HomeMy WebLinkAbout2009/11/05 Item 2ITY COUNCIL
STATEMENT
~~rii
~~ CITY OF
CHULA VISTA
NOVEMBER 5, 2009, Item ~
ITEM TITLE: UPDATE OF THE CITY'S FISCAL HEALTH PLAN
RELATED TO DEBT RESTRUCTURING OPTIONS
SUBMITTED BY: DIRECTOR OF FINANCE/TREASURER
CITY MANAGER
REVIEWED BY: ASSISTANT CITY MANAGER
4/STHS VOTE: YES ~ NO ^X
SUMMARY
On January 20, 2009, the City Council endorsed the City Manager's "Fiscal Health Plan" which
included the review of the outstanding debt obligations to ensure that the City will continue to
meet its debt obligations and minimize the impacts to City services.
ENVIRONMENTAL REVIEW
The Environmental Review Coordinator has reviewed the proposed activity for compliance with the
California Environmental Quality Act (CEQA) and has determined that contemplating the
restructuring of the City's debt service is not a "Project" as defined under Section 15378 of the State
CEQA Guidelines because it will not result in a physical change to the environment; therefore,
pursuant to Section 15060(c)(3) of the State CEQA Guidelines the actions proposed are not subject
to CEQA.
RECOMMENDATION
That the City Council consider the debt restructuring options as recommended under the Fiscal
Health Plan.
BOARDS/COMMISSION RECOMMENDATION
Not Applicable
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DISCUSSION
Background
Fiscal Health Plan
In January 2009, the City Council endorsed the City Manager's "Chula Vista Fiscal Health Plan"
which provided an outline to preserve City services, mitigate the current budget issues, and
provide long-term financial stability for the City of Chula Vista. The Fiscal Health Plan is
comprised of the following major components:
1. Reduce Operating Expenditures
2. Increase Revenues
3. Economic Development and Job Creation
4. Budget Reforms
Since the development of the Fiscal Health Plan, the City has taken steps in implementing the
plan and begins to put the City back on strong financial standing. As noted above, one of the
components of the fiscal health plan was to implement budget reforms. Some of the specific
actions recommended in the short term included implementation of a zero-based budget process,
establishing cross departmental analyst support, updating the existing General Fund reserve
policy, and restructuring current debt obligations.
Evaluating the feasibility of restructuring the debt obligations is being recommended at this time
because the significant slow down in development has created a cash flow issue in the Public
Facilities Development Impact Fee (PFDIF) fund. If the restructuring of the PFDIF debt is not
pursued the General Fund would need to assume the PFDIFs debt obligation. Over the last few
years, Council has taken decisive actions to address the changing economic picture and the
impact it has on the General Fund and the services the City is able to deliver to the community.
Adding the PFDIF debt service to the General Fund would likely trigger additional program and
service reductions. For this reason, staff is recommending pursuing other alternatives.
PFDIF Program
In 1991, the City Council approved the creation of the Public Facilities Development Impact Fee
("PFDIF") program which would generate funds paid by new development to fund the construction
and acquisition of public facilities and equipment, using cash on hand, long-term debt fmancing, or
a combination thereof. A total of $99 million has been spent from the PFDIF program funding fire
stations, recreation centers, a library and related equipment on a cash basis. The City financed the
construction of the new Corporation Yard and the Police Facility with the debt service payments
split between the PFDIF program and the General Fund. As a result of the significant reduction in
development-related fees currently being collected, the City is anticipating restructuring a portion of
the debt related to its PFDIF obligations. The City anticipates that this modification will provide
necessary cash flow relief to the PFDIF fund during this severe downturn in development as well as
spare the General Fund from paying the PFDIF share of the debt. Additional information on the
City's PFDIF program is included under Attachment A.
