated sale 2002 bonds Competitive sale 2009 bonds Negotiated sale Overall, in recent years, most municipal debt has been sold through negotiated sales, but this mix changes over time. A June 2018 outlook of announced municipal debt sales per the Bond Buyer shows approximately 56% negotiated sales versus 44% competitive sales ($7.40 billion of negotiated deals versus $5.87 billion of competitive sales). Most, but not all, refinancing transactions are done by negotiated sale. PFM is C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 110 of 156 Page 12 of 24 Roger S. Bailey Evaluation of Refinancing of Existing 2009 Bonds June 22, 2018 Page 8 recommending a negotiated sale for the refinancing of the 2009 Bonds, which staff concurs with. The difference between these types of sales are outlined below. • A competitive sale sets a day and time to take bids on securities from interested underwriters. The advantage of a competitive sale is the knowledge that the District received the lowest possible price as of the day and time the securities are sold. The disadvantage is that a significant event could raise interest rates on that date and once that sale date is set it cannot be easily changed. The likelihood of such an event is increased in an unstable market. • A negotiated sale engages an underwriter and pricing advisor and the securities are sold to the underwriter. A negotiated sale allows for pre-marketing to get the best possible interest rate and provides more flexibility in responding to significant market events proximate to the pricing date. An independent pricing consultant or financial advisor works for the District on the negotiations with the underwriter to ensure the District receives a fair interest rate based on market intelligence and comparison to comparable issues trading in the primary and secondary bond market. In private placements, the issuer selects one or a small number of investors that buy the bonds and collect the interest payments and principal directly. Direct loans, in which state or local governments enter a financing agreement with a bank or other financial entity, are also a form of private financing. PFM cites the following factors in recommending a negotiated sale: current volatility in the market, the ability to pre-market the sale, the fact that this is a refunding transaction, and the chance that there could be a Series 2009B refunding that would involve taxable debt. Because the economics of bond refunding is subject to market conditions, the ability to time the sale through a negotiated transaction is useful. Having PFM serve as an independent pricing consultant ensures that Central San pays a fair interest rate on the bonds, as well as that the compensation paid to the underwriter (i.e., the underwriter's discount) is appropriate. A Government Finance Officers Association guide (see summary table as Attachment 2) on choosing between a competitive and negotiated sale lists several factors that favor one type versus the other. This table, with check marks referencing staff's assessment of Central San's current situation, illustrates that the assessment is not clear cut. However, weighing the factors noted above more heavily leads us to the recommendation for a negotiated sale. Attachments: 1. Debt Policy Extract— Refinancing Requirements 2. GFOA Competitive versus Negotiated C:\Users\kyoung\Desktop\Evaluation of Refinancing of Existing 2009 Bonds 06-2018.docx June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 111 of 156 Attachment 1 Page 13 of 24 Cen tra.I con, tra Costa Number: BP 029 SanitaryDistrict Related Admin. Procedure AP 029 Authority: Board of Directors Effective: September 7, 2017 Revised: Reviewed: Initiating Dept./Div.: Administration/Finance BOARD POLICY DEBT MANAGEMENT AND CONTINUING DISCLOSURE I. PURPOSE The Government Finance Officers Association (GFOA) recommends' as a best management practice that state and local governments adopt comprehensive written debt management policies to improve the quality of decisions, articulate policy goals, provide guidelines for the structure of debt issuance, and demonstrate a commitment to long-term capital financial planning. Additionally, California SB 1029 requires public agency issuers of debt to adopt comprehensive written debt management policies pursuant to the GFOA recommendation, and to provide reports on any issuance prior to and after the debt sale, and on an ongoing basis, to the California Debt and Investment Advisory Commission (CDIAC).2 The purpose of this Debt Management and Continuing Disclosure Policy (Debt Policy) is to organize and formalize debt issuance and management related policies and procedures for the Central Contra Costa Sanitary District. This Debt Policy