BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Adopt a Resolution Authorizing the Execution and Delivery of Certain Agreements in Connection with a Direct Issue Commercial Paper Program, for an amount up to $250 million, and Authorize Certain Other Actions.
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RECOMMENDATION:
Recommendation
A. Adopt the Resolution AUTHORIZING THE EXECUTION AND DELIVERY OF CERTAIN AGREEMENTS IN CONNECTION WITH A DIRECT ISSUE COMMERCIAL PAPER PROGRAM, for an amount up to $250 million;
B. Authorize the Chief Executive Officer, District Counsel and the Clerk of the Board of Directors, and their Designees (including any acting, interim or otherwise appointed officer, as the case may be), acting singly, to negotiate, execute and deliver any and all documents and instruments and to do and cause to be done any and all acts and things necessary or proper for carrying out the transactions contemplated hereby; and
C. Approve utilizing the Commercial Paper Program to provide short-term financing for eligible Water Utility, Safe Clean Water, and Watershed Program expenditures.
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SUMMARY:
Board approval of the recommendations will enable Santa Clara Valley Water District (Valley Water) to expand its Commercial Paper (CP) program capacity to $250 million, from the current capacity of $150 million, to provide interim financing for the Water Utility, Safe Clean Water and Watershed Programs. The CP program is currently supported by a $150 million Letter of Credit (LOC) provided by MUFG Bank, Ltd. (MUFG Bank) which expires on December 10, 2024. MUFG Bank previously informed staff that it would not renew its LOC beyond the expiration date. A new $250 million LOC from Sumitomo Mitsui Banking Corporation (SMBC) will have an initial term of five (5) years with the option for extensions subject to compliance with the conditions set forth in the Resolution (Attachment 1) and the Reimbursement Agreement (Attachment 4).
SMBC provided the lowest cost proposal in response to a competitive Request for Proposal (RFP) process conducted in July 2024. Established in 1876, SMBC is one of the world’s leading commercial banks and is an active Letter of Credit provider to California municipal issuers. Examples of SMBC’s California clients include the San Francisco Public Utility Commission (Sewer and Water), San Francisco International Airport, East Bay Municipal Utility District, Imperial Irrigation District, Burbank-Glendale-Pasadena Airport, and Orange County Water District. SMBC’s credit ratings of A1/A/A (long-term) and P-1/A-1/F (short-term) will allow Valley Water’s CP Notes to be issued at cost effective levels to minimize the interest expense for Valley Water.
Approval of the recommended actions will enable the CP Program to continue to be utilized by Valley Water to fund capital project expenditures based on actual expenditures and minimize the interest costs of debt financing. Without approval of a replacement LOC, the CP Program will be terminated, and any outstanding CP debt will need to be repaid upon maturity when the current LOC expires on December 10, 2024. This will cause delays to the implementation of the FY 2024-2025 Capital Improvement Program (CIP) and increase overall financing costs for Valley Water.
Letter of Credit Bank Selection Process
Valley Water conducted a formal competitive RFP process to solicit bank proposals. The RFP was published on June 12, 2024, and advertised in the San Jose Post, El Observador, Chinese News, Vietnam Daily, the Bond Buyer, PlanetBids VendorLine government bidding platform, to ensure a broad and diverse audience of potential bidders are informed of the RFP. Staff also conducted direct outreach to small/local banks within the Bay area to inform them of the RFP. In addition, 17 banks that have recently been active in providing municipalities with bank credit products, including LOCs, were directly informed on the RFP, along with four credit unions. The RFP required all responding banks to be in compliance with the Valley Water Executive Limitation (EL) 4.7.7 related to Environmental, Social, and Governance (ESG) and submit proof of an ESG rating of medium or better (small local firms are exempt).
Five proposals were submitted to Valley Water on the RFP due date of July 3, 2024. SMBC provided the lowest cost proposal, with the fee of 0.33% per year for a five-year term, which results in an annual LOC fee of $899,193. The SMBC proposal is approximately $1.6 million less than the highest cost proposal of 0.91% or $2.5 million per year for a shorter four-year term.
Direct Issue Commercial Paper Program
Effective January 1, 2024, the District Act was amended through state Assembly Bill 939 Smart Financing for Valley Water Infrastructure, authored by Assemblymember Gail Pellerin (D-Santa Cruz), which among other amendments, authorizes Valley Water to directly issue short-term notes to support the CP program (the “Direct Issue Notes”) with a maturity not in excess of five years, and subject to a limit as to the principal and interest thereon that is not in excess of 85 percent of the estimated amount of the revenues, charges, taxes, and assessments of or allocable to Valley Water that will be available in that fiscal year for payment of the Direct Issue Notes. While the obligation of Valley Water to make payments of principal and interest on the Direct Issue Notes would be a general obligation of Valley Water, Valley Water expects to additionally pledge Net Water Utility System Revenues on a subordinate basis to Bonds and Contracts (as defined in the Parity Master Resolution), in accordance with the Parity Master Resolution and the Debt Management Policy (Attachment 5).
The proceeds of the CP Notes may be used for any Valley Water purposes, including, but not limited to, capital expenditure, investment and reinvestment, and the discharge of any obligation or indebtedness of the Valley Water. The repayment of the CP Notes will be allocated between Water Utility, Safe Clean Water, and Watershed Funds based on actual CP issuance for the respective Funds.
