PURPOSE

Due to current market conditions, the City now has an opportunity to take advantage of today�s lower bond interest rates and thereby generate significant savings, totaling up to $2.2 million, which can be used for City capital projects.  Therefore, the purpose of this report is to request authorization for the Burbank Public Financing Authority (the �Authority�) to issue up to $58.0 million in Revenue Bonds, 2007 Series A (Golden State Redevelopment Project) (the �2007 Authority Bonds�).  The proceeds of the 2007 Authority bonds will be used to:

1.      Refund (refinance) a portion of the Authority�s $87.3 million Revenue Bonds, 2003 Series A (Golden State Redevelopment Project),

2.      Purchase in lieu of redemption $25.0 million of the Redevelopment Agency of the City of Burbank Golden State Redevelopment Project Subordinated Tax Allocation Bonds, Issue of 1993, and

3.      Fund approximately $1.8 to $2.2 million of City capital improvements.

Although the financing is complex, the underlying premise is the same as refinancing a home mortgage.  Interest rates are lower today than the interest rates on the existing debt, and staff is therefore recommending this transaction in order to lower interest costs and generate proceeds that can be used to fund needed City projects.

BACKGROUND

The City Council adopted Ordinance No. 2269 on December 22, 1970 which approved and adopted the Golden State Redevelopment Plan for the Golden State Project Area (the �Project Area) in order to eliminate and prevent the spread of blight and deterioration, and to promote the conservation, rehabilitation, renewal and redevelopment of the Project Area to the extent permitted by law and the plan. On October 26, 2004  the City Council adopted Ordinance No. 3654 which  further amended and restated the Golden State Redevelopment Plan, and resulted in the Burbank Merged and Amended Redevelopment Project Area, merging three project areas: City Centre, Golden State, and South San Fernando. The Merged Project Area did not alter or affect the boundaries of the individual three project areas, nor modify any respective project area time limitations,   The Redevelopment Agency of the City of Burbank (�Agency�) continues to be instrumental in the elimination of blight through ongoing redevelopment projects and assistance with City infrastructure improvements.  

On March 16, 1993, a Joint Exercise of Powers Agreement was executed by and between the City and the Agency to form the Burbank Public Financing Authority (the �Authority�) pursuant to the California Government Code and Burbank Municipal Code Sections 14-1701 et seq. . The Authority has the power to borrow money to provide funds for any public facilities and improvements and to issue in its name revenue bonds to evidence the indebtedness created by such borrowing.

In 1993, the Agency issued $69.0 million of Golden State Redevelopment Project Tax Allocation Bonds, 1993 Series A (the �1993 Senior Agency Bonds�). The 1993 Senior Agency Bonds were issued to refinance certain outstanding bonds of the Agency and to generate funds for additional capital projects in the Project Area. The 1993 Senior Agency Bonds carry interest rates of 5.75% to 6.25%, and are payable from a senior pledge of tax increment from the Project Area.

In December 1993, the Agency issued $25.0 million of Golden State Redevelopment Project Subordinated Tax Allocation Bonds, Issue of 1993 (the �1993 Subordinated Agency Bonds�). The 1993 Subordinated Agency Bonds were originally carried on the books of the City to evidence an indebtedness of the Agency and were publicly remarketed on October 16, 2003 as insured bonds.  The remarketed 1993 Subordinated Agency Bonds mature on December 1, 2028, 2033, 2038 and 2043, may be redeemed on or after December 1, 2013, and carry interest rates that range from 5.10% to 5.75%. The 1993 Subordinated Agency Bonds are payable from a junior pledge of tax increment from the Project Area. The remarketed 1993 Subordinated Agency Bonds are insured by Financial Guaranty Insurance Corporation (�FGIC�).

In February 2003, the Authority issued $87.3 million of Revenue Bonds, 2003 Series A (Golden State Redevelopment Project) (the �2003 Authority Bonds�) principally to:

1. Purchase the Agency�s Golden State Redevelopment Project Tax Allocation Bonds, 2003 Series A (the �2003 Senior Agency Bonds�).

2. Purchase in lieu of redemption a portion of the 1993 Senior Agency Bonds.

The purchase in lieu of redemption structure was used in order to preserve the 2024 maturity of the 1993 Senior Agency Bonds. The 2003 Authority Bonds mature annually on December 1 from 2007 through 2024, may be redeemed on or after December 1, 2013 and, with respect to the maturities that can be redeemed, carry interest rates that range from 4.75% to 5.25%. The 2003 Authority Bonds are payable from the debt service payments made by the Agency on the 1993 and 2003 Senior Agency Bonds which, in turn, are secured by a senior pledge of tax increment from the Project Area. The 2003 Authority Bonds are insured by Ambac Indemnity Corporation (�Ambac�).

Current interest rates are lower than the rates on the 1993 Subordinated Agency Bonds and the 2003 Authority Bonds.  To take advantage of these lower rates, the proposed issuance of the 2007 Authority Bonds will refund a portion of the 2003 Authority Bonds and will purchase in lieu of redemption the 1993 Subordinated Agency Bonds. Based on market conditions as of April 6, 2007, the 2007 Authority Bonds are expected to carry interest rates ranging from 3.50% to 4.70%, and to generate approximately $1.8 million to $2.2 million of savings.

Rather than spread the savings over the term of the new bonds, staff recommends that these savings be accelerated and taken �up front.� At the issuance of the 2007 Authority Bonds, the upfront savings will be deposited in a project fund (the �Project Fund�) for use on any City capital project.  For example, the savings in the Project  Fund could be used to fund the approximate $2.0 million gap in funding for the joint City/School District sports field projects.

