BOARD AGENDA MEMORANDUM
Government Code § 84308 Applies: Yes ☐ No ☒
(If “YES” Complete Attachment A - Gov. Code § 84308)
SUBJECT:
Adopt a Resolution Authorizing the Issuance of Water System Refunding Bonds and Revenue Bonds to Finance Certain Costs of the Water Utility Enterprise, and Approving the Execution and Delivery of Certain Documents and Certain Acts In Connection Therewith in an Aggregate Not-to-Exceed Amount of $520 Million; Adopt a Resolution Authorizing the Issuance of Water System Revenue Bonds to Finance Certain Costs of the San Jose Water Purification Project, Phase I, and Approving the Execution and Delivery of Certain Documents and Certain Acts in Connection Therewith in an Aggregate Not-to-Exceed Amount of $100 Million; Adopt a 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 Short-Term Obligations; Adopt a Resolution for Intention to Issue Tax-Exempt Obligations for Water Utility Enterprise; and Adopt a Resolution for the Safe, Clean Water and Natural Flood Protection and Watershed Stream Stewardship Programs.
RECOMMENDATION:
A. Adopt the Resolution authorizing the issuance of WATER SYSTEM Refunding Revenue Bonds AND Revenue Bonds, AND approving the execution and delivery of certain documents and certain acts in connection therewith, in an aggregate not to exceed amount of $520 million;
B. Adopt the Resolution Authorizing the Issuance of Water System Revenue Bonds to Finance Certain Costs of the San Jose Water Purification Project (Phase I), and Approving the Execution and Delivery of Certain Documents and Certain Acts in Connection Therewith, in an amount not to exceed $100 million;
C. 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 short-term obligations;
D. Adopt the Resolution INTENTION TO ISSUE TAX-EXEMPT OBLIGATIONS FOR WATER UTILITY ENTERPRISE;
E. Adopt the Resolution INTENTION TO ISSUE TAX-EXEMPT OBLIGATIONS FOR SAFE, CLEAN WATER AND NATURAL FLOOD PROTECTION AND WATERSHED AND STREAM STEWARDSHIP PROGRAMS;
F. Authorize the Chief Executive Officer, or their designee, to execute the Tax and Revenue Anticipation Notes and the Certificate as to uncollected taxes, income, revenue, cash receipts and other money;
G. Authorize the District Counsel, or their designee, to approve as to form the Tax and Revenue Anticipation Notes; and
H. Authorize and direct the Chief Executive Officer, or their designee, and such other officers and staff of the Santa Clara Valley Water District, acting singly, to do any and all things to execute and deliver any and all documents which such officers may deem necessary or advisable in order to consummate the sale and delivery of the Refunding Revenue Bonds, Revenue Bonds, and the ongoing administration thereof.
SUMMARY:
ISSUANCE OF WATER UTILITY BONDS
Staff recommends Board approval to issue Water Utility Bonds for the following purposes:
• Issue (1) Refunding Revenue Bonds to refund (a) outstanding short-term obligations issued to finance projects for the Water Utility (WU) Enterprise, and (b) all or a portion of the outstanding Water Utilities Series 2016ABCD debt (the “2016 Obligations”), to provide net economic benefit to Valley Water; and (2) Revenue Bonds to acquire and/or construct, or reimburse the cost of the acquisition or construction of, certain WU capital improvements, in an aggregate not to exceed amount of $520 million (Attachment 1: Resolution);
• Issue Revenue Bonds to finance costs of the San Jose Water Purification Project (Phase I) in an aggregate not to exceed amount of $100 million (Attachment 2: Resolution, Water Purification); and
• Pay costs of issuance.
Method of Sale
The Refunding Revenue Bonds and Revenue Bonds (collectively, the “Bonds”) are recommended to be sold on a competitive basis, which is expected to result in the lowest overall cost of financing. Staff will conduct a targeted outreach to small, local banks by sending direct emails to these banks to inform them of the pending competitive sale. Staff will be placing the Notice of Sale advertisements in the San Jose Post, El Observador, Chinese News, Vietnam Daily, as well as the Bond Buyer, the daily municipal bond newspaper, to ensure a broad and diverse audience of potential bidders are informed of the competitive sale. The Notice of Sale will specify minimum qualifications as follows: (1) the firm must be in compliance with the Valley Water Board of Directors’ Executive Limitation (EL) 4.7.7 which requires an Environmental, Social and Governance (ESG) rating of medium or better (small local firms are exempt); and (2) the firm is currently qualified in the California State Treasurer’s Office underwriter pool.