is applicable to both the District and the Central Contra Costa Sanitary District Facilities Financing Authority, both hereinafter referred to as "the District". This Debt Policy is intended to comply with Government Code Section 8855(1). General Manager maintained procedures amplify and provide additional guidance to staff related to the Debt Policy. The debt policies and procedures of the District are subject to and limited by applicable provisions of State and Federal law. 1 In their publication "Best Practice Debt Management Policy" 2 https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160SB1029 June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 112 of 156 Page 14 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 2of9 II. POLICY OBJECTIVES The primary objectives of the District's debt and financing related activities are the following: • Maintain cost-effective access to the capital markets through prudent fiscal management policies and practices; • Specify parameters related to the prudent use of debt in the context of The District's rates and financial planning; o Ensure debt proceeds are expenditures for permissible uses as defined in this policy, and in accordance with bond covenants and other applicable requirements; • Minimize debt service commitments through effective planning and cash management; • Ensure the District is compliant with all applicable federal and state securities laws; • Protect the District's creditworthiness and achieve the highest practical credit ratings; and • Maintain the District's sound financial position. III. SCOPE AND DELEGATION OF AUTHORITY This Debt Policy will govern the issuance and management of all debt funded through the capital markets, including the selection and management of related financial and advisory services and products, and the investment of bond proceeds. Overall policy direction of this Debt Policy will be provided by the District's Board of Directors (Board). Responsibility for implementation of the Debt Policy and day-to-day responsibility for structuring, implementing, and managing the District's debt and finance program will lie with the General Manager or their designee (Director of Finance and Administration). The Board's adoption of the District's Annual Budget and Capital Improvement Program (CIP), or review of the financial plan, does not constitute authorization for debt issuance for any capital projects. This Debt Policy requires that the Board specifically authorize each debt financing. While adherence to this Debt Policy is required in applicable circumstances, the Board recognizes that changes in the capital markets, District programs, and other unforeseen circumstances may from time to time produce situations that are not covered by the Debt Policy and will require modifications or exceptions to achieve policy goals. In these cases, management flexibility is appropriate, provided specific authorization from the Board is obtained. June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 113 of 156 Page 15 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 3of9 IV. ROLES AND RESPONSIBILITIES • General Manager and/or Deputy General Manager— Provides oversight of debt program and recommendations on debt to the Board. • Executive Director of the Central Contra Costa Sanitary District Facilities Financing Authority — Provides oversight of debt program and recommendations on debt to the Board. • Director of Finance and Administration — Has primary responsibility for debt issuance recommendations, financing transaction execution, oversight of bond proceeds expenditures, and ongoing debt management. • Board of Directors — Sets debt policy and authorizes individual transactions. V. ETHICS AND CONFLICTS OF INTEREST Staff and Board involved in the debt management program will not engage in any personal business activities that could conflict with proper and lawful execution of securing capital financing and are to comply with the District's Conflict of Interest Code. VI. INTEGRATION WITH OTHER FINANCIAL POLICIES AND DOCUMENTS The District is committed to long-term capital and financial planning, maintaining appropriate reserve levels and employing prudent practices in governance, management and budget administration. Policies related to these topics are adopted separately but affect this Debt Policy in the context of the overall long-term financial plan. The Board shall be presented with the results of the long-term financial plan in contemplation of any proposed rate adjustment where the capital budget, financial policies, proposed debt issuances and resulting debt service are presented as elements contributing to the calculation of overall projected customer rates. VII. STANDARDS FOR USE OF DEBT