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HomeMy WebLinkAbout12. Consider adopting a resolution to appoint a financing team and address other matters related to a 2021 Debt Issuance Page 1 of 23 Item 12. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER MEETING DATE: MAY 6, 2021 SUBJECT: CONSIDER ADOPTING RESOLUTION 2021-023 TO APPOINT THE PROPOSED 2021 BOND OFFERING FINANCING TEAM;AUTHORIZE FINANCING THROUGH THE USE OF CERTIFICATES OF PARTICIPATION OFFERED THROUGH A COMPETITIVE SALE; REVISE THE FISCAL YEAR (FY)2020-21 SEWER SERVICE CHARGE (SSC) ALLOCATION RATIOS AND DIRECT REMAINING (APRIL AND JUNE) DISTRIBUTIONS TO OPERATI ONS AND MAINTENANCE (O&M) RESERVE FUND;AND SPECIFYTHE INTENTTHAT FY 2020-21 SPENDING BE REIMBURSABLE FROM BOND PROCEEDS NO EARLI ER THAN 60 DAYS PRIOR TO RESOLUTION ADOPTION SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE PHILIP LEIBER, DIRECTOR OF FINANCEAND ADMINISTRATION Roger S. Bailey Kenton L.Alm General Manager District Counsel ISSUE Per Board Policy 029- Debt Management and Continuing Disclosure Policy(BP 029), Board approval is required for the selection of the financing team that will assist with the execution of a 2021 debt transaction. The financing team includes the appointment of a financial advisor and bond counsel/disclosure counsel. With respect to the proposed method of issuance of the debt, a competitive offering is proposed,whereby the winning underwriter would be selected based on proposed lowest interest yields to Central San. Several other actions proposed in connection with the issuance are also recommended for Board adoption. BACKGROUND At the March 25, 2021 Financial Workshop, staff discussed the potential of achieving interest savings through the issuance of debt in 2021 to finance a portion of the planned Fiscal Year(FY)2021-22 Capital Improvement Budget(CI B). Sewer Service Charges (SSC)that would have otherwise gone to fund the FY 2021-22 Cl B would be used to pay down the unfunded actuarially accrued liability("UAAL")attributable to Central San's pension plan administered by Contra Costa County Employees Association ("CCCERA"). This proposal could generate significant interest savings, as well as help fully fund the pension. The latter is a goal specified in Board Policy(BP)041 -Pension Funding,which contains the following principles: May 6, 2021 Regular Board Meeting Agenda Packet- Page 93 of 239 Page 2 of 23 (1)Annual contributions toward defined contribution benefit plans should be made to ensure that the funded ratio is targeted at and maintained as close to 100%as is reasonably practicable. (2)When defined benefit plan funded ratios are below 100%, efforts should be taken to ensure the funded ratios are restored to 100%as soon as is practicable given other reasonable rate making constraints. The attached memo addresses the overall proposed transaction and anticipated savings, including current market conditions, recommendations on the structure for the debt, and appointment of a financing team. Proposed Transaction and Anticipated Savings The anticipated savings related to the financing are the difference between the carrying cost of the pension UAAL, and the cost of the bonds to finance the FY 2021-22 Capital Improvement Budget("Cl B"), inclusive of bond issuance costs. The issuance costs are anticipated as: Financial Advisor Fee $50,000 Bond Counsel $50,000 Disclosure Counsel $49,000 S&P Rating $50,000 Other miscellaneous cost $25,000 Total costs without underwriter costs $224,000 Current Market Conditions 10 Year-Municipal Market Daily(MMD)composite tax exempt interest rates have trended upward from the low points in August 2020 (0.68%)and December 2020 (0.71%), but are still near historic lows, at 1.03%as of April 12. This is lower than such rates have been over the past decade, apart from the lows mentioned in the past year. The interest rate on the proposed transaction,with a final maturity of about 7 years from now, are anticipated to be between the 5 year and 10 year MMD rates noted here, or somewhere around I%. —1MM6 ayMM6 Ap= 0% . 6.52%' 11 Mar 2021 0.5 1."%{ feb 2011 0.31% 0.83% 8 Ian 7011 021% D.— MCI 013% 0.71% a xw 2010 0.36% 0.80% Ott 2020 018% � Sep 2010 025% 089% 0 1.11036 12% 0.7. ex Jen 2020 I 0.39% o.t1A{ 4 42mo 0.70% 1.65% +fin' e�' o¢>'+ e¢`° a>y ,° �.. .�•" rho-° e. 96'~ Ma ayr202o ..6.% ..3" We;The tables on the right show monthly averages of short-term Ind 05 and tax-exempttbed Interestrates.As of MIl April 7.2021 piu�alme�'Meop&Cwnpany Aas prepared this manna lar IMprmapwat pprppses only, The outlook for interest rates in the coming months is uncertain. The Federal Reserve has issued generally dovish statements, but concerns about inflation are being more widely discussed. The increases from the lows seen over the past years, and the possibility of future increases, is a driver for moving as expeditiously as possible to lock in as much of the savings as possible from this transaction. Recommendations on the Structure of the Debt Two general alternatives are possible as to a debt structure for"new money" (as opposed to refinancing of existing debt): (1)Certificates of Participation ("COPs")or(2) Revenue bonds. 