9 Presentation by Albert Peche of A.M. Peche & Associates on Cost Savings Related to an Opportunity of Refunding of United States Department of Agriculture (“USDA”), Rural Development 2003 Sewer Series A Bonds and 2003 Sewer Series B Bonds. Possible direction to staff.

Meeting  Date: August 02, 2016

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STAFF REPORT

AGENDA ITEM: Presentation by Albert Peche of A. M. Peche & Associates on Cost Savings Related to an Opportunity of Refunding of United States Department of Agriculture ("USDA"), Rural Development 2003 Sewer Series A Bonds and 2003 Sewer Series B Bonds.

MEETING DATE: August 2, 2016

PREPARED BY: Odi Ortiz and A. M. Peche & Associates

REVIEWED BY: Odi Ortiz, Interim City Manager/Finance Director

BACKGROUND:

In 2003 the City issued two USDA bond issues: 1) the $5,000,000 2003 Sewer Series A Bonds (the "Series A Bonds") and 2) the $4,545,000 2003 Sewer Series B Bonds (the "Series B Bonds," and together with the Series A Bonds, the "USDA Bonds").

The USDA Bonds were issued to finance improvements to the City’s sewer system. The USDA Bonds were issued with 40 year maturities with an interest rate of 4 1/2 percent, and pay principal annually and interest semi-annually. The USDA Bonds do not carry ratings.

The Series A Bonds have a final payment on March 1, 2043 and there remains $4,196,000 of principal. The Series B Bonds also have a final payment on March 1, 2043 and there remains $3,807,000 of principal.

City management has entertained the possibility to refinance this outstanding debt at least twice in past four years. Due to the financial condition of the City, refinancing eligibility criteria was not met after internal reviews.

City’s financial condition has improved and refinancing eligibility criteria appears to be met per most recent internal analysis. Due to lower current interest rates, the City can now refinance the USDA Bonds without extending their maturities. A Financing Team that has worked for issuers in the Central Valley that includes the Livingston Union School District, the Keyes Community Services District, the Delhi County Water District, the Hilmar County Water District, the cities of Atwater, Firebaugh, Parlier and Orange Cove, has been assisting in performing internal analysis for Livingston.

This Financing Team is comprised of A. M. Peche & Associates LLC, as Financial Advisor, Nossaman LLP, as Bond and Disclosure Counsel, Hilltop Securities Inc. (formerly Southwest Securities Inc.), as Underwriter, and Tuckfield & Associates LLC, as Rate Consultant.

REFINANCING OVERVIEW:

For the refinancing of the USDA Bonds, based on current rates, a non-rated sale of a 2016 Sewer Refunding Bonds, with an estimated par amount of $8,185,000 would provide a gross savings of

$1,866,737 for a net present value savings (in today’s dollars) of $1,229,637 or 15.36% of the amount currently owned on the USDA Bonds. However, if the 2016 Sewer Refunding Bonds, with an estimated par amount of $8,000,000, were to achieve an investment grade rating of BBB, the gross savings would be $2,160,111 for a net present value savings of $1,456,612 or 18.20% of the amount currently owned on the Sewer Bonds.

These savings are net of an estimated cost of issuance of between $180,000 (for a non-rated transaction) and $200,000 (for a rated transaction, reflecting the additional rating fee) and an underwriting discount of 1.25% (for a non-rated transaction) and 1.00% (for a rated transaction) of the par amount of bonds.

Government Finance Officers Association Standards recommend a net present value savings of at least between 3% and 5% for an economic refunding. Therefore, the 2016 Sewer Refunding Bonds would constitute a good economic refunding. The Financing Team is reviewing the sewer enterprise funds, as well as other City factors, to determine if the refunding issues would qualify for BBB ratings.

FISCAL SAVINGS OVERVIEW:

Total gross savings to Livingston sewer ratepayers could be between $1,866,737 and $2,160,111 based off of current interest rates. The rates are not set until the bonds have sold. Therefore, it is prudent to move as quickly as possible to determine if ratings can be achieved, approve legal documentation, and bring the issues to market. Savings will be "locked in" once bonds are sold to investors through an official statement.

The risks involved with this refunding financing may include the following: (i) interest rates could move up thereby eliminating any potential savings (although interest rates could also move down increasing potential savings). Therefore, it is prudent to move as quickly as possible to close the refinancing. Once a Financing Resolution is approved, the Financing Team would begin the various steps to complete the refinancing and would bring legal documentation to the Council for approval in September. It is estimated that the issues would close in late September or October.

POTENTIAL CONTRACT AGREEMENTS:

The Financing Team of Hilltop Securities Inc., Nossaman LLP and A. M. Peche & Associates LLC would work on a contingent basis to provide the documentation necessary to proceed with the refinancing of the USDA Bonds. Other participants that are necessary for bond financings, other than the one described in the following paragraph, will also provide ancillary services on a contingent basis. Therefore, they will only be compensated from the bond issues once they close and savings are achieved.

It will be necessary to hire Tuckfield & Associates to provide independent projections for the 2016 Sewer Refunding Bonds. Because this specialized work involves projections, it cannot be paid for on a contingent basis. However, it can be paid from the sale of bonds.

RECOMMENDATION:

Provide direction to staff

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