Cal­i­for­nia City Over­came Tur­moil for Re­fund­ing

The Bond Buyer - - Front Page - Kee­ley Web­ster

LOS AN­GE­LES – Ox­nard, Cal­i­for­nia, of­fi­cials call a re­cent wa­ter and waste­water re­fund­ing deal a suc­cess with in­vestors, over­com­ing years of lo­cal tur­moil that in­cluded a voter-ap­proved re­ver­sal of a rate in­crease and an un­suc­cess­ful re­call ef­fort tar­get­ing the mayor and city coun­cil mem­bers.

“The story they heard from Je­sus Nava, [Ox­nard’s as­sis­tant city man­ager] in terms of the pos­i­tive trends came through,” said Mike Meyer, a vice pres­i­dent with NHA Ad­vi­sors, the fi­nan­cial ad­viser on the deal.

Ox­nard’s waste­water and wa­ter rates have been a hot potato in lo­cal pol­i­tics.

When the City Coun­cil voted to steeply raise rates in one fell swoop

in 2015, res­i­dents, led by lo­cal busi­ness­man Aaron Starr, re­volted. Starr got Mea­sure M on the bal­lot in 2016 and more than 70% of res­i­dents voted to re­verse the rate in­crease. The city gov­ern­ment had a bad image. An in­ves­ti­ga­tion by the Ven­tura County Dis­trict At­tor­ney’s of­fice in 2012 cre­ated dis­trust though the DA ul­ti­mately found that none of the gifts re­ceived by city of­fi­cials from firms that did busi­ness with the city rose to the level of crim­i­nal ac­tiv­ity.

“Sev­eral multi-mil­lion dol­lar trans­ac­tions were ex­am­ined in de­tail and no crim­i­nal ac­tiv­ity was dis­cov­ered,” ac­cord­ing to the DA’s 2012 re­port. “The ev­i­dence does not sup­port the al­le­ga­tion that the of­fi­cials had fi­nan­cial in­ter­ests in the con­tracts they ap­proved.”

The DA turned the mat­ter over to the Fair Po­lit­i­cal Prac­tices Com­mis­sion, which levied fines against some city of­fi­cials for not re­port­ing gifts, and for ac­cept­ing gifts over an­nual thresh­olds al­lowed for gov­ern­ment of­fi­cials. The gifts were mainly din­ners, travel and tick­ets to sport­ing events.

The city coun­cil later ap­proved a lower and phased-in set of rate in­creases for the two sys­tems, to which Starr re­sponded by gath­er­ing pe­ti­tions to force a re­call elec­tion seek­ing to re­move three coun­cil mem­bers and the mayor. Vot­ers re­jected the re­call May 1.

City of­fi­cials had said that with­out rate in­creases the city would vi­o­late covenants for ex­ist­ing wa­ter rev­enue bonds.

Ahead of the deal, S&P up­graded the waste­water rev­enue re­fund­ing bonds two notches to A-mi­nus from BBB and as­signed a sta­ble out­look. The wa­ter rev­enue re­fund­ing bonds re­ceived an A rat­ing. Both deals car­ried AA rat­ings from S&P be­cause of Build Amer­ica Mu­tual in­sur­ance.

“The raised rat­ing re­flects our view of the steps taken by the city to de-risk its debt port­fo­lio by re­fund­ing its ex­ist­ing vari­able-rate bonds with this se­ries 2018 fixed-rate bonds and ter­mi­nat­ing a swap agree­ment to which it is a party,” S&P an­a­lysts Mal­colm N D’Silva and Tim Tung wrote Nov. 6.

The waste­water rev­enue bonds priced to yield be­tween 1.98% for the 2019 ma­tu­rity and 3.86% for the 2034 ma­tu­rity. The wa­ter rev­enue bonds priced to yield be­tween 2.13% for the 2020 ma­tu­rity and 4.07% for the 2036 ma­tu­rity.

The city achieved $4.8 mil­lion present value sav­ings on the wa­ter re­fund­ing; and $1.8 mil­lion present value sav­ings on the waste­water re­fund­ing. The sav­ings are in­clu­sive of the ter­mi­na­tion of a swap agree­ment with RBC.

“In­vestors re­sponded by say­ing, ‘You got your act to­gether and finances have im­proved greatly,’” Nava said. “We think you have a brighter fu­ture ahead and have con­fi­dence that those are at­trac­tive in­vest­ments.”

Even be­fore mar­ket­ing to in­vestors, the city had to con­vince res­i­dents that re­fund­ing out of vari­able-rate debt and the re­sul­tant sav­ings were nec­es­sary and ben­e­fi­cial; and that rate in­creases were needed to pay prior bonds and up­date the wa­ter sys­tem, Meyer said.

The dis­trict is­sued the se­ries 2018 bonds to re­fund ex­ist­ing se­ries 2006 obli­ga­tions for an­nual debt ser­vice sav­ings. The city had roughly $173 mil­lion in wa­ter debt out­stand­ing at the end of fis­cal 2018, ac­cord­ing to S&P.

The fi­nance team in­cluded JPMor­gan as book run­ner, Ramirez & Co., Inc. as co-man­ager and Best Best and Krieger LLP as bond coun­sel.

