Agenda

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FINANCE COMMITTEE

Meeting Date:	12/16/2019
Subject: 2020 LEASE REVENUE BOND REFUNDING
Submitted For:	David Twa
Department:	County Administrator
Referral No.:	N/A
Referral Name:	2020 LEASE REVENUE BOND REFUNDING
Presenter:	Timothy M. Ewell	Contact:	Timothy M. Ewell

Information

Referral History:

Issuance of 2010 Lease Revenue Bonds

On October 12, 2010 the Board of Supervisors authorized the issuance and sale of $58,055,000 millin in lease revenue bonds to fund a portion of the construction and acquisition costs of the West County Health Center and refunding bonds issued in prior years for a cost savings. The bonds were issued using a combination of traditional tax-exempt and taxable financing, including Build America Bonds (BABs) and Recovery Zone Economic Development Bonds (RZEDBs) (together the "2010 Bonds") with a true interest cost ("TIC") of 4.15% and 3.84% for the Series A and Series B bonds, respectively.

The BAB and RZEDB portions of the 2010 Bonds were special financing vehicles authorized by the American Recovery and Reinvestment Act ("ARRA"), signed by President Obama in February 2009, which offered a direct subsidy for interest payments made on taxable bonds in the amounts of 35% and 45%, respectively. The direct subsidy payments are paid on a semi-annual basis upon claim by the County to the Internal Revenue Service (IRS). This was to incentivize state and local governments to invest in infrastructure as a means of stimulating the local economy and creating jobs while the country continued to battle the effects of the Great Recession. Taxable bonds typically demand a higher interest rate by investors compared to tax-exempt bonds because investors are required to pay taxes on the interest earnings that accrue from owning taxable bonds. This is the reason for the County's Series A TIC being 4.15% compared to the Series B TIC being 3.84% as outlined above; however, the higher interest rate is mitigated by the direct subsidies received from by IRS.

A summary of the 2010 Bonds, including principal, interest, anticipated direct subsidy receipts and total debt service by series is included in the table below for reference:

Sequestration

The Budget Control Act of 2011 (Public Law 112-25) (the "Act") included anticipated budget caps (usually referred to as "Sequestration") on discretionary spending through federal FY 2021. Each year the Congressional Budget Office (CBO) produces a report identifying the impact to certain discretionary federal programs by sequestration. The BAB and RZEBD direct subsidy bond programs are considered discretionary have been impacted by sequestration since the passage of the Act, including those revenue receipts anticipated by the County to mitigate the costs of taxable interest payments described above. A summary of the County's negative impact from reduced subsidies, including anticipated impacts for CY 2020 is included below for reference:

Although the impacts of sequestration are relatively small annually, over time these impacts will have accreted to approximately $524,162 by the end of CY 2020. This impact was not anticipated in the original plan of finance in 2010.

Referral Update:

In May 2019, the County Administrator released a Request for Proposals (RFP) to the County's underwriter pool seeking proposals to refund (or refinance) the 2010 Bonds. The 2010 Bonds are eligible for current refunding on June 1, 2020 because at the time of issuance, the County purchased a 10-year call option. A call option is a financial instrument that allows the County to repay the principal amount of a bond plus any accrued interest to the bondholder prior to the scheduled maturity date. This allows for flexability during the life of the bonds to restructure a debt portfolio, refund the bonds for cost savings or address other structural issues related to the bonds. Federal regulations allow the County to price refunding bonds 90 days prior to the call date making March 2020 the earliest possible time to bring a current refunding of the 2010 Bonds to the market.

May 2019 RFP Results

The County received six responses from underwriters, which all resulted in a net present value (NPV) savings to the County from refunding of the 2010 Bonds. NPV savings reflects the amount of money saved in current year dollars and is the preferred measure to assist in the determination wherher or not to move forward with a bond refunding. The County's Debt Management Policy (Resolution No. 2019/37) stipulates that initiation of a refunding for cost savings must result in a minimum 4% savings overall. This is measured by the applying the estimated NPV of a refunding to the NPV of the current stream of debt service payments with any resulting savings at or above 4% triggering staff to review the feasability of refunding the debt.

Each of the six RFP responses anticipated NPV savings greater than 4% and most suggested the use of a forward delivery contract as part of the refunding. A forward delivery contract allows for bonds to be issued in advance of the call date by paying a forward delivery premium on the bonds for the additional interest rate risk that the bondholder takes on by issuing the bonds early. In return, the County is able to lock in current market rates (plus the premium). This premium is measured in basis points (bps), which are equivelent to 1/100th of a percent. For example, 1 bps = 0.01%. The average premium quoted by underwriters was 5-6 bps per month leading up to the pricing date in March 2020 (in advance of the call date of June 1, 2020).

Review by the Debt Affordability Advisory Committee

The Debt Affordability Advisory Committee (DAAC) composed of the County Treasurer-Tax Collector, the Auditor-Controller, the County Finance Director and the Director of Conservation and Development reviewed the results of the May 2019 RFP at their June 4, 2019 meeting. At that time, the DAAC determined that it would be best to wait until the Fall to review proposals further for two reasons: 1) Market forecasts projected further interest rate reductions in the municipal bond market; and 2) by waiting, the County would not have to pay a forward premium on the bonds.

October 2019 RFP Results

On October 2, 2019, the County Administrator released a second RFP to respondents from the May 2019 RFP, requesting updated financial projections to reflect current market conditions. The recommendation of the DAAC to hold off on pursuing a refunding of the bonds was correct based on market analysis of rates as of June 3, 2019 and September 30, 2019. In summary, rates had fallen by 25-29 bps (or 0.25%-0.29%). The chart below shows this change in market conditions between that timeframe for a 15-20 year maturity:

The DAAC met on November 8, 2019 to review the updated RFP responses. After reviewing proposals received with the assistance of the County's independant registered municipal advisor (IRMA), Montague DeRose Associates, the DAAC determined the proposal from Barclay's was the most advantageous to the County. Barclays proposed the lowest takedown rate of all respondents at $1.50 per bond. The takedown rate is similar to a commission and reflects the amount paid to the underwriter for services assisting with bringing bonds to the market. In addition, Barclay's provided a favorable marketing approach for the bonds, including ideas to assist the County with a retail sales pilot project. Retail outreach in municipal bond transactions is a way to enlist interest from a jurisdiction's own residents to invest in local infrastructure through investment in bonds. The County included a section in the October 2019 RFP soliciting feedback on how to structure a retail engagement strategy as part of the 2020 refunding bonds.

Barclays' proposal resulted in an estimated NPV savings to the County of $6,174,390, or 14.97% with a TIC of 2.42%. The NPV savings is well above the minimum included in the County Debt Management Policy. A summary of the estimated refunding results is included below for reference:

Conclusion

Ultimately, the DAAC directed staff to recommend the following: 1) proceed with a current refunding of the 2010 Bonds; 2) select Barclays to serve as senior managing underwriter of the bonds; and 3) authorize a retail sales pilot project as part of this bond transaction.

Recommendation(s)/Next Step(s):

1. PROCEED with a current refunding of the 2010 Bonds;

2. SELECT Barclays to serve as senior managing underwriter of the bonds; and

3. AUTHORIZE a retail sales pilot project as part of this bond transaction.

Attachments
No file(s) attached.