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The Public Facilities Development Impact Fee (PFDIF) fund's annual debt service requirement is
approximately $5.2 million. The PFDIF fund met its debt service commitment m fiscal year 2008-
09 & 2009-10 through an interfund loan from the Transportation Development Impact Fee (TDIF)
fund. Without the inter-fund loan the General Fund would be required to make the debt service
payments on behalf of the PFDIF fund, which would have a significant impact on the City's
General Fund. The interfund loans from the TDIF approved to date are not anticipated to impact
capital project construction timing. A debt restructuring was not proposed at the time of the
approval of the inter-fund loans due to the severe challenges surrounding the financial markets.
Additional interfund loans are not recommended due to the potential to impact scheduled
transportation projects.
Due to the economic downturn over the past two years the General Fund budget has been reduced
by more than $37 million. Any added costs would have a severe impact on the City's ability to
maintain services. At this time, a modification of the PFDIF's debt is recommended with the
objective of generating cash flow relief for approximately three years as well as reduced annual debt
payments through fiscal year 2012-13 at which time the City's Pension Obligation Bonds (POB)
debt is paid off and the 2002 COPS are eligible for refunding.
Staff has worked with the City's Financial Advisor to review all outstanding PFDIF debt obligations
and identify the bond issuances most appropriate for restructuring and/or refunding. Following this
review, the debt related to the Corporation Yard (2000 COP), the Police Facility (2002 COP) and
the potential to issue COPS to reimburse the PFDIF fund for expenses incurred related to the Civic
Center have been identified as viable options to provide cash flow relief to the PFDIF fund.
It should be emphasized that the intent of the restructuring is to provide the PFDIF fund with
cash flow relief for the next three years, not a reduction in the total debt. This modification of
existing debt is expected to increase the PFDIF's total debt service payments by approximately
$27.6 million that includes $17.6 million in financing costs over the next 22 years. The net present
value of the financing costs is $1.6 million. The debt will be structured to allow the City the
opportunity to call bonds (payoff early) as development returns to minimize the overall debt to the
PFDIF program through build out.
Debt Restructuring Proposal
Staff is working with the City's Financial Advisor to develop a financing plan that provides the
desired cash flow relief to the PFDIF over the next three years (FY 2011 to FY 2013).
The restructuring plan involves three steps:
1. Issue COPS to reimburse the PFDIF fund for cost incurred in completing the Civic Center
Expansion.
2. Refund the 2000 COPs (Corporation Yard) which are currently callable and may generate
annual debt service savings (cash flow savings) by extending the term of the debt out an
additional 10 years.
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3. Review refinancing options related to the 2002 COPs (Police Facility) before call date of
August 1, 2012.
Staff is suggesting that the City implement athree-step process with the first two steps taking place
in the current fiscal year. The final step will involve the refunding of the 2002 COP which the City
may restructure after August of 2012, when the 2002 COPs can be called (i.e. refunded). This
three-step process should both minimize the cost of restructuring and provide a clearer outlook as to
how much the PFDIF fund will be able to afford in annual debt payments once the real estate
market has recovered.
These financing options are currently being reviewed by Bond Counsel to determine if they are in
compliance with federal tax laws. Final recommendations will be presented for Council
consideration and approval at a future City Council meeting along with final bond documents
and legal opinions.
Restructuring Summary
The City is considering issuing two series of bonds: PFDIF Reimbursement COPS and
Refunding COP Corporation Yard, which should provide the PFDIF fund with cash flow relief
through FY 2012-2013. The cash flow analysis included under Attachment B provides an
analysis of the cash flows for existing debt service obligations and the projected cash flows with
the proposed restructuring. If the City is unable to issue the Reimbursement COPS, the 2002
COPs will be included as part of the restructuring proposal which will be more expensive as
discussed below.
Step 1. Civic Center COPS Reimbursement
Under this option the City would "reimburse" the PFDIF fund for approximately $10 million in
Phase III City Hall Improvements previously paid from PFDIF funds. The proceeds from the
new money issue would be available to the PFDIF fund to enable it to make debt service
payments. This option is the least costly since it allows the City to issue traditional current
interest bonds with capitalized interest on a tax- exempt basis. The preliminary estimated
additional debt service obligations to the PFDIF fund will be approximately $22.0 million that
includes $12.0 million in financing costs. The net present value of the financing costs is $1.8
million.