1. "COPs". Central San has issued COPs in 1994 and 2009, in the amounts of$25 million and $30 million, respectively. The COP structure provides that the obligations would be sold through the Central Contra Costa Sanitary District Facilities Financing Authority ("Financing Authority"),with Central San responsible for the debt service obligations. As of 2020, Central San's financial plan did not anticipate a new money bond issuance in the foreseeable future. As such, staff recommended dissolution of the Financing Authority in January 2021,with a resolution adopted by the Board to that end. However, as the paperwork has not yet been filed with the State to officially dissolve the entity, using a COP structure through the Financing Authority remains a viable option. Concerns about potentially higher interest costs of a COP transaction versus a revenue bond option have also been considered by PFM. In PFM's opinion,the COP structure presently remains a cost effective compared with revenue bonds, and PFM supports using this arrangement for this transaction. May 6, 2021 Regular Board Meeting Agenda Packet- Page 94 of 239 Page 3 of 23 2. Revenue Bonds: Central San has issued Revenue Bonds in 1998 and 2018, in the amounts of$25.335 million and $19.450 million,for the purpose of refinancing previously issued COPS to take advantage of lower interest rates then available in those years. New money(in contrast to refunding/refinancing)revenue bonds cannot be issued directly by a sanitary district without a majority public vote. Given the costs and timeline involved, this is not the recommended course of action. Alternatively, revenue bonds can be issued through a joint powers authority of which Central San is a member. This is a possible option, and one that was anticipated for future bond funding needs. However, it is expected that the timeline for this is still longer than proceeding with COPs, and given the concern about rising interest rates in the current environment,this is considered by both staff and PFM as less desirable. Appointment of a Financing Team The financing team is comprised of a Financial Advisor, Bond Counsel/Disclosure Counsel and an Underwriter. • Financial Advisor-Staff is proposing to proceed with PFM Financial Advisors LLC ("PFM")as the Financial Advisor. Central San appointed PFM as a financial advisor in December 2017 under a contract of up to five years. PFM's work on this matter will include financial analysis related to the potential savings, evaluation of bond structuring alternatives, bond document review, bond pricing process/competitive sale coordination, interfacing with the rating agencies, and assistance with state and federal initial and continuing disclosure compliance. PF M's fee for this work, payable from bond proceeds,will be$50,000. • Bond Counsel/Disclosure Counsel -The law firm of Jones Hall served as both bond counsel and disclosure counsel to Central San in the 2009 bond issuance and 2018 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. As Jones Hall drafted the documents related to the 2009 certificates of participation,they are well situated to draft agreements on the new bonds which are proposed to use the same structure. As to the disclosure counsel work, their familiarity with Central San, and the past two bond official statements 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$50,000, and for disclosure counsel are$49,000. Both of these fees are payable from bond proceeds as a cost of issuance. • Underwriter: Staff recommends selling the debt on a competitive basis,whereby the underwriter is selected based on the lowest overall yield of the bonds based on the maturities and amounts established by Central San. This contrasts with a negotiated transaction where an underwriter is selected up-front,typically based on a request for proposals ("RFP")or abbreviated RFP process that considers qualifications and cost. Attachment 2 contains a resolution that appoints the financing team, and adopts other measures related to the proposed financing. Other Implementing Actions The precise borrowing amount(estimated at around $58-60 million), specific maturity schedule (estimated at about 7-8 years), and other transaction details are yet to be finalized,with further details provided at the time of Board adoption of the issuance resolution (May 2021)and after the close of the transaction(specific interest rates, and debt service schedule). I n order to effectuate the intended goal of the transaction of freeing up FY 2021-22 SSC that would have gone to the Sewer Construction fund, and alternatively use that SSC increment to pay down the UAAL(approximately$70 million), several changes to the spending plan set forth in the currently drafted budget for FY 2021-22 will be necessary. Central San will need to change the allocation of SSC between the O&M and Sewer Construction funds currently specified in the draft FY 2021-22 budget. Once more precise details of the amount of the SSC that needs to be re- directed are available, staff will propose a budget amendment to the FY 2021-22 budget that would take the following actions: 1. Change the reallocation of SSC to O&M and Sewer Construction specified in Table 5 of the budget book; 2. Revise the revenue sources for the SSC and Sewer Construction budgets; 3. Reduce the O&M budget to reflect lower UAAL payments payable to CCCERA; 4. Increase the debt service budget to reflect interest and principal payments payable on the new debt; 5. Show revised Reserve Projections (Table 14 of the budget) Furthermore, preliminary information suggests that the amount of SSC allocable to the Sewer Construction fund in FY May 6, 2021 Regular Board Meeting Agenda Packet- Page 95 of 239 Page 4 of 23 2021-22 (estimated at$34 