Some of Ox­nard’s ac­count­ing ir­reg­u­lar­i­ties and fail­ures to cor­rectly re­port ex­penses stemmed from turnover in fi­nan­cial staff af­ter the 2008 re­ces­sion, said Nava, who worked for the Santa Clara Wa­ter Dis­trict be­fore com­ing to Ox­nard in De­cem­ber 2016.

Nava will re­tire at the end of the year. City Man­ager Alex Nguyen, who came over from River­side this sum­mer, re­cently signed a five-year con­tract, which should help pro­vide con­ti­nu­ity, Nava said.

The city still has work to do to es­tab­lish solid ac­count­ing prac­tices, ac­cord­ing to S&P’s rat­ings re­port.

“A lin­ger­ing, but di­min­ish­ing, credit weak­ness, in our view, is the city’s legacy of man­age­ment de­fi­cien­cies, which the city started to con­front pub­licly in 2015 upon the re­lease of a con­sul­tant study that in­cluded a list of 128 gov­er­nance im­prove­ment ideas,” S&P an­a­lysts Chris Mor­gan and Christo­pher Grant wrote in an Oct. 18 re­port that af­firmed the city’s is­suer rat­ing at A and its long-term rat­ing at A-mi­nus, with a sta­ble out­look.

The city has pro­vided up­dates on each line item for gov­er­nance im­prove­ments on its to-do list, but has fully ad­dressed less than half, an­a­lysts said. The city has made bet­ter progress in deal­ing with in­ter­nal con­trol and man­age­ment prac­tices whit­tling a list of 96 items down to five, which S&P pos­tu­lated will be re­moved from the au­di­tors’ find­ings by the city’s fis­cal 2018 au­dit.

“We think Ox­nard is ex­pe­ri­enc­ing the tail end of a pe­riod of in­sti­tu­tional stress and po­lit­i­cal con­flict, with in­ef­fec­tive waste­water util­ity man­age­ment ear­lier in the decade lead­ing to dra­matic rate in­creases and po­lit­i­cal con­flict cul­mi­nat­ing in a re­call elec­tion that saw vot­ers turn down the op­por­tu­nity to re­place the mayor and three coun­cil mem­bers,” Mor­gan and Grant wrote.

The city will have roughly $457 mil­lion in di­rect debt out­stand­ing at the end of fis­cal 2019, ac­cord­ing to S&P.

The city went to court to chal­lenge the ref­er­en­dum that re­jected the ear­lier rate in­crease, but a su­pe­rior court judge ruled against Ox­nard in March.

“It is un­clear at this point whether city will be re­quired to make re­fund pay­ments to af­fected cus­tomers, or if the re­funds can take the form of cred­its against fu­ture billings,” S&P’s Tung wrote. “Based on re­cent au­dited and unau­dited cash and in­vest­ment bal­ances, we be­lieve that the sys­tem has the ca­pac­ity to make th­ese re­funds with­out ad­versely af­fect­ing credit qual­ity at the cur­rent rat­ing level.”

The city has es­ti­mated the max­i­mum cost of re­funds at $5.2 mil­lion, which S&P said city cof­fers could ab­sorb.

S&P said the re­fund­ing deal re­duces risk for the Ox­nard wa­ter and waste­water en­ter­prises.

“Al­though pro forma sav­ings as­so­ci­ated with the trans­ac­tion were mod­est, the city was able to sim­plify its debt port­fo­lio by re­mov­ing risks as­so­ci­ated with re­new­ing let­ter-of-credit sup­port for its vari­able-rate de­mand bonds and ad­min­is­tra­tive com­plex­i­ties in­her­ent to vari­able-rate debt and swap agree­ments,” Mor­gan and Grant wrote in the Oct. 18 re­port.

“Stan­dard & Poor’s up­grade of Ox­nard’s waste­water bonds vin­di­cates the City Coun­cil’s de­ci­sion to raise waste­water rates,” said Tim Flynn, Ox­nard’s mayor. “It’s a wel­come ac­knowl­edg­ment of the Coun­cil’s abil­ity to take a tough vote, and a clear sign of Ox­nard’s con­tin­u­ing fi­nan­cial sta­bil­ity.”

The city com­pleted a rate set­ting process in 2017 and im­ple­mented the first two of five ap­proved rate in­creases that led to a sig­nif­i­cant im­prove­ment in the city’s fis­cal 2017 fi­nan­cial per­for­mance, S&P an­a­lysts wrote in the Nov. 8 re­port.

“We an­tic­i­pate that the ap­proved rate plan will drive stronger per­for­mance in the near fu­ture,” S&P an­a­lysts D’Silva and Tung wrote.

It took city of­fi­cials and the fi­nan­cial ad­vi­sors more than a year and a half to get to the re­fund­ing, said Craig Hill, a prin­ci­pal with NHA Ad­vi­sors.

“It was a two-year stormy ad­ven­ture for the city, but the city staff and city coun­cil were able to stay the course,” Hill said. “They made the beach­head and were able to do what oth­ers be­fore us said they need to have to ac­cess the cap­i­tal mar­kets. It was a case study in main­tain­ing a strate­gic plan that didn’t de­vi­ate. It ended up be­ing a win for the city.” ◽

For more con­tent about this re­gion, visit the Re­gional News tab on BondBuyer.com.

Michael Cabezas

Ox­nard, Cal­i­for­nia’s as­sis­tant city man­ager, Je­sus Nava, per­suaded res­i­dents of the need for wa­ter and waste­water and rate in­creases.

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