BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Title
Adopt Resolutions Authorizing the Execution and Delivery of a Tax-Exempt Tax and Revenue Anticipation Note and a Taxable Tax and Revenue Anticipation Note to Support a Commercial Paper Program and Other Short-Term Obligations, Intention to Issue Tax-Exempt Obligations for Water Utility Enterprise, and Intention to Issue Tax-Exempt Obligations for Safe, Clean Water and Natural Flood Protection Program.
End
RECOMMENDATION:
Recommendation
A. Adopt the Resolution AUTHORIZING THE EXECUTION AND DELIVERY OF A TAX-EXEMPT TAX AND REVENUE ANTICIPATION NOTE AND A TAXABLE TAX AND REVENUE ANTICIPATION NOTE TO SUPPORT A COMMERCIAL PAPER PROGRAM AND OTHER SHORT-TERM OBLIGATIONS;
B. Authorize the Chief Executive Officer or their designee (in each case, including any acting, interim or otherwise appointed such officer as the case may be) to execute the TRANs, and the Certificate as to Uncollected Taxes, Income, Revenue, Cash Receipts and Other Money;
C. Authorize the Chief Executive Officer, District Counsel, and their designees (in each case, including any acting, interim or otherwise appointed such officer as the case may be) to execute such other instruments, documents and papers as are necessary to carry out this short-term debt financing program for Fiscal Year 2024-25;
D. Authorize the District Counsel (including any acting, interim or otherwise appointed such officer as the case may be) to execute the TRANs;
E. Adopt the Resolution INTENTION TO ISSUE TAX-EXEMPT OBLIGATIONS FOR WATER UTILITY ENTERPRISE; and
F. Adopt the Resolution INTENTION TO ISSUE TAX-EXEMPT OBLIGATIONS FOR SAFE, CLEAN WATER AND NATURAL FLOOD PROTECTION PROGRAM.
Body
SUMMARY:
Each fiscal year, the Board of the Santa Clara Valley Water District (Valley Water) is legally required to adopt a new resolution reauthorizing the execution and delivery of Tax Revenue Anticipation Notes (TRANs) to support Valley Water’s existing short-term debt financing program (Short Term Debt Program) (see Attachment 1), which currently allows for the issuance of commercial paper (CP) certificates and revolving line of credit certificates. Additionally, Board approval of resolutions of intention to issue tax-exempt obligations is required to allow Valley Water to reimburse itself from future proceeds of tax-exempt obligations for certain eligible capital costs of the Water Utility Enterprise and Safe, Clean Water and Natural Flood Protection (SCW) Program (see Attachments 2-3).
If the Board does not approve the resolution reauthorizing the TRANs, the Short-Term Debt Program will need to be deactivated which will result in Valley Water not being able to issue new short-term debt in Fiscal Year (FY) 2024-25 as planned and require all outstanding CP and revolving line of credit certificates to be repaid upon maturity. The impact of not taking action would likely increase financing costs and result in delays to the Water Utility and SCW Capital Improvement Programs.
The recommended actions with respect to the resolutions of intention to issue tax-exempt obligations do not obligate Valley Water to issue any debt; rather, they provide Valley Water flexibility to reimburse costs from future tax-exempt debt proceeds. The anticipated annual maximum amount of the Water Utility project costs to be reimbursed is $317 million. The anticipated annual maximum amount of the SCW project costs to be reimbursed is $126 million. These capital outlay amounts, which include expected project carryovers, are from the draft FY 2024-25 Operating and Capital Budget, which is scheduled to be recommended for adoption by the Board on May 14, 2024.
The recommended actions are in compliance with Executive Limitation 4.7 regarding debt management for Valley Water, and certain Internal Revenue Service regulations applicable to tax-exempt municipal financing transactions.