million)will be insufficient(we need about$58 million)to provide sufficient funding to pay off the UAAL($70 million)along with the available funds in the Pension Prefunding Trust($12 million). This approximately$24 million shortfall can be addressed by: • Revising the FY 2020-21 SSC allocation to direct any remaining available funds from the April and June 2021 County distributions of SSC to the O&M reserve. The Sewer Construction reserve is projected to have$28.8 million more than is needed for the policy required level at June 30, 2021. Then,the proposed forthcoming borrowing of about$60 million can be used for not only FY 2021-22 Cl B, but future years spending, or even FY 2020-21 expenditures that would have come from these revenues. • With respect to using bond proceeds to fund FY 2020-21 sewer construction expenditures,the adoption of a reimbursement resolution is proposed. This will allow bond proceeds to fund FY 2020-21 expenditures not earlier than 60 days prior to the adoption of the resolution pursuant to I RS regulations. Schedule and Next Steps An initial financing schedule was prepared by PFM in early April, and will be refined as necessary. It is provided as Attachment 1. The schedule targets an issuance in late June 2021. The next key milestone for Board and Finance Committee involvement will be approval of several key documents, which would be scheduled for May or June, as noted below: 1. Adoption of the Financing Resolution, authorizing the issuance of certificates of participation by the Central Contra Costa Sanitary District Financing Authority; 2. Approval of draft Preliminary Official Statement for the obligations; 3. Approval of other necessary documents to authorize and implement the financing; Financing Team members will available to answer any further questions the Board may have on the documents and proposed transaction. ALTERNATIVES/CONSIDERATIONS The primary issue is whether to proceed with a debt issuance to fund a portion of the capital improvement budget and free up Sewer Service Charge funds to be used to pay-down UAAL obligations. Various analysis prepared by staff, and by financial advisor PFM indicates the likely value of doing so. Beyond that, details of the proposed transaction for which alternatives are possible include: 1. Members of the financing team. As noted above, PFM and Jones Halls are recommended based on availability, familiarity with Central San, and the value of proceeding on an expedited basis. 2. The nature of the sale-negotiated or competitive. A competitive sale is recommended for the following reasons: a. Avoid the need for a separate process to select an underwriter. b. A competitive sale is likely the most cost effective manner of issuing the debt. 3. The type of debt to be issued-revenue bonds through a Joint Powers Authority("J PA"), or certificates of participation through the financing authority. As noted, COPs are recommended due to: a. Proceeding with a COP arrangement is viewed as the most expeditious approach, and avoids the need to establish or participate in a pre-existing J PA for the issuance of revenue bonds. b. In PFM's opinion, there is no material pricing disadvantage to a COP structure versus the all-in cost of issuing revenue bonds. 4. The amount of the offering. Just enough to accomplish the pay-down of the pension UAAL is recommended;this is expected to be approximately$58 million. Alternatively, a higher amount could be issued to provide funding for FY 2022-23 Cl B needs as well, potentially to reshape the financial plan's anticipated rate adjustments. This is not recommended at this time, as the forward looking Sewer Service Charge rate adjustments are anticipated to be in the manageable/low-single digit range. 5. Whether to send all of the freed-up sewer service charge to CCCERA to retire the UAAL, or whether to instead deposit a portion in the Pension Pre-Funding Trust. This was discussed briefly at the Finance Committee on April 27, 2021. For example, sufficient funds could be sent to CCCERA to provide for a 97%funding ratio, and the balance of funds could be kept in the Pension Prefunding Trust. May 6, 2021 Regular Board Meeting Agenda Packet- Page 96 of 239 Page 5 of 23 Advantages to this alternative would be: a. Greater flexibility of funds in the Pension Prefunding Trust--they could be used to pay normal/ongoing Pension costs. b. Avoiding concerns about"super-funding". Disadvantages include: a. CCCERA does not recognize the funds held in the our Pension Prefunding Trust. They will continue to charge us amortization of any UAAL layers that exist per their actuarial records. However,funds in the Pension Prefunding Trust could be drawn down/used to pay those ongoing UAAL amortization charges. This issue can be further explored, if desired, by the Board between now and late June when funds would be sent to CCCERA. FINANCIAL IMPACTS As is: Presently,we pay an interest carrying cost(assessed at 7%)on the pension UAAL of about$70 million. Offsetting a portion of this,we have about$12 million invested in a Pension Prefunding Trust earning a market return anticipated to be something close the CCCERA interest carrying cost. To Be: We will borrow at approximately 1%and avoid paying 7%. But, once the funds have been provided to CCCERA, they will earn a"market return". Over the last 20 years, that return has averaged 7.7% annually, but has been as low as- 26.5% (in 2008), and as high as 23.5% (in 2003). The ultimate savings of