Step 2. 2000 Certificates of Participation -Corporation Yard
In October 2000, the Chula Vista Public Financing Authority (Authority) issued $25,255,000 in
2000 Certificates of Participation Series A ("2000 COPS"), to provide funds to improve the City's
800 Megahertz emergency communications system, improve the City's Corporation Yard, finance a
reserve account for the certificates, and pay the costs of issuance incurred in connection with the
execution and delivery of the certificates. The 2000 COPs are backed by a pledge of the City's
General Fund.
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The certificates mature in amounts ranging from $855,000 in 2001 to $1,790,000 in 2020. Interest
is payable semi-annually on March 1 and September 1, at interest rates ranging from 4.25% to
5.25%. The certificates maturing after September 1, 2010, are subject to redemption at premiums
ranging from zero to 2%. The outstanding balance at October 30, 2009 is approximately $15.64
million.
Since the City needs to significantly reduce the PFDIF debt service payments over the next few
years, the term of the bonds are proposed to be extended out an additional 10 years to provide the
cash flow savings necessary to meet debt obligations. The preliminary estimated additional debt
service obligations to the PFDIF fund of approximately $5.6 million at a net present value
savings of $200,000.
Step 3. Review Restructuring Option for 2002 Certificates of Participation -Police
Facility
In June 2002, the Chula Vista Public Financing Authority issued $60,145,000 in 2002 Certificates
of Participation ("2002 COPS") to finance the construction of the City's Police Headquarters and an
adjoining parking structure. The 2002 COPS are backed by a pledge of the City's General Fund.
The certificates mature in amounts ranging from $1,125,000 in 2005 to $3,870,000 in 2032. Interest
is payable semiannually on February 1 and August 1, at interest rates ranging from 4.50% to 5.0%.
As of October 30, 2009 the outstanding balance is approximately $54.1 million.
The 2002 COPs are not callable until 2012, but if the City is unable to issue a COP to reimburse
for the Civic Center Phase III project the City may have to look at restructuring a series of 2002
COPs prior to the call date. The restructuring would include a "window" of time to include the
principal and interest for the period 2/1/2010 to 8/1/2012. In order to create the required
"window", the City will need to fund $10.9 million in scheduled payments over the next 6 debt
service payments dates. In a new money bond issue, this is typically accomplished through the
use of capitalized interest. However, the IRS effectively prohibits the use of capitalized interest
on refunding bonds. Therefore, the City will have to issue taxable COPS with capitalized interest
to pay debt service.
The additional debt service obligations to the PFDIF fund under this option would be
approximately $ 19.0 million at a net present value cost of $12.0 million. This option is more
costly than seeking a reimbursement issuance for the Civic Center Phase III and should onl~be
considered if absolutely necessary
DECISION MAKER CONFLICT
Staff has reviewed the property holdings of the City Council and has found a conflict exists, in
that Council Member Castaneda has property holdings within 500 feet of the boundaries of the
property, which is the subject of this action.
CURRENT YEAR FISCAL IMPACT
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If the City successfully restructures the 2000 COPs by February 2010, the PFDIF fund can
realize $384,000 in cash flow savings in the current fiscal year. All costs associated with the
Financial Advisor, Bond Council, and Underwriter will be paid out of the bond issuance and not
existing reserves.
ONGOING FISCAL IMPACT
The cost of restructuring the debt will largely depend on the market conditions, interest rates,
credit rating, market demand, insurance coverage and actual structure achieved at the time the
bonds are sold.