Financing Plan
The Bonds will be secured by a pledge of and lien under the Water Utility System Parity Master Resolution (16-10) on Water Utility System Revenues. The authority to issue the Refunding Bonds is provided for in Sections 53580-53589.5 of the California Government Code. The authority to issue any Revenue Bonds is provided for in Section 25.2 of the District Act and Sections 54300 et. seq. of the California Government Code. The Bonds are expected to be issued with a maximum of 30-years repayment term, payable from Net Water Utility Revenues.
Outstanding debt previously issued under the Parity Master Resolution (“Parity Debt”) is currently rated ‘AA+’ by Fitch Ratings (“Fitch”) and ‘Aa1’ by Moody’s Investors Service (“Moody’s), both one-notch below the highest possible ratings of ‘AAA’ and ‘Aaa,’ respectively. Staff will be requesting ratings for the Bonds from Fitch and Moody’s and anticipates receiving similar high-grade credit ratings for this transaction.
Board approval of the Resolutions does not commit Valley Water to a definite course of action with regard to any particular project and does not limit Valley Water in exercising any discretion following California Environmental Quality Act (CEQA) review of the project, including (i) considering other feasible alternatives and mitigation measures to avoid or minimize project impacts, (ii) making modifications deemed necessary to reduce project impacts, or (iii) determining not to proceed with one or more component of a project. Additionally, approval of the recommended actions does not obligate Valley Water to approve the construction of any of the projects.
Estimated Sources and Uses of Bond Proceeds
The estimate of sources and uses of funds for the Bonds are set forth below. The amount of each type of debt may be adjusted to reflect business needs and market conditions at time of issuance. Details of the true interest cost, finance charge, total proceeds, and payment amounts are provided in the “Good Faith Estimated Costs” section below.
|
|
Refunding and Revenue Bonds (2025AB, excluding Taxable 2016) |
Refunding Revenue Bonds (Taxable 2016 Only) |
Revenue Bonds 2025C (San Jose Water Purification Project) |
Total |
|
Sources |
|
|
|
|
|
Principal Amount |
$404,350,000 |
$98,395,000 |
$93,590,000 |
$596,335,000 |
|
Premium |
$23,477,158 |
-- |
$7,042,190 |
$30,519,348 |
|
Bond Proceeds |
$427,827,158 |
$98,395,000 |
$100,632,190 |
$626,854,348 |
|
|
|
|
|
|
|
Uses |
|
|
|
|
|
Repay Short-Term Debt |
$200,000,000 |
-- |
---- |
$200,000,000 |
|
Refund 2016 Debt |
$125,141,176 |
$97,904,903 |
|
$223,046,079 |
|
New Project Funds |
$100,000,000 |
-- |
$100,000,000 |
$200,000,000 |
|
Underwriters’ Fee* |
2,015,597 |
490,097 |
474,103 |
$2,979,797 |
|
Costs of Issuance |
670,385 |
-- |
158,087 |
$828,472 |
|
TOTAL |
$427,827,158 |
$98,395,000 |
$100,632,190 |
$626,854,348 |
*Reflects a conservative assumption of underwriters’ fee that is subject to competitive bid of winning firm.
Good Faith Estimated Costs
Refunding Revenue Bonds and Revenue Bonds, Series 2025A and 2025B
Pursuant to California Government Code Section 5852.1, the good faith estimates are as follows: (1) the true interest cost is currently estimated to be 4.80%; (2) the finance charge (which means the sum of all fees and charges paid to third parties) is estimated to be $2,685,982; (3) the amount of proceeds received by Valley Water (which is net of the finance charge) is estimated to be $425,141,176; and (4) the total payment amount (which means the sum of all debt service payments to the final maturity) is estimated to be $760,012,526.