Valley Water utilizes the CP program to provide interim financing for capital expenditures pursuant to the Board approved CIP, on a reimbursement basis to ensure only actual expenditures are financed, thus minimizing interest expense. The long-term strategy is to periodically refinance CP Notes with long-term debt to be repaid over time. For the Water Utility Program, the issuance of long-term debt helps keep water charges low and stable over the long-term while resulting in inter-generational equity and allows for the completion of capital projects in a timely manner. For the Safe, Clean Water Program, issuing debt allows the projects to be done earlier as it bridges the timing difference between when the voter approved special parcel tax revenues are collected versus the desired project delivery schedule based on the Board approved CIP. The Watershed Fund may require utilization of the CP program to support various Watershed capital projects as needed, to bridge the timing gap between receipt of Watershed revenues, primarily consisting of the 1% ad valorem property taxes, versus incurrence of project expenditures.
CP Notes are a source of low-cost short-term debt marketed by CP Dealers with maturities ranging from 1 day to 270 days. CP Notes are sold to institutional investors such as mutual funds, insurance companies, banks, and other qualified institutional buyers (as defined in Rule 144A promulgated under the Securities Act of 1933) or accredited investors (as defined in Regulation D promulgated under the Securities Act of 1933). Over the last three years, Valley Water’s tax-exempt CP was issued at interest rates ranging from 0.06% to 3.75%, with a 3-year average of 1.70%, and the taxable CP was issued at interest rates ranging from 0.87% to 5.62%, with a 3-year average of 3.86%. The CP Dealers (JP Morgan, Barclays, and Bank of America), the Letter of Credit provider (SMBC), and the Issuing and Paying Agent (U.S. Bank), are in compliance with EL 4.7.7 and currently have ESG ratings of medium or better.
Valley Water currently has no outstanding CP Notes but anticipates issuing up to $250 million in FY 2024-25 to support the planned expenditures for the Water Utility, Safe Clean Water, and Watershed CIP.
Good Faith Cost Estimate
Pursuant to California Government Code Section 5852.1, the good faith cost estimates are as follows (based on the assumptions described below): (1) the true interest cost is currently estimated to be 4.21%; (2) the finance charge (which means the sum of all fees and charges paid to third parties) is estimated to be $1,024,193 per year, plus a one-time upfront cost of issuance fee of $215,000; (3) the amount of proceeds received by Valley Water (which is net of the finance charge) is estimated to be $248,760,807 per year; and (4) the total payment amount (which means the sum of all debt service payments to the final maturity) is estimated to be $260,454,054 per year plus a one-time upfront cost of issuance fee of $215,000. The principal portion of the total annual payment amount of the CP Notes is expected to be paid from proceeds of (i.e. refunded from) long-term debt with a 30-year repayment term.
The above cost estimates are based on the following assumptions: (1) the interest rate for tax-exempt CP at 3.00%, taxable CP at 4.85% based on current market rates as of 9/25/2024; (2) CP Notes will be issued to reimburse capital expenditures incurred in prior months; (3) the annual letter of credit fee of 0.33%; and (4) the annual dealer fee of 0.05%. Actual fees and payment amounts will vary depending on Valley Water’s CP issuance to meet business needs and the interest rates to be determined at the time of each CP Notes issuance date.
Financing Documents
The following financing documents, in substantially final form, are attached for Board review and approval:
Attachment 1 - Resolution of the Board;
Attachment 2 - Issuing and Paying Agent Agreement;
Attachment 3 - Dealer Agreements; and
Attachment 4 - Reimbursement Agreement and Fee Letter.
Issuance Costs
The estimated one-time issuance cost in the amount of $215,000 is summarized below:
Financing Schedule
The current financing schedule is summarized below:
Community Bank Investments
Valley Water’s Board has implemented an innovative approach that promotes small, local bank participation in Valley Water’s financings and investments. EL 4.7.7 requires that Valley Water only engage with banks that have an Environmental, Social, and Governance (ESG) rating from at least one professional ESG research company of at least average/medium (or its equivalent); banks located within the nine Bay Area counties with total assets below $10 billion are exempt from this limitation. As a result of this policy, the following banking arrangements have been established:
• $20 million in Revolving Lines of Credit from three small, local California banks (Bank of San Francisco, Community Bank of the Bay, and First Foundation Bank) that support the short-term financing program.
• $51 million in deposits with various small, local banks.
• Three letters of credit issued by San Jose-based Technology Credit Union totaling $841,000 to meet the U.S. Army Corp’s financial assurance requirements for the operations of Upper Penitencia, Coyote Ridge, and Rancho Cañada de Pala Preserve watershed projects.
• Valley Water underwriting pool is limited to investment banks with ESG ratings of medium or better with exceptions for small, local California banks.
ENVIRONMENTAL JUSTICE AND EQUITY IMPACT:
There are no environmental justice and equity impacts associated with this item.
FINANCIAL IMPACT:
The annual finance charge of $1,024,193 per year, plus a one-time upfront cost of issuance fee of $215,000 and CP interest expense will be paid from funds budgeted in the Board adopted FY 2024-2025 Operating and Capital Budget, allocated based on utilization to the Safe Clean Water Commercial Paper project number 26993001, and the Water Utility Commercial Paper project numbers 95993007 and 95993008. Future annual financing costs will be incorporated in the corresponding future budget for Board consideration.
CEQA:
The recommended action does not constitute a project under CEQA because it does not have the potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
ATTACHMENTS:
Attachment 1: Resolution
Attachment 2: Issuing and Paying Agent Agreement
Attachment 3: Dealer Agreements
Attachment 4: Reimbursement Agreement and Fee Letter
Attachment 5: Debt Management Policy
UNCLASSIFIED MANAGER:
Manager
Darin Taylor, 408-630-3068