Short Term Debt Program
Valley Water’s Short Term Debt Program has a maximum principal issuance capacity of $320 million and is supported by a (1) $150 million Letter of Credit (LOC) from MUFG Bank, Ltd. (MUFG Bank), (2) $41 million of revolving line of credit from a banking syndicate led by U.S. Bank National Association (U.S. Bank) that includes three local Bay Area banks, First Foundation Bank, Bank of San Francisco, and Community Bank of the Bay (collectively, the “Syndicate”) and (3) $129 million of revolving line of credit from U.S. Bank.
Background
On January 13, 2015, the Board adopted Resolution No. 15-02 authorizing the execution and delivery of various agreements for a $150 million Letter of Credit supporting Valley Water’s CP program (CP Program). The current LOC from MUFG Bank is effective through December 10, 2024. Financial Planning & Management Services staff and Procurement staff will be issuing a Request for Proposals to replace the expiring LOC, and will return to the Board prior to expiration to request approval of a replacement LOC.
In response to the ongoing economic uncertainties related to the COVID-19 pandemic that emerged in March 2020, and to create a secondary source of liquidity to fund Valley Water’s CIP, the Board adopted Resolution 20-11 on April 28, 2020, to establish revolving bank lines of credit. On October 13, 2020, the Board authorized staff to proceed with the execution of a bank line or lines of credit with the Syndicate for a combined not to exceed amount of $200 million. On October 30, 2020, Valley Water entered into a $170 million revolving line of credit agreement with the Syndicate. On April 29, 2022, the revolving line of credit was bifurcated into two lines of credit, one with the U.S. Bank for $129 million and one with the Syndicate for $41 million, with each agreement term effective through April 29, 2025. The revolving lines of credit may be extended thereafter in accordance with Resolution No. 20-11 which grants authority to the Chief Executive Officer or their designee to enter into extensions subject to certain conditions and amendments that are mutually acceptable to the Syndicate, U.S. Bank, Valley Water, and the Santa Clara Valley Water District Public Facilities Financing Corporation (PFFC).
Analysis
Debt proceeds from the Short-Term Debt Program 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 Valley Water. Per Board approval on January 13, 2015, the Short-Term Debt Program was directed to be utilized to fund eligible Water Utility and SCW expenditures only. The repayment of Short-Term Debt Program debt is allocated between Water Utility and SCW funds based on actual issuance for the respective funds.
The obligation of Valley Water to make payments of principal of and interest on the TRANs is a general obligation of Valley Water. Valley Water has also pledged Net Water Utility System Revenues of Valley Water on a subordinate basis to the payment of bonds and contracts of Valley Water to additionally secure the payment of the principal of and interest on the TRANs, all in accordance with the Water Utility Parity System Master Resolution No. 16-10 adopted by the Board of Directors on February 23, 2016, as amended from time to time.
To ensure flexibility in utilizing the Short-Term Debt Program to meet the needs for tax-exempt and taxable debt issuances in FY 2024-25, the tax-exempt TRAN authorization is being set at $230 million and the taxable TRAN authorization at $270 million. This is in compliance with Sections 53850-53858 of the California Government Code which provides authority that is not limited by any other provision of law for Valley Water to issue TRANs with maturities up to 15 months for principal and interest payable in any fiscal year in an amount up to 85% of the budgeted uncollected taxes, income, revenue, cash receipts and other monies of Valley Water. Actual debt issuances are currently limited, however, to an aggregate total of $320 million for both tax-exempt and taxable short-term debt due to the capacity to borrow against the MUFG Bank LOC and the lines of credit. The aggregate issuance amount could increase in the future if the Board authorizes additional credit facilities or increases the capacity of current facilities.
The long-term strategy is to issue short-term debt to provide just-in-time funding for capital expenditures which avoids the issuance and repayment of long-term debt earlier than necessary and having unused debt proceeds prior to future spending on projects. As the outstanding short-term debt reaches the Short-Term Debt Program capacity, the outstanding debt is refunded with long-term debt to be repaid over the life of the improvements.