Refunding Revenue Bonds (Taxable 2016 Obligations Only)
Board approval of the refunding of the Taxable 2016 Obligations would provide Valley Water the option to refund these bonds should market conditions change at the time of the bond sale to produce economic savings. Pursuant to California Government Code Section 5852.1, the good faith estimates, assuming interest rates reduce uniformly by 1.47% compared to current market rates, are as follows: (1) the true interest cost is currently estimated to be 3.92%; (2) the finance charge (which means the sum of all fees and charges paid to third parties) is estimated to be $490,097; (3) the amount of proceeds received by Valley Water (which is net of the finance charge) is estimated to be $97,904,903; and (4) the total payment amount (which means the sum of all debt service payments to the final maturity) is estimated to be $145,550,067. The refunding of the Taxable 2016 Obligations will not occur unless market rates are sufficiently reduced to result in a true interest cost of 3.92% or lower.
Revenue Bonds, Series 2025C (San Jose Water Purification Project)
Pursuant to California Government Code Section 5852.1, the good faith estimates are as follows: (1) the true interest cost is currently estimated to be 4.42%; (2) the finance charge (which means the sum of all fees and charges paid to third parties) is estimated to be $632,190; (3) the amount of proceeds received by Valley Water (which is net of the finance charge) is estimated to be $100,000,000; and (4) the total payment amount (which means the sum of all debt service payments to the final maturity) is estimated to be $181,755,878.
The estimates provided above are based on market conditions as of March 14, 2025, for tax-exempt and taxable debt, plus a 0.25% market rate buffer. Actual results will differ depending on market conditions on the pricing date currently targeted in August 2025.
Financing Documents
The following financing documents, in substantially final form, are attached as follows for Board review: Indentures of Trust, Continuing Disclosure Agreements, Escrow Agreement, and Notice of Sale (Attachment 6: Financing Documents, Series 2025AB) and Indentures of Trust, Continuing Disclosure Agreements, and Notice of Sale (Attachment 7: Financing Documents, Series 2025C).
Issuance Costs
The estimated total costs of issuance, if all the authorized bonds and other obligations are issued, in the amount of $828,472, will be paid from the proceeds of the debt issuances upon or shortly after closing:
|
Description |
Estimate |
|
Rating Fees (Fitch/Moody’s) |
$ 350,000 |
|
Bond Counsel |
205,000 |
|
Municipal Advisor |
160,000 |
|
Trustee |
30,000 |
|
Printing (Official Statement) |
10,000 |
|
News Outlets |
35,000 |
|
Contingency |
33,472 |
|
Total |
$ 828,472 |
Additionally, underwriting costs in the estimated amount of approximately $2,979,797 which is dependent on the amount bid for the Bonds will be retained at closing by the winning firm.
Financing Schedule
The current anticipated financing schedule is summarized below; the dates indicated below are preliminary and subject to change based on market conditions and business needs.
|
Description |
Date/Month |
|
Board Meeting - Financing Plan/Documents |
May 2025 |
|
Board Meeting - Preliminary Official Statement |
July 2025 |
|
Receive Credit Ratings |
August 2025 |
|
Post Preliminary Official Statement |
August 2025 |
|
Pricing |
August 2025 |
|
Closing |
September 2025 |
Preliminary Official Statement
Staff anticipates presenting the Preliminary Official Statement for Board approval in July 2025. As the primary securities offering document to potential investors, the Preliminary Official Statement (POS) contains all material information relevant to the Bonds and the security thereof. Valley Water’s Board and executive team are responsible for ensuring that no material facts are omitted or misstated in the POS in accordance with federal securities laws and disclosure requirements outlined in the Valley Water Debt Management Policy (Attachment 8: Debt Management Policy).
TAX-EXEMPT TAX AND REVENUE ANTICIPATION NOTE AND TAXABLE TAX AND REVENUE ANTICIPATION NOTES
Each fiscal year, the Board is legally required to adopt a new Resolution reauthorizing the execution and delivery of the Tax and Revenue Anticipation Notes (the “TRANs”) to support the $150 million Revolving Line of Credit (Attachment 3: Resolution, TRANs). Debt proceeds from the Revolving Line of Credit 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.