this transaction will depend on what that market return turns out to be over the life of the bonds of about 7-8 years. Based on a borrowing amount of about$58 million on a net basis (CCCERA$70 million UAAL less balance in pension trust of$12 million), and the differential between 7% interest and 1% interest on the bonds, net interest savings on the order of$9.4 million can be anticipated. However, actual savings will depend on the actual debt interest rate, and the earnings on the CCCERA assets. Accordingly,the savings cannot be represented as a"point estimate" but rather are better represented as a probability distribution. PFM conducted an analysis (Attachment 3)of the potential savings by building a sophisticated model comparing prospective anticipated pension returns versus debt service costs. Then, a Monte-Carlo type simulation was run with ten thousand iterations,where historical returns over the past 20 years are the set of potential annual returns over the next decade. From this, distributions of potential savings were generated and displayed graphically as noted below. 3596 32.0% 30% 26.6% � 1596 c c 2096 19.0% 1596 12-7% a 1496 596 a.s% 4.9% 0.690 0.696 96 p96 0.0 -$30to-$20 -$20to-510 -510 to$0 $0 to$10 $10 to$20 520 to 530 $30 to$40 $40 to 550 550 to 560 Range of UenLN5[$Mil ansa This modelling shows that the savings are expected to be favorable with an 81% probability, and at least$1 million of savings with a 79% probability. Why is it not 100%? This is because of the relatively short duration of the debt(about seven years), and the potential volatility of returns. The down side case would be significant adverse returns early in the seven- year period,which would then be a challenge to recover from, and which could affect the overall savings available from the transaction. The analysis shows that there is about a 21% probability that the transaction will not save money(three bars on the left of the distribution). To further decompose that,there is: • a 12.7% chance that the net savings will be between a loss of$10 million, and 0$; • a 4.8% chance that the net savings will be between a loss of$20 million, and a loss of$10 million; May 6, 2021 Regular Board Meeting Agenda Packet- Page 97 of 239 Page 6 of 23 • a 0.6% chance that the net savings will be between a loss of$30 million, and a loss of$20 million; Despite this, both staff and PFM believe the transaction is worth pursuing given the still high probability of savings. With respect to the debt load that will be outstanding if this transaction proceeds: • "Debt" remains well within limits specified in the 2017 Debt Management Policy(BP 029),whereby not more than 60%of 10 year C I P is debt financed. The debt calculated per this measure would be 24.6%,well below the 60% limit: ($173MM SRF loan+$58MM for Cl P for UAAL payoff= $231 MM/$939MM Cl P=24.6%). • Rating agencies also use other various measures of debt carrying capacity in their assignment of ratings to a utility, including debt service coverage, debt to operating revenues, and debt to capitalization. On all of these measures, Central San's debt load is healthy and consistent with high ratings. It should also be noted that in this proposed transaction which is changing one form of liability for another, that rating agencies already consider pension obligations as a form of debt, so there is no anticipated adverse impact on many of these measures with proceeding with the transaction. COMMITTEE RECOMMENDATION The Finance Committee reviewed this matter at its meeting on April 27, 2021 and recommended that the Board adopt the recommended resolutions. RECOMMENDED BOARD ACTION Staff recommends that the Board adopt the proposed resolution: 1. Appointing the financing team proposed for the 2021 obligations, consisting of PFM Financial Advisors LLC as financial advisor, Jones Hall as disclosure and bond counsel; 2. Authorizing staff to pursue the financing transaction through the use of Certificates of Participation as an obligation of the Central Contra Costa Sanitary District Facilities Financing Authority; 3. Authorizing the securities be sold on a competitive basis to an underwriter; 4. Revising the FY 2020-21 Sewer Service Charge allocation rations specified in the adopted budget to direct all remaining funds from the April and June County SSC distributions to the O&M Reserve; and 5. Specifying the official intent of the District that the FY 2020-21 Sewer Construction spending not earlier than 60 days prior to the adoption of the resolution be reimbursable from bond proceeds. Separately,the Board of the Central San Facilities Financing Authority is requested to adopt Board resolution 2021-02 to rescind resolution 2021-01 that was to have dissolved the Facilities Financing Authority. Strategic Plan Tie-In GOAL THREE:Fiscal Responsibility Strategy 1—Maintain financial stability and sustainability, Strategy 2—Ensure integrity and transparency in financial management ATTACHMENTS: 1. Schedule 2. Proposed resolution 3. PFM Pension Funding Analysis 4. Presentation May 6, 2021 Regular Board Meeting Agenda Packet- Page 98 of 239 Page 7 of 23 0 Central Contra Costa Sanitary District Wastewater Revenue Certificates of Participation, Series 2021 Financing Schedule as of April 1, 2021 Board meetings are on the first and third Thursday of the month S M T W F S S M T W T F S S M T W T F S S M T W T F S 1 2 3 1 1 2 314 5 1 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 6 7 8 9 10 11 12 4 5 