At this time, based on assumptions regarding the market, the restructuring of the 2000 COPs will
result in a net cost of $5.6 million over the term of the debt or a net present value savings of
$200,000. The cost of issuing a COP to reimburse the PFDIF fund for the Civic Center Phase III
project would result in a net cost of $12.0 million or a net present value of $1.8 million. The
additional financing cost would also impact the PFDIF fee by approximately $375 per EDU.
The actual impacts to the fee will be determined during the next fee update which will take into
account other expenditure adjustments and changes to the planned development.
Approval of this item authorizes the Finance Director to develop restructuring options as
discussed in the report. Staff anticipates returning with financing documents requesting final
City Council consideration seeking the restructuring of the debt by the end of the calendar year.
Future restructurings may likely be necessary in order to level out the debt.
If the City does not pursue the restructuring options or is unable to successfully restructure the
debt, the General Fund will be obligated to begin making the debt service payments on behalf of
the PFDIF fund beginning in fiscal year 2010-11 of approximately $5.2 million annually.
Attachments
A -PFDIF Program
B -PFDIF Cash Flow Projections
Prepared by.• Maria Kachadoorian , Director of Finance, Finance Department
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Attachment A -PFDIF Program
The Public Facilities Development Impact Fee (PFDIF) program was established in 1991. The fee
program is a cost spreading mechanism, ensuring that development mitigates its impacts on public
facilities. All development projects in the City that generate additional demand for services are
required to pay a PFDIF fee in conjunction with the building permit process. The PFDIF program
then uses these fees to fmance the construction and acquisition of public facilities and equipment,
using cash on hand, long-term debt financing, or a combination thereof.
The fee program was last comprehensively updated in 2006. At that time, future program
expenditures were estimated at $250.8 million. The future cost assumed in the 2006 PFDIF Update
was a combination of debt service payments, direct project expenditures (cash on hand), capital
equipment acquisitions, and program administration. The table below summarizes the future PFDIF
expenditures included in the 2006 PFDIF Update by type.
PFDIF Program Future Expenditures per 2006 Update
(Millions)
Debt Service Expenditures $ 132.6
CIP Projects $ 95.5
Non-CIP Expenditures $ 22.7
Total PFDIF Expenditures $ 250.8
The future program cost was spread over future anticipated development, including 27,320
residential units and 1,400 commercial and industrial acres. Over a 25 year period (fiscal year
2005-06 through buildout in fiscal year 2029-30) this equates to an average of over 1,000 residential
units annually.
Of the total $250 million in future expenditures included in the 2006 PFDIF Update, $132.6 million
in costs were associated with debt repayments. At that time, the residential permits paying fees
annually required to meet the PFDIF's debt obligation was estimated at approximately 600 units. In
light of the historic levels of development in the City and the significant number of future units to be
built in the City by fiscal year 2029-30, it was reasonable to consider this level of development
would continue in the future. The City's historic residential permit activity is illustrated in the chart
below.
Annual Residential Permits IssuedX
4,000
3,500
3,000 _Ayg 1991-2005:_ - _ __
2,500 ......1,710 Units __
Avg 2006-2009:
2,000 _ -735 Units.
1,500
10
^
0 ~~.~~..
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
*1991 through 1997 data is per calendar year; 1998 through 2009 data is per fiscal year.
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For those projects which had already been constructed, the program reflects the actual cash
expenditures or debt service obligations. For facilities not yet constructed in 2006, construction and
financing costs were estimated.
Overall, the PFDIF's funding priorities are to first meet external debt obligations, then internal debt
obligations, and finally to construct new facilities and acquire additional capital equipment.