The Revolving Line of Credit was authorized by the Board on April 28, 2020 (Resolution 20-11), which provides for the ongoing administration of the facility, including future renewals. The initial authorization established a $129 million non-syndicated Revolving Line of Credit with U.S. Bank National Association (US Bank), and a $41 million syndicated Revolving Line of Credit with US Bank and three community banks, each with an expiration date on April 29, 2025. Staff has renegotiated the fee structure with US Bank as part of the periodic renewal process and was successful in lowering the original annual commitment fee from 0.35% down to 0.20% or $300,000 per year for a $150 million facility, representing $225,000 in annual savings, and the draw fee was reduced down to a spread of 0.50% plus the benchmark rate (Secured Overnight Financing Rate (SOFR), as calculated by the New York Federal Reserve), from the original 1.40% spread. Due to the reduction in fees, the syndicated Revolving Line of Credit which had a higher fee structure was not renewed.
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.
In addition to the $150 million Revolving Line of Credit, Valley Water Board previously authorized a $250 million Commercial Paper (CP) program, supported by a Letter of Credit from the Sumitomo Mitsui Banking Corporation (SMBC) on October 22, 2024 (Resolution 24-49). The Revolving Line of Credit and CP are good sources of low-cost short-term debt that are issued at variable interest rates. Between 2023 and 2024, Valley Water paid interest rates ranging from 1.95%-2.75% on the tax-exempt short-term debt and from 4.23%-5.84% on the taxable short-term debt.
The long-term strategy is to issue short-term debt to provide just-in-time funding for capital expenditures to minimize interest cost. As the outstanding short-term debt reaches capacity, the outstanding debt is refunded with long-term debt to be repaid over the life of the improvements.
INTENTION TO ISSUE TAX-EXEMPT OBLIGATIONS
Board approval of Resolution of intention to issue tax-exempt obligations is legally required to allow Valley Water to finance eligible capital costs of the WU Enterprise (WUE) (Attachment 4: Resolution, WUE), Watersheds Stream Stewardship Fund (WS), and Safe, Clean Water and Natural Flood Protection (SCW) Program (Attachment: 5 Resolution, WS, SCW). The estimated not to exceed amount of the WU project costs to be reimbursed is $350.7 million, and the WS and SCW project costs is $218.3 million, subject to Board approval of the FY 2026-30 Capital Improvement Program in May 2025.
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 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. SMBC and U.S. Bank both meet the ESG policy requirement. Additionally, Valley Water has expanded its support of local community banks through the following investments:
• $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 impacts associated with this item.
FINANCIAL IMPACT:
The estimated total costs of issuance in the amount of $828,472 plus underwriter’s fees of approximately $2,979,797 will be paid from the proceeds of the debt issuance. The Board adopted FY 2024-25 operating budget, and the proposed FY 2025-26 operating budget includes sufficient funds for the short- and long-term debt programs.
Based on market rates as of March 14, 2025: (a) the refunding of the tax-exempt 2016 Obligations is estimated to result in $823,595 in annual debt service savings, and $17,295,494 over the life of the Obligations; and (b) the refunding of the taxable 2016 Obligations, assuming interest rates decrease by 1.47% compared to current market rates, is estimated to result in $201,152 in annual debt service savings, and $4,224,195 over the life of the Obligations. Actual results will differ and depend on market conditions on the pricing date currently targeted for August 2025.
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, as outlined in the State CEQA Guidelines, Section 15060(c)(2).
ATTACHMENTS:
Attachment 1: Resolution
Attachment 2: Resolution, Water Purification
Attachment 3: Resolution, TRANs
Attachment 4: Resolution, WUE
Attachment 5: Resolution, SCW, WS
Attachment 6: Financing Documents, Series 2025AB
Attachment 7: Financing Documents, Series 2025C
Attachment 8: Debt Management Policy
Attachment 9: PowerPoint
UNCLASSIFIED MANAGER:
Darin Taylor, 408-630-3068