6 7 8 9 10 11 12 13 14 15 16 17 9 10 11 12 13 14 15 13 14 15 16 17 18 19 11 12 13 14 15 16 17 18 19 20 21 22 23 24 16 17 18 19 20 21 22 20 21 22 23 24 25 26 18 19 2021 22 23 24 25 26 27 28 29 30 23 24 25 26 27 28 29 27 28 29 30 25 26 27128 29 30 31 30 31 Board Meeting Finance Committee i Holiday Thursday, March 25 ■ CCCSD Board Annual Financial Workshop CCCSD, MA Week of April 5 • Working group organizational call CCCSD, MA, BC • Circulate information request for Preliminary Official BC Statement Friday, April 16 ■ Finalize materials for April 27 Finance Committee meeting CCCSD, MA Monday, April 19 ■ Packet mailed for April 27 Finance Committee meeting CCCSD Friday, April 23 ■ Information provided by District for POS CCCSD Tuesday, April 27 ■ Finance Committee meeting to discuss financing CCCSD, MA strategy [and method of sale] Wednesday,April 28 • Circulate drafts of bond documents, POS, and NOS BC Monday, May 3 ■ Circulate first draft of credit presentation MA Weds., May 5 ■ Conference call to review bond documents, POS, NOS, All and credit presentation Monday, May 10 ■ Circulate second drafts of bond documents, POS, and BC NOS Wednesday, May 12 ■ Circulate revised draft of credit presentation MA Monday, May 17 • Conference call to review revised documents and credit All presentation Weds., May 19 ■ Circulate revised drafts of bond documents, POS, and BC NOS Thursday, May 20 • Send draft bond documents and POS to S&P MA Financing Schedule 1 May 6, 2021 Regular Board Meeting Agenda Packet- Page 99 of 239 Page 8 of 23 0 Central Contra Costa Sanitary District Wastewater Revenue Certificates of Participation, Series 2021 Financing Schedule as of April 1, 2021 Board meetings are on the first and third Thursday of the month S M T W F S S M T W T F S S M T W T F S S M T W T F S 1 2 3 1 1 2 314 5 1 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 6 7 8 9 10 11 12 4 5 6 7 8 9 10 11 12 13 14 15 16 17 9 10 11 12 13 14 15 13 14 15 16 17 18 19 11 12 13 14 15 16 17 18 19 20 21 22 23 24 16 17 18 19 20 21 22 20 21 22 23 24 25 26 18 19 2021 22 23 24 25 26 27 28 29 30 23 24 25 26 27 28 29 27 28 29 30 25 26 27128 29 30 31 30 31 Board Meeting Finance Committee Holiday Monday, May 24 ■ Conference call to finalize bond documents and POS for BC submittal to District Tuesday, May 25 ■ Deadline to submit POS and bond documents to District for BC June 3 Board meeting ■ Credit presentation dry-run All Weds., May 26 • Packet mailed for June 3 Board meeting CCCSD ■ Final credit presentation sent to S&P MA Thursday, May 27 ■ Credit presentation to S&P All Monday, May 31 Memorial Day Holiday Thursday, June 3 - Board/Financing Authority Meeting to approve 2021 CCCSD, MA, BC COPS Monday, June 7 ■ Receive credit rating MA Weds., June 9 ■ Post POS and NOS BC/P Weds., June 16 ■ Bond sale All Monday, June 21 - Print final Official Statement BC/P ■ Circulate draft closing documents BC Monday, June 28 ■ Preclosing All Tuesday, June 29 ■ Closing All Financing Schedule 12 May 6, 2021 Regular Board Meeting Agenda Packet- Page 100 of 239 Page 9 of 23 Central Contra Costa Sanitary District Wastewater Revenue Certificates of Participation, Series 2021 Financing Schedule as of April 1, 2021 Board meetings are on the first and third Thursday of the month S M T W ILF S S M T W T F S S M T W T F S S M T W T F S 1 2 3 1 1 2 3-1-475— 1 2 3 4 5 6 7 8 9 10 2 3 4 1516 7 8 6 7 8 9 10 11 12 4 5 16 7 8 9 10 11 12 13 14 15 16 17 9 10 11 t2627 14 15 13 14 15 16 17 18 19 11 12 13 14 15 16 17 18 19 20 21 22 23 24 16 17 18 21 22 20 21 22 23 24 25 26 18 19 20 21 22 23 24 25 26 27 28 29 30 23 24 25 28 29 27 28 29 30 25 26 27128 29 30 31 30 Board Meeting Finance Committee i Holiday GroupParty Working Participant Abbreviation Issuer Central Contra Costa Sanitary District CCCSD Municipal Advisor PFM Financial Advisors MA Bond & Disclosure Counsel Jones Hall BC Trustee U.S. Bank T Printer TBD P Financing Schedule 3 May 6, 2021 Regular Board Meeting Agenda Packet- Page 101 of 239 Page 10 of 23 ATTACHMENT 2 RESOLUTION NO. 2021-023 RESOLUTION APPOINTING A FINANCING TEAM TO ASSIST WITH PROPOSED FINANCING OF CAPITAL IMPROVEMENTS AND TAKING OTHER ACTIONS RELATED TO THE FINANCING WHEREAS, the Central Contra Costa Sanitary District (District) owns and operates facilities and property for the collection, treatment, disposal and reuse of wastewater within the service area of the District (Wastewater System), and in order to provide funds to finance improvements to the Wastewater System (Project), the District anticipates working with the Central Contra Costa Sanitary District Facilities Financing Authority (Financing Authority) and a corporate trustee to execute and deliver certificates of participation (Certificates); and WHEREAS, the Board of Directors of the District wishes at this time to appoint a financing team to assist the District with the financial and legal aspects of the proposed financing; and WHEREAS, the legal documents pursuant to which the Certificates will be executed, delivered and sold, and the preliminary official statement pursuant to which the Certificates will be marketed to potential purchasers thereof, shall be brought back to the Board of Directors for approval at a later meeting. WHEREAS, the proceeds from the Certificates may be used in part to reimburse for sewer construction expenditures related to Fiscal Year (FY) 2020-21 , as well as sewer construction expenditures in FY 2021-22 and potentially FY 2022-23, and that as a result of allocating