CP and revolving line of credit certificates are good sources of low-cost short-term debt that are issued at variable interest rates. CP certificates are issued to the open market under the MUFG Bank LOC and remarketed periodically. For the most recent 12 months, Valley Water paid interest rates ranging from 1.95%-2.75% on the tax-exempt CP certificates and from 4.23%-5.62% on the taxable CP certificates. Line of credit certificates are issued directly to and purchased by U.S. Bank and the Syndicate. For the most recent 12 months, Valley Water paid no interest on line of credit certificates as none were issued during that time.
For the Water Utility Program, the periodic issuance of long-term debt helps keep water charges lower and more stable over the long-term while resulting in inter-generational equity and allows for the completion of capital projects in a timely manner. The timing and amount of debt financing is dependent on the incurrence of Water Utility capital project costs.
Funding for SCW projects is primarily from the special parcel tax authorized by voters through the passage of Measure S in November 2020. The timing and amount of debt financing is dependent on the incurrence of SCW capital project costs.
PFFC Short Term Debt Program Authorization
Due to prior statutory limitations in the District Act limiting short-term borrowings to only $8 million, Valley Water issued CP and line of credit certificates in conjunction with the PFFC. In addition to Valley Water Board authorizations, the PFFC Board was required to provide its authorizations, accordingly. The PFFC Board adopted the resolution authorizing the issuance of CP certificates on May 10, 2012 (Resolution No. PFFC 12-001) and subsequently adopted resolutions authorizing certain amendments and restatements. On April 17, 2020, the PFFC Board adopted Resolution No. 20-01 authorizing the solicitation, negotiation of, and execution and delivery of various agreements for a bank line or lines of credit.
On September 8, 2023, Governor Newsom signed into state law Assembly Bill 939, which made numerous changes to the District Act, including removing the $8 million limit on short-term debt Valley Water could issue without holding an election. Consistent with the California Constitution and the combined amount of the TRANs being proposed herein, Valley Water, without requiring the assistance of the PFFC, can now issue short term debt (with maturities up to five years) that is payable in any fiscal year in an amount, when added to the interest thereon, not to exceed 85% of the estimated amount of revenues, charges, taxes, and assessments that will be available in that fiscal year for the payment of principal and interest on the debt. Because the agreements with the CP LOC and line of credit banks were entered into with the PFFC and require the issuance of the TRANs, however, Valley Water needs to continue issuing the TRANs until such time that the agreements may be replaced or amended. It is anticipated that the agreements will be replaced or amended upon their respective expirations with agreements or terms not requiring the involvement of the PFFC and issuance of the TRANs.
ESG Policy
At its August 11, 2020, meeting, the Board approved the addition of Executive Limitation 4.7.7 to stipulate that Valley Water can only do business with banks that have an Environmental, Social and Governance (ESG) risk rating of “Average/Medium” or better from at least one professional ESG research company. Small and local banks/credit unions located within the nine Bay Area counties with total assets at or below $10 billion are exempt from this provision. MUFG Bank and U.S. Bank both meet the ESG policy requirement. The other banks in the Syndicate - First Foundation Bank, Bank of San Francisco, and Community Bank of the Bay - are all exempt from the policy.
ENVIRONMENTAL JUSTICE AND EQUITY IMPACT:
There are no environmental justice and equity impacts associated with this item. This action is unlikely to or will not result in human health or environmental effects and is not associated with an equity opportunity.
FINANCIAL IMPACT:
The Short-Term Debt Program is an on-going activity of Valley Water and associated costs are budgeted annually as costs of operations. The estimated cost of the Short-Term Debt Program, including interest and other costs associated with the program (e.g., banking, legal and other related fees), in FY 2024-25 is $12.0 million. Upon the future issuance of short-term debt obligations, certain eligible capital expenditures initially paid for by Valley Water will be reimbursable from proceeds of these obligations.
CEQA:
The recommended action does not constitute a project under CEQA because it does not have a potential for resulting in direct or reasonably foreseeable indirect physical change in the environment.
ATTACHMENTS:
Attachment 1: Resolution, TRANs
Attachment 2: Resolution, WUE
Attachment 3: Resolution, SCW
UNCLASSIFIED MANAGER:
Manager
Darin Taylor, 408-630-3068