In total, the PFDIF program reflects tax exempt financing (debt issuance) for the construction and/or
acquisition of eight facilities:
1. Corporation Yard - 2000 COP A
2. Police Facility - 2002 COP
3. 800 Megahertz Radio System - 2003 Refunding COP
4. CAD (Computer Aided Dispatch) System - 2003 Refunding COP
5. Fiscal System - 2003 Refunding COP
6. Civic Center - Adamo Property Acquisition
7. Civic Center -Phase I
8. Civic Center -Phase II
9. Civic Center -Phase III (actually funded on a cash basis)
All other projects (either previously constructed or planned for construction) have been financed
using cash on hand. The future major facilities to be constructed were prioritized in the 2006
Update in the following order:
1. Rancho del Rey Library
2. EUC Fire Station
3. EUC Library
4. Otay Ranch Village 4 Recreation Facility
5. Otay Ranch Village 4 Aquatic Facility
In order to meet its current debt obligation, the PFDIF must collect fees from approximately 700
residential units annually. As a result of the recent downturn in the development market, the City
has not issued sufficient permits to meet this annual debt obligation since fiscal year 2006-07.
Development is not anticipated to return to the levels necessary to meet the debt obligation for
possibly several years. It is therefore necessary to restructure existing PFDIF debt to reduce the
annual external debt payments in the short term, allowing time for development to recover. An
analysis showing projected cash flow for the PFDIF with and without the proposed restructuring is
included as Attachment B.
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Attachment B -PFDIF Cash Flows
- NO DEBT
Beginning Cash Balance (2,280,529) (1,559,692) (5,742,751) (11,148,577)
Revenues
Loan from TDIF 5,300,581 - - -
Projected DIF Fee Revenue* 695,794 1,000,000 1,250,000 1,500,000
Total Revenues 5,996,375 1,000,000 1,250,000 1,500,000
Expenditures
External Debt Service (5,275,538) (5,183,059) (5,185,826) (5,186,023)
Repay TDIF Loan' - - (1,470,000) (1,428,000)
CIP & Non-CIP Exp. - - - -
Total Expenditures (5,275,538) (5,183,059) (6,655,826) (6,614,023)
Ending Cash Balance (1,559,692) (5,742,751) (11,148,577) (16,262,600)
- RECOMMENDED DEBT RESTRUCTURIN
Beginning Cash Balance $ (2,280,529) $ (1,175,201) $ - $ -
Revenues
Loan from TDIF $ 5,300,581 $ - $ - $ -
Projected DIF Fee Revenue* $ 695,794 $ 1,000,000 $ 1,250,000 $ 1,500,000
Civic Center Phase III ReimbZ $ - $ 4,268,555 $ 4,321,973 $ 1,409,472
Total Revenues $ 5,996,375 $ 5,268,555 $ 5,571,973 $ 2,909,472
Expenditures
External Debt Service $ (4,891,047) $ (4,093,354) $ (4,101,973) $ (4,101,443)
Repay TDIF Loan' $ - $ - $ (1,470,000) $ (1,428,000)
CIP & Non-CIP Exp. $ - $ - $ - $ -
Total Expenditures $ (4,891,047) $ (4,093,354) $ (5,571,973) $ (5,529,443)
Ending Cash Balance $ (1,175,201) $ - $ - $ (2,619,971)
*Projected fee paying multi family units 85 120 1 SO 180
1. Annual inter-fund loan repayments from the PFDIF fund to TDIF fund are projected at $1.4 million atmually
beginning in fiscal year 2011-12.
2. Projected Civic Center Phase III reimbursements total $10 million. The actual reimbursement amount per year may
vary from the above estimate. All reimbursement monies will be applied to existing debt service payments through
fiscal year 2012-13
NOTES:
Cash flow relief of approxunately $13.6 million (represents 3 years of bonded debt payments) is projected to result from
the restructuring.
Cash flows reflect the City's Fee Deferral Program which is expected to expire in December 31, 2010. The exception is
the EUC which is eligible to defer their DIF obligations for their entire project but payable upon occupancy.
The final debt payment for the City's Pension Obligation Bonds (POBs) will occur in fiscal year 2011-12. After this
period, approximately $2.6 million may be available to pay the PFDIF's share of debt payments without impacting the
City's General Fund. This option will be evaluated at the tune of the bond restructuring anticipated in fiscal year 2012-
13.
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