a portion of the proceeds to FY 2020-21, the allocation of Sewer Service Charge to Operations & Maintenance and Sewer Construction sub-funds specified the adopted budget for FY 2020-21 should be revised. NOW, THEREFORE, BE IT RESOLVED by the Board of Directors of the Central Contra Costa Sanitary District as follows: Section 1. Engagement of Professional Services. The Board of Directors hereby approves the engagement of PFM Financial Advisors LLC, to act as financial advisor to the District in connection with the execution, delivery and sale of the Certificates. The Board of Directors hereby further approves the engagement of the law firm of Jones Hall, A Professional Law Corporation, to act as special counsel and disclosure counsel to the District in connection with the execution, delivery and sale of the Certificates. The Director of Finance and Administration is hereby authorized and directed to execute an agreement with each of said firms on behalf of the District, as and to the extent deemed necessary or advisable. The Certificates are anticipated to be sold via to an underwriter to be selected via competitive sale. May 6, 2021 Regular Board Meeting Agenda Packet- Page 102 of 239 Page 11 of 23 Central Contra Costa Sanitary District Resolution No. 2021-023 Page 2 of 3 Section 2. Intention to Reimburse. The Board of Directors hereby declares that it reasonably expects to cause the execution and delivery of the Certificates and to use a portion of the proceeds thereof to reimburse certain expenditures made by the District with respect to the Project before the date of delivery of the Certificates, and not more than 60 days before the date of adoption of this Resolution. The Board anticipates that the Certificates will be delivered in an aggregate principal amount which is sufficient to raise funds for the Project in the approximate amount of$60 million dollars. Section 3. Official Actions. The Board President, General Manager, Director of Finance and Administration, Finance Manager, and all other officers of the Board of Directors and the District are each authorized and directed in the name and on behalf of the District to execute and deliver such additional documents that they or any of them might deem necessary or appropriate in order to effectuate the purpose and intent of this Resolution. Whenever in this Resolution any officer of the District is authorized to execute and deliver any document or take any action, such execution, delivery or action may be taken on behalf of such officer by any person designated by such officer to act on his or her behalf in the case such officer is absent or unavailable. Section 4. Sewer Service Charge Allocation. The Board of Directors hereby directs that the April and June 2021 Sewer Service Charge collections shall be allocated entirely to the Operations & Maintenance sub-fund rather than allocated to the Operations & Maintenance and Sewer Construction sub-funds according to the ratios proscribed in the FY 2020-21 adopted budget. Section 5. Effective Date. This Resolution shall take effect from and after the date of its passage and adoption. PASSED AND ADOPTED this 6th day of May, 2021 by the Board of Directors of Central San by the following vote: AYES: Members: NOES: Members: ABSENT: Members: Tad J. Pilecki President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California May 6, 2021 Regular Board Meeting Agenda Packet- Page 103 of 239 Page 12 of 23 Central Contra Costa Sanitary District Resolution No. 2021-023 Page 3 of 3 COUNTERSIGNED: Katie Young Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm, Esq. Counsel for the District May 6, 2021 Regular Board Meeting Agenda Packet- Page 104 of 239 Page 13 of 23 Attachment 3 0 Pfm Central Contra Costa Sanitary District Pension Funding Analysis PFM Financial Advisors LLC Sarah Hollenbeck and Nicholas Jones April 2021 _49i 1 0 Tax-Exempt Borrowing Rates Near All-Time Lows • AAA rated tax-exempt borrowing rates have been lower than their current levels less than 3%of the time since 1993 • 10-year AAA MMD index stands at 0.97%, 30-year at 1.60%as of April 141h —%of Time AAA MMD was Below Current —AAA MMD Yield Curve as of 4/14/21 3.0% 1.8% v 1.6% 2.5% U' 1.4% n 3 0 2.0% 1.2% ii m 3 1.0% 0 1.5% o 0.8% < m E 1.0% 0.6% co 'o 0.4 0.5% 0.2% 0.0% - ————— 0.0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 4 25 26 27 28 29 30 Maturity 2 2 1 May 6, 2021 Regular Board Meeting Agenda Packet- Page 105 of 239 Page 14 of 23 0 CCCERA Historical Returns • CCCERA has achieved an average return of 7.7%since 2001,slightly above their discount rate of 7.0% • Annual returns have ranged widely,from-26.5%to 23.5% Year Annual Return 2001 -2.4 2002 -9.5 2003 23.5 2004 13.4 2005 10.8 2006 15.3 2007 7.3 2008 -26.5 2009 21.9 2010 14.0 2011 2.7 2012 14.1 2013 16.5 2014 8.4 2015 2.6 2016 7.4 2017 14.2 2018 -2.7 2019 14.6 2020 9.2 ©PFM Average 7.7 3 3 0 Probability of Success Model • PFM has evaluated the probability of success of the proposed financing strategy • "Success"is defined as achieving at least$1 of financial benefit over the life of the bonds as compared to the status quo • Model compares two alternatives: 1. Make payments into CCCERA over time as scheduled through FY 2028-29 2. Pay$58M CIP funds into CCCERA now and issue$58M bonds to fund CIP;bonds repaid through FY 2028-29 • Model simulates 10,000 possible investment performance scenarios through FY 2028- 29,with each annual investment return selected randomly