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 CITY COUNCIL AGENDA ITEM NO. 18


Meeting Date: May 13, 2008

Subject/Title: Adopt a Resolution 1) appointing RBC Capital Markets, Inc. as the underwriter, 2) Orrick, Herrington & Sutcliffe LLP as the bond and disclosure counsel; 3) declaring official intent to reimburse certain expenditures from proceeds of indebtedness in an amount not-to-exceed $58,000,000 in connection with the financing of the new water treatment plant, to be constructed by the Contra Costa Water District (CCWD), and refinancing prior obligations issued for the water and wastewater enterprise; and 4) authorizing staff to undertake the proceedings of debt issuance for future Council consideration.

Prepared by: Brian Kelleher, Accountant

Submitted by: Pamela Ehler, Director of Finance and Information Systems



RECOMMENDATION
Adopt a Resolution 1) appointing RBC Capital Markets, Inc. as the underwriter, 2) Orrick, Herrington & Sutcliffe LLP as the bond and disclosure counsel; 3) declaring official intent to reimburse certain expenditures from proceeds of indebtedness in an amount not-to-exceed $58,000,000 in connection with the financing of the new water treatment plant, to be constructed by the Contra Costa Water District (CCWD), and refinancing prior obligations issued for the water and wastewater enterprise; and 4) authorizing staff to undertake the proceedings of debt issuance for future Council consideration.

PREVIOUS ACTION
On November 26, 1996, City Council approved Resolution No. 96-206 authorizing and approving the issuance of Water and Sewer Revenue Bonds 1996 Series A in an amount of $12,195,000 of which $9,755,000 was for water and $2,440,000 was for sewer.

On September 11, 2007, City Council approved Resolution No. 2007-209 approving and authorizing the City Manager to execute a second amendatory agreement with the Contra Costa Water District (CCWD) pertaining to long term treated water services as a part of the Surface Water Treatment Facility Project.

BACKGROUND
The second amendatory agreement approved on September 11, 2007, further clarified the City’s financial responsibility related to the financing of the Surface Water Treatment Facility and the issuance of Water Revenue Bonds by the City vs. the issuance by CCWD. Per the agreement, the City has the option to issue bonds at anytime during the construction phase or within twelve months of receiving treated water. The estimated cost of construction that will need to be financed is $46,000,000 and we anticipate that the City will begin receiving treated water during the summer of 2008. The City’s bonds will refinance commercial paper of CCWD, which has provided the interim financing for construction.

The City has several reasons for securing the financing on the water treatment plant rather than having CCWD issue the debt. First, the City will be able to refinance our existing 1996 Water bonds at much lower interest rates, allowing the City to realize approximately $500,000 in net present value (NPV) savings based on existing market conditions at the end of April 2008. This equates to 6.5% of the outstanding bonds to be refinanced, and compares favorably with the typical benchmark for municipal refundings of only 3% NPV. The existing water bonds will have $7,710,000 outstanding after making the July 1, 2008 bond payment. The refinance would lower the rate from 5.65% to approximately 4.5%. Moreover, it is much more cost effective to combine the refinance with the new money financing. A stand alone subordinate refunding (as described below) would reduce the savings to approximately $200,000 or lower, making it at best only a marginal refunding. Even with consent, CCWD cannot refinance the City’s outstanding bonds.

Second, if CCWD were to issue the bonds on behalf of the City the new bonds would have to be subordinate to CCWD’s outstanding and future debt. Even more problematic was that in order to meet the proposed CCWD requirements, all of Brentwood’s outstanding and future water revenue bonds would also have to be subordinate to CCWD debt. Consequently, the CCWD bonds would not only be more expensive but would also force the City to refinance the 1996 Bonds as subordinate to CCWD. This would result in a lower rating for our revenue bonds and higher interest rates which would cost the City most, if not all, of the potential refund savings. In addition, it may also be difficult to find a bond insurer for subordinate bonds. For example, a 30 basis point increase in the bond insurance premium would cost the City approximately $250,000. If the City could not find an insurer, the potential cost to the City could increase by over $2 million in net present value.

In addition to the refinance of the water bonds, the City will evaluate the remaining outstanding sewer bonds and potentially pay off the remaining outstanding bonds. The principal due on the sewer portion will be approximately $1,970,000 after making the July 1, 2008 bond payment. The savings in interest over the next 18 years would be approximately $1,175,000.

While the Municipal Bond Market has been quite volatile lately due to the impact of the sub-prime mortgages on bond insurers, taking this action at this time allows the City to be in a position to issue bonds when the market is in a favorable condition.

The firms of RBC Capital Markets and Orrick, Herrington & Sutcliffe are both highly respected, industry leaders in municipal bond financing in the State of California as well as across the Nation. Both firms have previously participated in successful financings for the City and are very familiar with the City’s operations.

