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HomeMy WebLinkAbout11-14-16 UtilitiesOFFICE OF THE CITY CLERK KAREEMAH FOWLER, CITY CLERK UTILITIES Committee Members Present: Other Council Present: Others Present: Agenda: NOVEMBER 14, 2016 4:00 P.M. Dr. David Varner, Oliver Davis, Randy Kelly, Regina Williams- Preston Jo Broden, John Voorde, Gavin Ferlic, Tim Scott, Karen White Kareemah Fowler, Joseph Molnar, Michael Passavoir, Kathy Cekanski - Farrand Bill No. 67 -16 — Waterworks Bond Refunding Committee Chair Dr. David Varner called the meeting to order with one (1) item on the agenda. Bill No. 67 -16 — Waterworks Bond Refunding John Murphy, City Controller with offices on the 12'h Floor of the County -City Building, served as presenter of the bill. He stated, We have done a number of bond refundings over the years. Since 2012, the City has refunded bonds, and present value savings is $8,900,000. This is a smaller one, but it is still very important and will hopefully generate savings of over $200,000. Philip Faccenda, Barnes & Thornburg, 100 North Michigan Street, South Bend, IN, continued with the presentation. He stated, Those who have been on the Council in the recent past know what John stated, which is that there's been a number of refinancing and refundings, both from the Water side and Sewer side. This bond will be a bond not to exceed $3,720,000, so it's a smaller bond. The majority of that is to take out the 2006 bonds. So, it's a refunding of both the 2000 bonds and the 2006 bonds. Currently, that will leave the City on the large side with four (4) outstanding bonds, and this one will be five (5). So, it would be the two (2) 2009 bonds and two (2) 2012 bonds that are outstanding, and then this one refinances two (2), so you take out two (2) and replace them with one (1). With regard to refinancing, the nice thing about it is that we won't be extending maturity. These bonds will mature at the same time that the `07's would have, now that the `06's would have been maturing. Interest rate -wise, as you probably saw in the ordinance, we are not allowing an interest rate in excess of four percent (4 %). We hope to do quite a bit better than that for the purposes of this kind of refund. Below three percent (3 %) is the target. The Board of Public Works met on November 8`h and approved this refinancing, and 455 County-City Building • 227 W. Jefferson Boulevard • South Bend, Indiana 46601 Phone 574- 235 -9221 • Fax 574 -235 -9173 • TDD 574- 235 -5567 • www.SouthBendIN.gov JENNIFER M. COFFMAN ALKEYNA M. ALDRIDGE JOSEPH MOLNAR CHIEF DEPUTY/ CHIEF OF STAFF DEPUTY/ DIRECTOR OF POLICY ORDINANCE VIOLATION CLERK recommended it to the Council favorably. We anticipate closing on the bond issue before the end of the year. Committeemember Oliver Davis asked what the projected amount of savings was. Mr. Faccenda responded that gross savings would be an anticipated $250,000. Committeemember Davis asked what that would do for the City, to which Mr. Murphy responded that that would be money the City no longer had to pay. Committeemember Davis asked for more details. John Julien, Umbaugh & Associates, 112 Ironworks Ave, Mishawaka, IN, continued the presentation. He stated, The purpose of this is to do a recap of the financial aspects of the refunding. The first schedule gives details on the two (2) bonds that Phil mentioned that are going to be refunded. There's about $3,800,000 of debt that pays off with interest rates that range from two- point -nine percent (2.9 %) to around four- and -a -half percent (4.5 %). Those bonds pay off in probably the next ten (10) years, with final payment in January of 2027. With those interest rates, we see an opportunity for the water utility to reduce total interest cost and generate some savings. The second schedule is a recap of the budget for the project to get the refunding completed. We anticipate selling bonds here, and the week after Thanksgiving, with the principal amount of around $355,000. That may move a little bit, based upon how the market reacts with the bidding —I don't want to get too far in the weeds —but it won't go up. It may come down, if the winning bidder is bidding a premium, which means we'll pay more than a dollar for every dollar of bond. With that par amount of $3,300,000, with today's market, we've updated the analysis. We estimate that the yields on those bonds are going to be from around one- point - three- five percent (1.35 %) in the early years up to just under three percent (3 %) in the latter years. An average coupon would be about two - and -a -half percent (2.5 %). With that sort of result, we've had payments on these bonds of just under $3,800,000. As Phil mentioned, we're going to keep the payment schedule the same, we're not extending the payments, we're not shortening them up. So, they will be paid off in a little over ten (10) years. At the very first payment that we're showing there, there's a January one in 2027, where we're saving around $466,000 —don't get too excited about that. All that really is is a payment that we're going to sell and close by mid - December. Bond people don't like to get paid -off within a couple of weeks, so we're basically taking that payment and eliminating it, but you've already set aside that payment, so you're going to see down below that I'm going to net that out. When we get into the real heart of things, we're going to be saving about $40,000 to $45,000 a year as a result of this. If you add all the savings up, we're almost $900,000, but, again, some of that is false savings because we're eliminating that first payment and we're applying cash. Really, we're at a savings of about $250,000 to $260,000 of net. The present value of that in today's dollars are a little over $200,000. On a percentage basis —and we're looking at about six (6 %) or seven percent (7 %) of the par amount of the bonds we're refunding— general threshold is, if you can get two percent (2 %) or above, it's worth pursuing. We're definitely in the right neighborhood, in terms of taking advantage of this opportunity. We're in the midst of evaluating the financial strength of the water utility and we need to improve the financial position, primarily, to help with capital improvements. That $45,000 that's freed up from this refunding are dollars that will be available to help fund that $4,000,000 -plus annual capital improvement thing. So, the ordinance that is under consideration this evening is the legal step to put us in position to move forward with the refunding. The plan today is to sell probably around the 30th, right after Thanksgiving. If you've N been following the markets after our election last week —it is a roller coaster. We'll keep a watch of things here. In the last three (3) days, the interest rates have moved, so we have probably lost about $2,000 a year in savings. If it moves significantly above that, you're not committed to sell. So, we'll watch that and advise the Administration in terms of making sure we don't drop below the point that it makes it worthwhile to complete the refund. As things stand now, we're expecting the results that we're showing here. Committeemember Davis asked if Mr. Julien thought that that would stabilize by the Spring of 2017. Mr. Julien responded, that he thought so, before the election. The expectation was that any changes that were going to happen in 2017 were going to be gradual and probably spread throughout the year. He explained that they had seen more action in the last three (3) trading days than they had in the last two (2) years of market activity. He explained that every election has a short term impact on the market, so this is not entirely unexpected, nor does it erode savings too much. History will tell if the impact will be more long -term or not. Committeemember Davis asked, So, typically after an election we're looking at four (4) to six (6) months, right? Mr. Julien responded that he expected things to stabilize more quickly than that. Council Attorney Kathleen Cekanski- Farrand suggested that since the petitioner went from a mandatory use to a discretionary use for the funds proposed in the substitute bill, the matter should be clarified for the Council. Mr. Faccenda stated, The Water Works utility had a common reserve fund, and has had a common reserve fund for several years. Meaning that, with regard to various bond issues, to have it in that sort of reserve you can make it common to all the bonds. It actually saves a little bit of money, in terms of the amount of dollars you have to reserve. Because the bonds have been placed with different purchasers, including the State, the State revolving fund required its own independent reserve. So, we went that route years ago. Subsequent to that, there were some private placements of the bonds, or other sales that also took advantage of an individual sub - account. Instead of eliminating our common reserve, we simply went the route of creating sub - accounts that were themselves securing just with one series of bonds. So, actually, with this refunding of the 2000 and the 2006, there would be no common reserve —any bonds that would be secured by the common reserve. What we wanted to do was make sure that, if we bought into it —and it looks like we very well may want to, for this bond and future bonds —go back to taking advantage of the common reserve. So, that language was modified a little bit to just allow for us to use the common reserve versus a sub - account. And that's the only change. Committee Chair Dr. David Varner stated, I see that we applied two (2) separate debt service reserve funds —one $550,000, one $120,000 —when we bond the three- point- eight- seven -two (3.872), we create another debt reserve service fund. Apparently specific to this bond? Mr. Faccenda responded, Right. It will be for this bond, but it will allow us to also do it with future bonds in the common reserve. So, the clearing out of those dollars that are tied to the prior bond issue allows you to reduce the principal amount of bonds that you actually have to issue, because you're reducing cash on -hand. Also, tax -wise, that's what the federal government wants you to do. You pull out of the reserve the amounts that are tied to those bonds that you're refunding, and you drop them into the refinancing itself. Committee Chair Dr. Varner asked if, at some point in time, the City would be better off applying the debt service reserve and reducing the bond, and paying the bond off sooner as opposed to going through the convoluted process being presented. Mr. Julien responded, In effect, that's what we are doing. As Phil mentioned, for federal tax purposes, we have to account for reserves. If you look at the savings schedule and the project budget, there's money going into the refunding, paying for refunding from your dollars that are on -hand, and then we're pulling out a lower amount —that would be that reserve for these bonds, as safety net for these. We have to show something to the market —that there's a reserve there, just to avoid them assigning unnecessary risk. That step is necessary. So, we're applying more than we're putting back, so if you look at the savings schedule, the net impact is at $600,000, in gross savings. We have to account for that. Committeemember Randy Kelly moved to send Substitute Bill No. 67 -16 to the Common Council with a favorable recommendation and Regina Williams- Preston seconded, which carried by a voice vote of four (4) ayes. With no further items on the agenda, Committee Chair Dr. David Varner adjourned the meeting at 4:17 p.m. Respe Submitted, Dr. David Varner, Committee Chair 4