Meeting_Body
FINANCE, BUDGET & AUDIT COMMITTEE
SEPTEMBER 19, 2024
Subject
SUBJECT: MEASURE R BONDS
Action
ACTION: APPROVE RECOMMENDATIONS
Heading
RECOMMENDATION
Title
CONSIDER:
A. ADOPTING a Resolution, Attachment A (“Resolution”), that authorizes the issuance and sale of up to $500 million in aggregate principal amount of Measure R Senior Sales Tax Revenue Refunding Bonds in one or more series and taking all other actions necessary in connection with the issuance of the refunding bonds (“Refunding Bonds”); and
B. ESTABLISHING an underwriter pool as shown in Attachment B that will be used to select underwriters for all future negotiated debt issues through June 30, 2029.
(REQUIRES SEPARATE, SIMPLE MAJORITY VOTE OF THE FULL BOARD)
Issue
ISSUE
The outstanding Measure R Senior Sales Tax Revenue Bonds, Series 2010-A (“2010 Bonds”) are eligible for refunding, on a current basis, pursuant to the Extraordinary Optional Redemption (“EOR”) provision described in Section 14.02 of the First Supplemental Trust Agreement relating to the 2010 Bonds. As discussed in more detail below, the EOR provision offers Metro an opportunity to pay off, or refund, the 2010 Bonds prior to maturity at a lower redemption price than otherwise provided following a reduction in federal subsidy payments relating to the 2010 Bonds. Such subsidy payments were originally authorized by the American Recovery and Reinvestment Act of 2009, as part of the Build America Bond (“BAB”) program at the time the 2010 Bonds were issued. Approximately $482.40 million of the 2010 Bonds are outstanding and eligible for the refunding.
The refunding would also eliminate the risk to Metro that Congress further reduces, or outright terminates, the subsidy payments (which are reimbursements to Metro from the Federal Government for a portion of the interest payable on the 2010 Bonds). The reduction of subsidy payments is called sequestration. In addition, the refunding would add optionality to Metro’s Measure R debt portfolio by including a par call option (the ability to redeem the Refunding Bonds prior to their final maturity at a redemption price equal the principal amount of the Refunding Bonds, plus accrued interest), not available in connection with the outstanding 2010 Bonds, which provide for only redemptions that utilize the EOR provision.
Background
BACKGROUND
Following authorization of the proposed refunding, Metro may proceed to refund the outstanding 2010 Bonds as early as October 2024 using the EOR provision. The Debt Policy establishes criteria to evaluate refunding opportunities for economic cost-effective opportunities or other non-economic reasons to issue refunding obligations. The refunding would add option value with an early call option applicable to the Refunding Bonds, and it would eliminate the sequestration risk associated with the 2010 Bonds.
Build America Bonds history:
In 2009 and 2010, the Build America Bond (“BAB”) program allowed municipal issuers to issue taxable bonds for new money purposes with the expectation that issuers would be reimbursed for 35% of the interest payable on such bonds (in the form of subsidy payments distributed semi-annually to such issuers, including Metro). When Metro’s Series 2010-A Build America Bonds were issued in 2010 it was determined at the time that, with the 35% interest subsidy provided under the BAB program, the taxable 2010 Bonds provided a lower cost of funds than traditional tax-exempt bonds. However, following the subsequent enactment by Congress of the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012, which required sequestration of certain direct federal spending, BAB subsidy payments, including with respect to the 2010 Bonds, were reduced by 8.7% in 2013 (reduced from 35% to 31.95%) for federal fiscal year 2013.
The sequestration percentage of the subsidy has fluctuated from year to year since 2013. Currently, BAB subsidy payments are subject to sequestration at the 5.7% (reduced from 35% to 33.01%) rate through FY2030. Additionally, the Statutory Pay-As-You-Go Act of 2010 can impose mandatory spending cuts, including potentially 100% sequestration of the BAB subsidy, if legislation increases the federal budget deficit. In 2022, there were concerns that the BAB subsidy could be subject to 100% sequestration in 2023. The Consolidated Appropriations Act of 2023 protected the BAB subsidy from being subject to 100% sequestration through 2025, but risks remain based on future federal budget conditions. Further, in November 2023, the U.S. Supreme Court effectively confirmed that Congress had full authority to reduce BAB payments through sequestration. Sequestration risk is the threat of reduced subsidy payments due to automatic government spending cuts, which can impact bondholders and increase costs for Metro. This refunding would eliminate the sequestration risk associated with the 2010 Bonds and protect Metro from paying increased debt service over the remaining life (potentially up to $62 million). The Refunding Bonds help Metro avoid the risk of losing money if Congress cuts BAB subsidy payments, making it safer and easier to pay off debt.