FINANCING In financial planning, the District will evaluate the use of various alternatives including current year funding of capital projects through rates, various forms of debt financing, use of reserves, and inter-fund borrowing. The District will utilize the most advantageous financing alternative balancing the goals of long-term cost minimization, risk exposure, and compliance with generally accepted ratemaking principles. The District's debt management program will consider debt issuance where public policy, equity (including intergenerational equity), general ratemaking principles, economic efficiency and compliance with long-term financial planning parameters favor financing over cash funding. June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 114 of 156 Page 16 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 4 of 9 A. Use and Timing of Debt The District shall integrate its debt issuances with the goals of its Capital Improvement Program by timing the issuance of debt to ensure that projects are available when needed in furtherance of the District's public purposes (as articulated in, inter alis, the District's mission, vision, and goals) and are consistent with the rate and financial planning parameters specified in the District's long-term financial plans. The Board shall be presented with a long-term financial plan in each instance Sewer Service Charge rates are to be adjusted. 1. The long-term financial plans will specify an expected debt issuance amount over a decade or more long-term planning horizon. a. The District shall target rate or tax revenue funding of, at a minimum, the value of the collection system replacement program (specifically, pipeline replacement) component of the CIP. b. Not more than 60% of the overall CIP shall be financed with debt. 2. All projects in the CIP are eligible to use debt financing, so long as the minimum rate or tax revenues are generated as described in A.1 of this section. This policy does not contemplate the use of debt financing to fund ongoing operating & maintenance expenditures; exceptions beyond a de-minimis amount would require approval of the Board. With respect to debt repayment and amortization, the debt repayment period should be structured so that the weighted average maturity of the debt does not exceed 100% of the expected average useful life of the project being financed. B. Credit Quality All District debt management activities for new debt issuances will be conducted in a manner conducive to receiving the highest credit ratings possible consistent with the District's debt management objectives. As debt service coverage is a key ratings consideration, the District shall target a debt service coverage level of at least 2.Ox or greater for financial planning and ratemaking purposes. C. Ongoing Debt Administration and Internal Controls The District will maintain all debt-related records according to the District's Retention Policy. The District will maintain internal controls to ensure compliance with the Debt Policy (including use of bond proceeds for purposes specified in the applicable Bond Official Statements and in compliance with this debt policy), all debt covenants and any applicable requirements of Federal and State law, including but not limited to the following: initial bond disclosure, continuing disclosure, tax-exemption, post-issuance compliance, investment of bond proceeds (including, for example, any continuing disclosure obligations under Securities and June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 115 of 156 Page 17 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 5of9 Exchange Commission (SEC) Rule 15c2-12, and tax covenants, and related federal tax compliance requirements such as arbitrage restrictions and rebate requirements), and annual transparency reporting to CDIAC. These internal controls are further specified in the related Debt Management and Continuing Disclosure (AP 029). D. Rebate Policy and System The District will develop a system of reporting interest earnings that relates to and complies with Internal Revenue Code requirements relating to rebate, yield limits and arbitrage. The District will accurately account for all interest earnings in debt-related funds to ensure that the District is compliant with all debt covenants and with state and federal laws. The District will invest funds in accordance with the investment parameters set forth in each respective bond indenture, and as permitted by the District's Statement of Investment Policy (BP 005). VIII. FINANCING CRITERIA When District staff determines the use of debt is appropriate, staff shall provide a report to the Board that: • describes the intended use of the financing proceeds (funding for new