from CCCERA's actual annual investment returns over past 20 years ©PFM 4 4 2 May 6, 2021 Regular Board Meeting Agenda Packet- Page 106 of 239 Page 15 of 23 0 Probability of Success Model,continued • For each iteration,at end of FY 2028-29 model quantifies two metrics: 1. The asset balance in CCCERA(higher asset balance=better off) 2. The amount of cash CCCSD has paid,to CCCERA or in bond debt service,through FY 2028-29(more cash paid=worse off) • If the total financial benefit(asset balance in CCCERA minus cash paid)is higher in the bond alternative,that iteration is considered a"success"for the bond alternative •The probability of success metric measures the percentage of time in 10,000 iterations that the bond alternative produces positive financial benefit as compared to the status quo ©PFM 5 5 0 Probability of Success, continued • Using the methodology described,we estimate an 81%probability of the proposed financing strategy generating a positive financial benefit • 79%probability of generating a benefit of at least$1,000,000 • Financial benefit of$9.2 million anticipated over the 7-yr bond term if CCCERA achieves its 7%return target each year • Actual savings will depend on the actual bond interest rate and future earnings of CCCERA assets • If CCCERA misses its 7%earnings target in any year,a new UAL will be generated,whether or not bonds are issued 35% 32.0% 30% 26.6% u 25% e 20% k&0 6 > 15% t n 10% $X 9.8% JL4.W% 0.6% 0.6% 0 0% -$30to-$20 -$20to-$10 -$10to$0 $0 to$10 $10 to$20 $20to$30 $30 to$40 $40 to$50 $50 to$W Range&eenefas(6 Millions) 6 6 3 May 6, 2021 Regular Board Meeting Agenda Packet- Page 107 of 239 Page 16 of 23 ATTACHMENT 4 PENSION OVERVIEW AND FUNDING FINANCIAL STRATEGIES: INITIAL RESOLUTIONS RELATED TO FINANCING May 6 2021 Board Presentation Phil Leiber, Director of Finance and Administration CENTRALSAN 1 PENSION COSTS HAVE BEEN A SIGNIFICANT FACTOR AFFECTING OUR O&M BUDGET IN PAST DECADE • Labor related costs are about 75% of the O&M Budget • Pension UAAL costs most volatile component Budgeted salaries and BenOitsWL E in millions 100 80 U 60 HE T zm 0 2am2onz 2nzi6 2oT72nzo2uo 2 1 May 6, 2021 Regular Board Meeting Agenda Packet- Page 108 of 239 Page 17 of 23 PENSION AND OPEB FUNDING STATUS ($MILLIONS) o PensionNOPEB $lso tw9: $90 Loos Sao $12o mfc $70 (Nt 'm` 56v tox $100 wss 5so box $80 m $6o 3 530 Boz $40 $zo mx zox $z0 10% SID $o ox $o os V/ L —Funded% _u_L —Fended% Pension Assets in OPEB Prefunding CCCERA Trust(1) Trust11) Trust(2) Reserves-Start of Year(6/30/20)(1) $69.8 $10.3 $338.3 Anticipated Increases $99 $1.6 $22,.1 Projected Ending Balances ZZ9. 1L. JafiQA (1) OPEB and Pension Prefunding Trust balances as of 6/30/20 and 12/31/20. (2) Initial actuarial value of assets per December 31,2018 CCCERA valuation and ending balanceis per 2019 CCCERA Valuation. 3 3 rUnfunded UAAL UPDATE ..ctuarially Accrued Liability("WAL") Progress: AAL has been reduced by 50%since 2012 (Pension funded status up from .8%) • Each year, layers are added to the UAAL,which are then amortized over 18 years. • We are on track to pay off UAAL this decade. • Board's commitment to directing additional funding has helped make this happen faster. Anticipated UAAL with Scheduled Amortization(Blue) and with Additional UAAL Payments to Pension Prefu nding Trust to Date and at$1.25 million through 2025(Red) 540 Net Asset 520 ® —� Isfinl (580) 2019 2818 2021 2822 2823 2824 2025 282fi 2821 2028 •VML(29[9 Yaoaionl 1510151 t552I (553) (544) (Smn (53]1 (523) (514) (54) 52 p Ne[l1ApL[1819 Vauananl (62) (51) (411 1381 (22) 1131 0) 1 19 26 wiF,Person p0uraing Tn6 MST • Years above are CCCERA"valuation date". Lag of 2 years for Central San for FY Impact.` CENTRALSAN 4 2 May 6, 2021 Regular Board Meeting Agenda Packet- Page 109 of 239 Page 18 of 23 UAAL REDUCTION STRATEGIES ZILI 7- Central San has taken many proactive stepsmanage pension costs including adopting a pension funding strategy with goal of a fully funded pension • Borrowing for CIP,freeing up funds for UAAL paydown and reducing interest cost is a strategy for ----- — consideration. Measure Status -- ---- -- • Pension Reform change in beneBl levels Q Pensionable Compensation Lawsura P6PRA • Establish new tiers for new employees 2013 PEPfiP. Establish Pension- Pension Payment Stabilization Reserve Fund canBooard elects Also nave Rate S1aelllmtion A-um Designated Reserves Section 115 Trust Established in 2017 Prepayment of annual contribution to Retirement tom: Have teen doing this for years Prepayment of UAL System for discount(year-to-year strategy) • Partial prepayment of total Retirement UAAL Q Addrl payments annaaiiy to CCCFRA and (longer-term strategy) to Pension Trust Reallocating capital reserves and issuing tax-exempt Proposed rorConsideration Now infrastructure financing in-lieu of Taxable POB Issuance of Oebt Did n 2010 Refunding saved interestcpsis et • Targeted relurtdings for budget relief Q defer pnncipai • Pension Obligation Bonds(POB) Explored.FY2012-13 ` r 5 CENTRAL SAN 5 UAAL REDUCTION STRATEGY: INTEREST EXPENSE REDUCTION • Strategy: • Debt financing for CIP and free up SSC revenue that have would gone towards Capital Spending, then use it to pay down pension UAAL. • Goal: • Replace 7% interest cost for Pension "debt"with --1% interest on debt for CIP • Term of debt would be same as schedule for payoff of UAAL • Net Savings of-$9.4 million: Interest Costs on Pension Debt vs.CIP Debt 4_43100,1000 3.s00,000 3.000.000 2,500,000 2.