Discussion
DISCUSSION
Refunding Bonds:
The Refunding Bonds will be structured as fixed rate bonds and will be sold using a negotiated sale method. If market conditions change suddenly, a negotiated sale provides Metro the flexibility to alter the sale date and/or bond structure, as needed. A negotiated sale method also allows Metro to advance its DBE/SBE/DVBE firm participation goals. In alignment with Metro’s desire to maximize DBE/SBE/DVBE firm participation, 50% of the participants chosen for the proposed transaction identify as DBE/SBE/DVBE, including the lead Senior Manager role. The underwriters will pre-market the issue to target as many investors as possible, assist with the credit rating process and advise on market conditions for optimal bond pricing.
The evaluation team has selected the following firms as the underwriting syndicate for the transaction.
Senior Managing Underwriter: Siebert Williams Shank & Co. (DBE)
Co-Senior Managing Underwriters: Jefferies and Morgan Stanley
Co-Managing Underwriter: Academy Securities (DVBE)
Underwriting Pool:
Consistent with the Metro Debt Policy, underwriters for this transaction and the requested pool were selected by a competitive Request for Proposal (“RFP”) process conducted by Montague DeRose and Associates, LLC (“MDA”) and Public Resources Advisory Group (“PRAG”), Metro’s Transaction Municipal Advisor and General Municipal Advisor, respectively. Of the 25 proposals received,17 are recommended for the negotiated underwriting pool expiring June 30, 2029. Orrick, Herrington & Sutcliffe LLP and Nixon Peabody LLP were selected by Treasury staff and County Counsel to serve as Bond Counsel and Disclosure Counsel, respectively.
Of the 25 proposals received during the underwriter selection process, 13 were designated as DBE/SBE/DVBE (doubling the number of DBE/SBE/DVBE firms in Metro’s underwriter pool from 4 to 8).
Determination _of_Safety_Impact
DETERMINATION OF SAFETY IMPACT
Approval of this item will not impact the safety of Metro’s patrons or employees.
Financial_Impact
FINANCIAL IMPACT
The costs of issuance for the Refunding Bonds will be paid from proceeds of the financing and will be budget neutral. Approval of this item is intended to reduce financial risk, sequestration risk, and maintain planned funding and schedules for Metro capital projects funded by Measure R.
Equity_Platform
EQUITY PLATFORM
During the underwriter selection process, Metro was able to double the number of DBE/SBE/DVBE firms in the new underwriter pool. Almost half of the new members of the pool (8 of 17) is made up of DBE/SBE/DVBE firms. Metro Treasury will continue outreach encouraging participation by these firms while ensuring they have sufficient underwriting capacity to support bond transactions.
Implementation_of_Strategic_Plan_Goals
IMPLEMENTATION OF STRATEGIC PLAN GOALS
Recommendation supports the following Metro Strategic Plan Goal:
Goal #5: Provide responsive, accountable, and trustworthy governance within the Metro organization.
Alternatives_Considered
ALTERNATIVES CONSIDERED
The Board could defer the issuance of the Refunding Bonds to a later time or indefinitely. This is not recommended because staff cannot predict that interest rates will remain low enough to generate a comparable economic benefit. Federal Reserve Bank actions and all other market and economic conditions may create federal budget constraints and result in further BAB subsidy reductions. Additionally, deferring issuance to a later time or indefinitely would result in the 2010 Bonds remaining at risk of increased or complete sequestration.
Next_Steps
NEXT STEPS
• Obtain ratings on the Refunding Bonds
• Complete legal documentation and distribute the preliminary official statement to potential investors, initiate the pre-marketing efforts
• Negotiate the sale of the Bonds with the underwriters
Attachments
ATTACHMENTS
Attachment A - Authorizing Resolution
Attachment B - Summary of Underwriter Selection
Prepared by: Rodney Johnson, Treasurer, (213) 922-3417
Biljana Seki, Assistant Treasurer, (213) 922-2554
Michael Kim, Senior Budget Manager, (213) 922-4026
Reviewed by: Nalini Ahuja, Chief Financial Officer, (213) 922-3088
