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HomeMy WebLinkAboutAgenda Item: Certificates of Participation (2000 Sewer System Improvement Project) p �,9'A ril 24, 2000 �p a at° AGENDA REPORT i as ,3 TO: MAYOR YOST AND (� 8® MEMBERS OF THE CITY COUNCIL FROM: KEITH TILL, CITY MANAGER Il&P SUBJECT: Certificates of Participation (2000 Sewer System Improvement Project) SUMMARY OF REQUEST: City Council to review process and documents for sewer system financing. BACKGROUND: As previously reported to City Council, the aging sewer system is in immediate need of critical repairs and replacement. The only available means of funding these essential projects is through a public financing device. After evaluation of a number of financing alternatives, certificates of participation emerged as the most appropriate. The following description was prepared with the assistance of bond counsel. The use of certificates of participation to finance capital projects is the most prevalent securities vehicle in California. This financing technique provides long-term financing through a lease, installment sale agreement or loan agreement that does not constitute indebtedness under the state constitutional debt limitation and is not subject to other statutory requirements applicable to bonds, including interest rate limitations, election requirements, competitive sale requirements, or semi-annual or fixed rate interest payment requirements. Certificates of participation allow the public to purchase(in $5,000 increments) participation in a stream of lease payments, installment payments or loan payments relating to the acquisition or construction of specific equipment, land or facilities. In the current financing, the obligation that will serve as the basis for the certificates of participation will be an installment sale agreement pursuant to which-the City will make installment payments exclusively from a designated special fund, the City's sewer enterprise. Although installment payments are subject to the constitutional debt limitation, they do not violate the debt limitation under the"special fund" exception. The City will be obligated to appropriate payments from the special fund. The installment payments are composed of components of principal and interest. The future right to receive the installment payments is sold to investors in individual portions and the proceeds of that sale are available to the City to pay for the capital improvements. Mr. Keith Till April 24,2000 Page 2 Since the installment payments include an interest component, the repayment to the investors of the interest portion of the installment payments is tax-exempt income. Because the investor does not need to pay State or federal income tax on the interest it receives, the interest rates attributable to the interest component of the installment payments and payable by the City is significantly lower than the interest rates for conventional financing. If authorized by the Council, the Seal Beach sewer transaction will be structured as follows: The City will purchase the financed capital improvements from the newly-created Seal Beach Public Financing Authority (see description below) pursuant to the installment sale agreement. The Authority will assign its interests in the installment sale agreement, including its right to receive installment payments from the City and its rights to enforce remedies against the City for nonpayment, to a trustee bank. The trustee bank will be BNY Western Trust Company. The trustee bank will execute and deliver certificates of participation evidencing direct, undivided fractional interests in the installment payments. The certificates of participation will be sold to investors, by competitive sale, and the proceeds of the sale will be deposited with the trustee bank, for investment and disbursement for construction costs at the direction of the City. The City will make semi-annual installment payments for the project directly to the trustee bank (as assignee of the Authority) and the trustee bank will make debt service payments to the investors. Since certificates of participation financing is based upon the structure of a lease or sale(as here), a"seller," or conduit entity, must be identified. In California, the most common entity employed in this situation is a nonprofit corporation or joint powers authority created by the affected city. Experience has shown that the use of a joint powers authority is preferable because, as a new public entity, its annual maintenance is minimal as compared to a nonprofit corporation which would require the preparation of annual financial statements and the filing of tax returns. For that reason, this financing contemplates the formation by the City and the City's redevelopment agency of a new entity, the"Seal Beach Public Financing Authority." The sitting City Council of the City will sit as the board of directors of the Authority. It is staffs recommendations that the following actions be taken by the Seal Beach Redevelopment Agency, Seal Beach Public Financing Authority and City Council, on May 8, 2000, in connection with the creation of the Seal Beach Public Financing Authority and the contemplated financing.