[700.000 1 500,000 1.000.000 500.000 ■ ' - . - '_ cv zz-u cv zz-z3 cv z�za r-v z4a c-r zszs cv x�n c-r z>-zs cv�a-a .rrxxer c:cos ws is .rrxces cos To 6 CENTRALSAN 6 3 May 6, 2021 Regular Board Meeting Agenda Packet- Page 110 of 239 Page 19 of 23 UAAL STRATEGY: 7'13 MORE BORROWING FOR CIP Steps: • 1. Allocate more SSC($58 million)to Running Expense (O&M)fund in FY 2021-22 that is sufficient, along with Pension Prefunding Trust($12 million), to pay down UAAL of$70 million. • 2. Collect SSC next year and transmit it and Pension Funding Trust balance to CCCERA. • 3. Borrow(Revenue Bond offering)$58 million to fund CIP that would have been funded with SSC. • 4. Maturity schedule for$58 million debt matches the original UAAL amortization schedule so that overall (Debt&Liability) burden is no different than status quo. Money that would have gone to UAAL payment in those upcoming years goes to pay down loan. • 5. "Debt'remains well within limits specified in the 2017 Debt Management Policy(BP 029),whereby not more than 60% of 10 year CIP is debt financed • ($173MM SRF loan+$58MM for CIP for UAAL payoff= $231 MM/$939MM CIP =24.6%) • 6. Result: Lower financing costs by--$9.4 million over the next decade. (Actual savings dependent on market returns at CCCERA) I � CENTRAL SAN 7 UAAL STRATEGY: INTEREST EXPENSE REDUCTION 7- Risks:lerl • Actual savings will vary depending on pension asset earnings • PFM Analysis Completed to assess this • Interest rates for CIP Borrowing may change until issuance [, • Rates still favorable; • Moving expeditiously, while rates are low,and to remit funds to CCCERA prior to 7/1 to get credit for UAAL payments in FY 2021-22. 8 CENTRAL SAN 8 4 May 6, 2021 Regular Board Meeting Agenda Packet- Page 111 of 239 Page 20 of 23 0 0 CCCERA Historical Returns pf m • CCCERA has achieved an average return of 7.7%since 2001,slightly above their discount rate of 7.0% • Annual returns have ranged widely,from-26.5%to 23.5% Year Annual Return 2001 -24 2002 -9.5 2003 23 5 2004 13.4 2005 10.0 2006 153 2007 73 2008 -26.5 2009 21 9 2010 14.0 2011 2.7 2012 14.1 2013 16.5 2014 8.4 2015 2.6 2016 7.4 2017 14.2 2018 -27 2019 14.6 2020 92 ©PFM Average 7.7 3 CENTRALSAN 9 0 0 Probability of Success Model pf m • PFM has evaluated the probability of success of the proposed financing strategy • "Success"is defined as achieving at least$1 of financial benefit over the life of the bonds as compared to the status quo • Model compares two alternatives: 1. Make payments into CCCERA overtime as scheduled through FY 2028-29 2. Pay$58M CIP funds into CCCERA now and issue$58M bonds to fund CIP; bonds repaid through FY 2028-29 • Model simulates 10,000 possible investment performance scenarios through FY 2028- 29,with each annual investment return selected randomly from CCCERA's actual annual investment returns over past 20 years 0 PFM 4 CENTRALSAN 10 5 May 6, 2021 Regular Board Meeting Agenda Packet- Page 112 of 239 Page 21 of 23 0 0 Probability of Success Model, continued pf M • For each iteration,at end of FY 2028-29 model quantifies two metrics: 1. The asset balance in CCCERA(higher asset balance=better off) 2. The amount of cash CCCSD has paid,to CCCERA or in bond debt service,through FY 2028-29(more cash paid=worse oft) • If the total financial benefit(asset balance in CCCERA minus cash paid)is higher in the bond alternative,that iteration is considered a"success"for the bond alternative • The probability of success metric measures the percentage of time in 10,000 iterations that the bond alternative produces positive financial benefit as compared to the status quo ®PFM 5 141 11 0 0 Probability of Success, continued pf m • Using the methcdology described,we estimate an 81%probability of the proposed financing strategy generating a positive financial benefit - 79%probability of generating a benefit of at least$1,000,000 • Financial benefit of$9.2 million anticipated over the 7-yr bond term if CCCERA achieves its 7%return target each year • Actual savings will depend on the actual bond interest rate and future earnings of CCCERA assets • It CCCERA misses its 71k earnings target in any year,a new UAL will be generated,whether or not bonds are issued asx v•� Sox zb.bx a 25% c zo% Z 15% 10% 5% 4.9% 4.9% as% .6% 00% o% 3snm-San -Smm3vt -Sw.so Soto 570 570m5m Sm.ss 53om 54n S40mS5o Ssom Sw RaW of BenMits($Millions ®PFM 6 12 6 May 6, 2021 Regular Board Meeting Agenda Packet- Page 113 of 239 Page 22 of 23 - - KEY TRANSACTION STEPS • Create proposed financing calendar 0 • Assemble Financing Team 0 • Select key structuring details p • Negotiated vs.rompetitive sale • Revenue bonds or Certificates of Participation • Assemble documents including Preliminary Official statement ❑ • Underway; major effort in first 3 weeks of May • Finalize issuance amount and maturity schedule ❑ • Around $58 million; maturities match UAAL payments • Financing Authority/Board adoption of documents-June 3 ❑ • Bond Competitive Sale-June 16 ❑ • Closing Date-June 29 ❑ 13 CENTRAL SAN 13 .. .' . - RESOLUTIONS • District: Appoint Financing Team • District: GM, Director of Finance and Board officers authorized to deliver documents to effectuate purpose of resolution • District : Adopt reimbursement resolution • Financing Authority: Rescind dissolution decision of January 2021 ,4 CENTRAL SAN 14 7 May 6, 2021 Regular Board Meeting Agenda Packet- Page 114 of 239 Page 23 of 23 QUESTIONS? r 15 CENTRAL SAN 15 8 May 6, 2021 Regular Board Meeting Agenda Packet- Page 115 of 239