projects or to refund existing bonds); • recommends a specific debt type to include duration, type, interest rate characteristics, call features, credit enhancement or financial derivatives to be used in the transaction; • presents the impact of the bonds on the District's forecasted rates based on the anticipated maturity schedule. For refunding transactions, a comprehensive report on the debt to be redeemed, the replacement debt, and the anticipated benefits of the transaction shall be provided. IX. TERMS AND CONDITIONS OF DEBT The District will establish all terms and conditions relating to the issuance of debt, and will control, manage, and invest all debt proceeds. The District staff will specify to the Board proposed debt terms, coupon structure, debt service structure, redemption features, any use of capitalized interest, and lien structure. X. TYPES OF DEBT The following types of debt are allowable under this Debt Policy, subject to applicable law, and the District's statutory authority to issue debt: • General obligation bonds • Commercial paper June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 116 of 156 Page 18 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 6of9 • Bond or grant anticipation notes • Lease revenue bonds, certificates of participation and lease-purchase transactions • Other revenue bonds, including private placement obligations • Tax and revenue anticipation notes • Land-secured financings, such as special tax revenue bonds issued under the Mello-Roos Community Facilities Act of 1982, as amended, and limited obligation bonds issued under applicable assessment statutes • Refunding Obligations • State Revolving Fund Loans • Lines of Credit • Letters of Credit • The Board may from time to time find that other forms of debt would be beneficial to further its public purposes and may approve such debt without an amendment of this Debt Policy. XI. CREDIT ENHANCEMENTS The District may consider the use of credit enhancement on a case-by-case basis, evaluating the economic benefit versus cost for each case. Only when a clearly demonstrable savings or other measurable advantages can be shown will enhancement be considered and authorized. XII. REFINANCING OUTSTANDING DEBT The District will periodically evaluate outstanding bond issues for refunding opportunities and will bring to the attention of the Board those opportunities that are in the District's interest. Reports to the Board on potential refunding shall describe anticipated savings and the structure of refunding and refunded debt, and any refunding transaction executed will be followed with a report on actual savings. XIII. METHODS OF ISSUANCE District bonds may be sold on a competitive or negotiated basis (including private placement). A recommendation regarding the proposed use of either method shall be prepared by staff and provided to the Board prior to or concurrent with the proposed issuance. XIV. MARKET RELATIONSHIPS A. Rig Agencies and Investors The General Manager and designees (Deputy General Manager and Director of Finance and Administration) will be responsible for maintaining the District's June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 117 of 156 Page 19 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 7of9 relationships with rating agencies, which will typically include two or more of the nationally recognized statistical rating agencies. B. Board Communication The General Manager will make available to the Board any ratings report or other relevant feedback provided from rating agencies and/or investors regarding the District's financial strengths and weaknesses and recommendations for addressing any weaknesses. C. Continuing Disclosure The District will remain in compliance with SEC Rule 15c2-12 addressing continuing disclosure obligations. The District will also comply with state reporting requirements specified in SB 1029, which require initial and ongoing debt reporting requirements for California public agencies. D. Rebate Reporting The use and investment of bond proceeds shall be monitored to ensure compliance with arbitrage restrictions. E. Other Jurisdictions From time to time, the District may issue bonds to fund projects that provide a benefit to other public entities, (e.g. City of Concord). The District will conduct such analyses as deemed necessary to assure adequate cost recovery for such funding and to mitigate risks to the District (including consideration of the use of limited bonding capacity). The District may participate in a joint powers authority with one or more other eligible entities pursuant to Section 6500 of the California Government Code if deemed advantageous and appropriate and approved by the Board. XV. CONSULTANTS A. Selection of