FISCAL IMPACT
There is no fiscal impact associated with the adoption of this resolution. The actual savings realized from the City of Brentwood obtaining financing directly from the capital markets rather than through CCWD will depend on market conditions in the tax-exempt bond market at the time of bond issuance, whether the City can refinance the 1996 bonds on a stand alone basis, the difference in the bond insurance premium between subordinate and parity debt of the City, and if the City would have to issue uninsured bonds with a stand alone rating. These factors will be quantified at the time the financing package is brought before Council for consideration and approval. Fees paid to the underwriter, bond and disclosure counsel, are contingent upon the successful completion of the issuance of bonds.

Attachment:
Resolution



RESOLUTION NO.

A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF BRENTWOOD APPOINTING 1) APPOINTING RBC CAPITAL MARKETS, INC. AS THE UNDERWRITER, 2) ORRICK, HERRINGTON & SUTCLIFFE LLP AS THE BOND AND DISCLOSURE COUNSEL; 3) DECLARING OFFICIAL INTENT TO REIMBURSE CERTAIN EXPENDITURES FROM PROCEEDS OF INDEBTEDNESS IN AN AMOUNT NOT-TO-EXCEED $58,000,000 IN CONNECTION WITH THE FINANCING OF THE NEW WATER TREATMENT PLANT, TO BE CONSTRUCTED BY THE CONTRA COSTA WATER DISTRICT (CCWD), AND REFINANCING PRIOR OBLIGATIONS ISSUED FOR THE WATER AND WASTEWATER ENTERPRISE; AND 4) AUTHORIZING STAFF TO UNDERTAKE THE PROCEEDINGS OF DEBT ISSUANCE FOR FUTURE COUNCIL CONSIDERATION.

WHEREAS, the City Council (the “City Council”) of the City of Brentwood (the “City”) has determined to commence proceedings for the financing of a new water treatment plant (the “Project”) to be constructed by Contra Costa Water District (“CCWD”) pursuant to an agreement to be entered into between the City and CCWD; and

WHEREAS, the City desires to appoint the members of the financing team to enable the City to pursue said proceedings and financing; and

WHEREAS, the City expects to pay certain expenditures (the "Reimbursement Expenditures") in connection with the Project prior to the issuance of indebtedness for the purpose of financing costs associated with the Project on a long-term basis; and

WHEREAS, the City reasonably expects that debt obligations in an amount not expected to exceed $58,000,000 will be issued and that certain of the proceeds of such debt obligations will be used to reimburse the Reimbursement Expenditures; and

WHEREAS, the City desires to refinance certain tax-exempt obligations issued in 1996 for the Water Enterprise as a part of this transaction;

NOW, THEREFORE BE IT RESOLVED by the City Council of the City of Brentwood that:

1. The foregoing recitals are true and correct, and this City Council so finds and determines.

2. The City hereby determines to undertake proceedings for the financing of the Project and the refinancing of the prior obligations and hereby directs the City Manager, Director of Finance and Information Systems, City Engineer, City Attorney, and all other necessary officers and employees of the City to prepare or cause to be prepared proceedings to accomplish same and to submit same to the City Council for consideration at the earliest practical opportunity.

3. The firm of RBC Capital Markets is hereby appointed Underwriter for said financing.

4. The firm of Orrick, Herrington & Suttcliffe LLP is hereby appointed Bond and Disclosure Counsel for said financing.

5. The declaration to pay the Reimbursement Expenditures is made solely for purposes of establishing compliance with the requirements of Section 1.150-2 of the United States Treasury Regulations. This declaration does not bind the City to make any expenditure, incur any indebtedness, or proceed with the Project.

6. The City hereby declares its official intent to use proceeds of indebtedness to reimburse itself for Reimbursement Expenditures.

7. This resolution shall take effect immediately upon its passage.

PASSED, APPROVED AND ADOPTED by the City Council of the City of Brentwood at a regular meeting on the 13th day of May 2008, by the following vote:


CLERK’S CERTIFICATE

I, Margaret Wimberly, City Clerk of the City of Brentwood, do hereby certify as follows:

The foregoing resolution is a full, true and correct copy of a resolution duly adopted at a regular meeting of the City Council of said City duly and regularly held at the regular meeting place thereof on the 13th day of May, 2008, of which meeting all of the members of said City Council had due notice and at which a majority thereof were present; and that at said meeting said resolution was adopted by the following vote:

AYES:
NOES:
ABSENT:
ABSTAINED:

An agenda of said meeting was posted at least 72 hours before said meeting at City Hall, 150 City Park Way, Brentwood, California 94513, a location freely accessible to members of the public, and a brief description of said resolution appeared on said agenda.

I have carefully compared the foregoing with the original minutes of said meeting on file and of record in my office, and the foregoing is a full, true and correct copy of the original resolution adopted at said meeting and entered in said minutes.

Said resolution has not been amended, modified or rescinded since the date of its adoption and the same is now in full force and effect.


Dated: _______________, 2008


________________________________________
Margaret Wimberly,
City Clerk, City of Brentwood





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