Background

The City’s focus on resiliency and innovative constraint has enabled us to maintain our financial strength and continue providing the high quality services that are important to our residents – even during challenging swings in the economy. To accomplish this, the City of Sugar Land prepares a five-year capital improvement program (CIP) annually as part of the budget process, incorporating the first year of the plan into the adopted budget for appropriation. Our approach in the FY2019-2023 CIP continues this focus – taking into account current and future capital needs while weighing financial impacts on taxpayers and rate payers.

In order to maximize the City's ability to invest in such improvements - and to ensure residents today will not be solely responsible for funding improvements that will benefit future residents, the City's CIP regularly includes projects anticipated to be funded from the issuance of debt.

Not only does the City carry a "AAA" bond rating for its tax-backed debt – which means we are able to complete more projects at a lower cost to residents, but staff regularly monitors the market for refunding opportunities to save taxpayers and rate payers even more money throughout the life of projects - further allowing the City to complete additional projects at lower tax and utility rates than would otherwise be possible.

In the municipal bond world, refunding bonds are a means of refinancing outstanding debt to achieve overall savings. When bonds are issued, they usually have a call provision - usually 10 years, which means that anytime on or after the call date, the issuer has a right to redeem or “call” the bonds at par value. Typically, this is done by issuing new bonds that carry a lower interest cost than the original bonds. The cost of issuing the new bonds is factored into the analysis to determine whether the refunding generates sufficient savings to warrant moving forward with the refunding. Refunding bonds can also be issued to restructure outstanding debt; however, the City strives to maintain the same maturity structure in the new bond issue so that the debt obligations are not being extended.

Financial Management Policy Statements (FMPS) Guidance

The Council-adopted FMPS address refunding bonds as follows:

Debt Refunding
The City’s financial advisor shall monitor the municipal bond market for opportunities to obtain interest savings by refunding outstanding debt. As a general rule, the net present value savings of a particular refunding should exceed 3.0% of the refunded maturities unless (1) a debt restructuring is necessary or (2) bond covenant revisions are necessary to facilitate the ability to provide services or to issue additional debt.

Sale Process
The City shall use a competitive bidding process in the sale of debt unless the nature of the issue warrants a negotiated sale. The City will utilize a negotiated process when the issue is, or contains, a refinancing that is dependent on market/interest rate timing. The City shall award the bonds based on a true interest cost (TIC) basis. However, the City may award bonds based on a net interest cost (NIC) basis, as long as the financial advisor agrees that the NIC basis can satisfactorily determine the lowest and best bid.

GO Refunding
There are four issues that staff has been monitoring for a refunding opportunity. Three of the issues are callable in February 2019, and one is currently callable and will be redeemed upon delivery of funds. Bonds are considered a current refunding if the delivery date of the new bonds is within 90 days of the call date of the old bonds. With last year’s passage of the Tax Reform Act, a current refunding is the only available option to refund outstanding bonds with tax exempt debt.

The proposed refunding is being evaluated as part of the recent ratings visit and review by Standard & Poor’s and Fitch Investors Service.   Both agencies affirmed the City's "AAA" rating for tax-backed debt.

Based on November 26th market conditions, the refunding could produce a net present value savings of $843,185 with annual debt service savings averaging $82,146 for the next 12 years. The overall anticipated savings is 5.8% of the bonds being refunded, which is within the threshold set by the FMPS.

Approximately 30% of the savings will be realized in the Tourism fund, as $3.84 million of the $6.715 million GO Refunding Series 2010 bonds is related to the Conference Center at the Sugar Land Town Square Marriott, which is supported by hotel tax revenues.

The refunding bonds will be competitively sold, with bids due at 10:45 a.m. on December 4, 2018.  The attached ordinance will be presented along with the sale results and recommendation during the Council meeting.  While this refunding will be a stand-alone transaction, the official statement will be combined with the 2019 Certificates of Obligation for IRS purposes, since the issues carry the same pledge of property taxes.  The Preliminary Official Statement and draft Bond Ordinance are attached as exhibits.

The refunding opportunity was reviewed with the City Council Finance/Audit Committee at their November 15th meeting.  The Committee concurred with the staff recommendation to move forward with the refunding, as long as market conditions hold steady.