Financing Team Members The General Manager or designee will make recommendations for all financing team members, with the Board providing final approval. Financing team members may include a financial advisor, bond counsel, disclosure counsel (which may be the same firm as bond counsel), and underwriter. Selection of those financing team members shall be in accordance with Professional Service and Consultant provisions of the District's procurement policies, and consistent with Chapter 2.36 "Purchasing and Materials Policy" of the District Code. In the event of a competitive bond sale, the District's debt will be offered to the underwriter providing the most cost advantageous proposal to the District. June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 118 of 156 Page 20 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 8of9 B. Financial Advisor The District may utilize a financial advisor to assist in its debt issuance and debt administration processes as is deemed prudent and necessary by management and in compliance with Municipal Securities Rulemaking Board (MSRB) regulations. C. Bond Counsel District debt will include a written opinion by legal counsel affirming that the District is authorized to issue the proposed debt and that the District has met all constitutional and statutory requirements necessary for issuance and a determination of the proposed debt's federal income tax status. The approving opinion and other documents relating to the issuance of debt will be prepared by counsel with extensive experience in public finance and tax issues. D. Disclosure Counsel The District may utilize a separate firm to serve as disclosure counsel as it deems necessary. If cost effective, bond counsel may also serve as disclosure counsel. E. Underwriter The District will have the right to select a senior manager for a proposed negotiated sale, as well as co-managers and selling group members, as appropriate. F. Conflict of Interest Disclosure by Financing Team Members All financing team members will be required to provide full and complete disclosure, relative to agreements with other financing team members and outside parties. The extent of disclosure may vary depending on the nature of the transaction. However, in general terms, no agreements will be permitted which could compromise the firm's ability to provide independent advice that is solely in the District's interests (to the extent the firm's role involves a duty to do so) or which could reasonably be perceived as a conflict of interest. XVI. INITIAL AND CONTINUING DISCLOSURE COMPLIANCE A. Disclosure Coordinator and Overall Requirements for Initial and Continuing Disclosure The Director of Finance and Administration (or as designated, the Finance Manager) for the District shall be the disclosure coordinator of the District (Disclosure Coordinator). The Disclosure Coordinator shall perform the following functions: June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 119 of 156 Page 21 of 24 Number: BP 029 DEBT MANAGEMENT AND CONTINUING DISCLOSURE Page 9of9 • Ensure that any Official Statement meets appropriate standards and is approved by the Board as required. • Ensure that initial and continuing disclosure obligations undertaken by the District related to each debt issuance are met, including State of California requirements, and MSRB requirements that the District commits to undertake in the Continuing Disclosure Certificate or Agreement over the life of the bonds to investors. o Initial Disclosure requirements include preparation of the Bond Official statement and reports on the issuance to the CDIAC. o Ongoing disclosure requirements include annual reports with the MSRB Electronic Municipal Market Access (EMMA) system and the CD IAC. XVII. EXCEPTIONS In the event there are any deviations or exceptions from the Debt Policy when a certain bond issue is structured, those exceptions will be discussed in the staff reports when the bond proposal is agendized for Board consideration. XVIII. POLICY CONSIDERATION This policy shall be reviewed on a biennial basis. Any changes must be approved by the Board, as well as the individual(s) charged with maintaining internal controls. [Original retained by the Secretary of the District] June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 120 of 156 Page 22 of 24 ATTACHMENT 2 Governmental Finance Officers Association (GFOA) 03 MPETITIV E v, H EG TI T E D SAL E : Summiary of Conditions FavorI g Each Method of Sale CONI)MM FAV01UNG A CONDITIONS FAVORING A CCOMT[TIVE SALE NEGOTIATED SALE DEWT MUMRE P$edged Revenues General Ohligadon or ung Protect-SUPWed-SUPRevenues Sim Revenue secudty stmdure Con'erlfional Resolution and Uni usual or Weak rants' (for ftwenue Bonds) Cash Mow, Rate Grant and Subordinaled Debt Debt Instrunrient Tradglonal SeMl aW Term, VS8 of l5novative Structuft, Foo Coupon Bonds Derivalive ProductS. ctur:e to Attract Parti o lar Investom CREDIT QUALITY (e-g.Dieu nt ),ej i n iA'or better Below siroe W CKFNWk Stable Weak M lip 'or Ur Stress ISSUER CRARACTERLSTICS Type of Or rrizatiorr ad-Based General Purpose Sal PUS'Inde $+fir Authy i Frequency of Issuance Regular Mier jrr Plublic New or infrequent Issuer Markel Market Aviramness ACUve Secondary Malt+rwf h Little or W Insi tulional Bred Investor Awareness of Issuer,Higorical 4/ Anti thy Investor rnf Well-Knp Stable Issuer I uar orf encingnlfirMt 4V pini andal,Legal or Other pwblerns MARKET CONDITIONS Inlerest Riges Stable;Prediclable Wrkfft Volatile or Dedinire MaAet -44 Super aW Demand Stmng Investor De ni'Goad Oversold Market.Hem upply L uiddy,Light Forward aleadar POLICY CONSIDERATIONS Participation in Sale or Broad Markel Parbeipation De!iru to Direct Susine ss to rti mired Ior Sale of BoMs DBE cw Lo I egk)ref Fines r Stimulation of Investor Broad Market Pariidpati on Dg5 ire to Direct 1Btziness to Interest Desired for Pumha5e of Bis LocaURegional Investors Red checkmarks are the informal assessment of Central San Staff 13 June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 121 of 156 Attachment 2 Page 23 of 24 Central Contra Costa Sanitary District Wastewater Revenue Refunding Certificates of Participation, Series 2018 Financing Schedule as of June 13, 2018 Board meetings are on the first and third Thursday of the month SEPTEMBER S M T W T F S S M T W T F S S M T W T7344 S M T W T F S 1 2 1 2 3 4 5 6 7 1 2 1 3 4 5 6 7 8 9 8 9 10 11 12 13 14 5 6 7 8 9 10 11 2 3 4 5 6 7 8 10 11 12 13 14 15 16 15 16 17 18 19 20 21 12 13 14 15 16 17 18 9 10 11 12 13 14 15 17 18 19 20 21 22 23 22 23 24 25 26 27 28 19 20 21 22 23 24 25 16 17 18 19 20 21 22 24 25 26 27 28 29 30 29 30 31 26 27 28 29 30 31 23 24 25 1 26 1 27 1 28 29 30 Holiday Week of May 7 ■ Circulate information request for Preliminary Official Statement DC Week of May 14 ■ Finalize and Distribute underwriter RFP MA Mon., May 21 ■ Finance Committee meeting for recommendation to proceed CCCSD Week of May 21 ■ Information provided by District for POS CCCSD Mon., May 28 ■ Memorial Day All Week of May 28 ■ Circulate first drafts of bond documents and POS BC/DC Week of June 4 ■ Receive underwriter RFP responses MA Week of June 11 ■ Circulate underwriter RFP summary MA Fri.,June 22 ■ Deadline to submit memo to Finance Committee CCCSD Week of June 25 ■ Kick-off call to review documents and POS All Tue.,June 26 ■ Finance Committee meeting to consider financing team CCCSD/MA Week of July 2 ■ Circulate first draft of credit presentation MA ■ Circulate revised drafts of documents and POS BC/DC Wed.,July 4 ■ Independence Day All Thu.,July 5 ■ Board meeting to approve appointment of financing team CCCSD/MA Week of July 9 ■ Conference call to review credit presentation,documents, POS All ■ Circulate second draft of credit presentation MA/UW Week of July 16 ■ Finalize credit presentation MA/UW Fri.,July 20 ■ Deadline to submit documents and POS to Finance Committee CCCSD/BC Week of July 23 ■ Meetings with rating agencies CCCSD/MA/UW Financing Schedule 1 June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 122 of 156 Page 24 of 24 0 ip Central Contra Costa Sanitary District Wastewater Revenue Refunding Certificates of Participation, Series 2018 Financing Schedule as of June 13, 2018 Board meetings are on the first and third Thursday of the month SEPTEMBER S M T W T F S S M T W T F S S M T W T 7FS S M T W T F S 1 2 1 2 3 4 5 6 7 1 2 1 3 4 5 6 7 8 9 8 9 10 11 12 13 14 5 6 7 8 9 10 11 2 3 4 5 6 7 8 10 11 12 13 14 15 16 15 16 17 18 19 20 21 12 13 14 15 16 17 18 9 10 11 12 13 14 15 17 18 19 20 21 22 23 22 23 24 25 26 27 28 19 20 21 22 23 24 25 16 17 18 19 20 21 22 24 25 26 27 28 29 30 29 30 31 26 27 28 29 30 31 23 24 25 26 27 28 29 30 Holiday Tue.,July 24 ■ Finance Committee meeting to review documents and POS CCCSD/MA/BC Week of Jul 30 ' Select Printer CCCSD/MA July ■ Due Diligence Call All Thu.,August 2 ■ Board meeting to approve documents and POS CCCSD/MA/BC Week of August 6 ' Receive credit ratings All ■ Post POS P Week of August 13 ■ Bond Pricing All Week of August 20 ■ Print final Official Statement P Mon.,September 3 ■ Labor Day All Week of September 10 ■ Closing All WorkingPa rty Group Participant Abbreviation Issuer Central Contra Costa Sanitary District CCCSD Municipal Advisor PFM Financial Advisors MA Bond &Disclosure Counsel Jones Hall BC/DC Underwriter TBD UW Underwriter's Counsel TBD UC Trustee TBD T Verification Agent TBD V Printer TBD P Financing Schedule 2 June 26, 2018 Regular FINANCE Committee Meeting Agenda Packet- Page 123 of 156