ANALYSIS

OVERVIEW OF 2007 AUTHORITY BONDS

Based on market conditions as of April 6, 2007, the 2007 Authority Bonds will be issued in the approximate amount of $53.8 million. However, changes in market conditions at the time of sale could cause the principal amount of the 2007 Authority Bonds to decease or increase.  Should interest rates be higher at the time of sale, this will necessitate that more bonds be sold.  Therefore, staff is requesting that Council authorize a �not to exceed� amount of $58.0 million.  In no event shall the principal amount exceed $58.0 million. Further, if the net present value of the projected savings drops below 3.0%, the bonds will not be sold as, at that point, the costs associated with selling the 2007 bonds would exceed the savings.  

The proposed 2007 Authority Bonds will have two primary components:

1)                 Purchase 1993 Subordinated Agency Bonds in lieu of redemption � Approximately $27,910,000 of the proceeds of the 2007 Authority Bonds will be used to purchase the 1993 Subordinated Agency Bonds on their first optional redemption date of December 1, 2013. The 1993 Subordinated Agency Bonds will not be redeemed but will be held in trust by the Trustee for the 2007 Bonds. This approach will preserve the 2043 final maturity of the 1993 Subordinated Agency Bonds.  A traditional refunding would require the final maturity to be shortened to 2021. Prior to December 1, 2013, most of the proceeds of the 2007 Authority Bonds allocable to this purpose will be invested in interest bearing Treasury securities that will mature on December 1, 2013.  The securities, known as SLGS or State and Local Government Series, are structured by the U.S. Treasury so as to basically guarantee a fixed rate of return during their term.  Until the 1993 bonds are purchased in 2013, the SLGS securities� earnings along with the underlying principal will be used to make annual debt payments on the 1993 bonds.

Following the December 1, 2013 purchase date, the debt service on the 1993 Subordinated Agency Bonds will flow through the Trustee to pay a portion of the debt service on the 2007 Authority Bonds. Because the interest rates on the 1993 Subordinated Agency Bonds are higher than the expected rates on 2007 Authority Bonds, the annual debt service payments with respect to the 1993 Subordinated Agency Bonds will be able to fund the annual debt service on a larger amount of 2007 Authority Bonds. As a result, after payment of all transaction costs, this portion of the 2007 Authority Bonds will be able to generate approximately $1,165,000 to $1,525,000 of savings/additional funds that can be deposited in the Project Fund for City capital projects.

2)                 Refund a Portion of the 2003 Authority Bonds � Approximately $25,890,000 of 2007 Authority Bond proceeds will be used to advance refund those 2003 Authority Bonds maturing on December 1, 2014 through 2024. The debt service on the 1993 and 2003 Senior Agency Bonds will flow through the Trustee to pay a portion of the debt service on the 2007 Authority Bonds. After payment of transaction costs, this portion of the 2007 Authority Bonds will generate approximately $585,000 to $625,000 of savings/additional funds that can be deposited in the Project Fund for City capital projects.

The aggregate deposit of between $1.8 million and $2.2 million in the Project Fund represents net present value savings generated through the proposed issuance of the 2007 Authority Bonds in the current market. These savings equate to approximately 4.5% of the underlying Agency bond issues, after payment of all transaction costs. The final savings level will depend on interest rates at the time that the 2007 Authority Bonds are sold. Should market  conditions at time of sale not generate a minimum of 3% net present value savings, the 2007 Authority Bonds will not be issued because at that point, the resultant dollar savings would not justify the cost of issuing the new bonds.

Source of Repayment for 2007 Authority Bonds

The 2007 Authority Bonds will be repaid from debt repayments from a portion of the 2003 Senior Agency Bonds, a portion of the 1993 Senior Agency Bonds, the 1993 Subordinated Agency Bonds (collectively, with the 2003 Senior Agency Bonds and the 1993 Senior Agency Bonds, the �Agency Bonds�) and interest earnings on the 2007 Authority Bonds which will flow to the Trustee. The three Agency Bonds, in turn, continue to be payable from tax increment revenues generated in the Project Area. 

A diagram of the flow of funds for the 2007 Authority Bonds is attached as Exhibit A.

TRANSACTION COSTS

The Authority expects to pay an estimated $1.3 million in aggregate transaction costs in connection with the issuance of the 2007 Authority Bonds. These costs will be funded from bond proceeds and are contingent on the sale and closing of the 2007 Authority Bonds.

There are three primary elements of transaction costs. First, the Authority will purchase bond insurance at an estimated cost of $740,000. Bond insurance will result in �AAA� ratings on the 2007 Authority Bonds which, in turn, will result, in lower interest rates.  Savings as result of obtaining bond insurance will exceed the cost of the insurance.

An estimated $300,000 represents the underwriters� discount (fees) for selling the 2007 Authority Bonds. This amount equates to a discount rate of 0.56% of the par amount of the 2007 Authority Bonds.  The fee is based on a survey of fees paid by other local government agencies on recent comparable bond financings.  Staff was able to negotiate the lower fee based on the survey �comps.�
 

The remaining costs are estimates for the cost of obtaining an underlying credit rating from the bond rating agencies and the costs of bond legal counsel, disclosure counsel to prepare the various legal documents, the City�s financial advisor, bond printer, trustee and miscellaneous costs.

FINANCING TEAM

The financing team will consist of the following:

Bond and Disclosure Counsel: Quint & Thimmig LLP has been retained. This firm has served as the Bond Counsel for the City, Authority and Agency since 1997 (and attorneys at Quint & Thimmig LLP served as bond counsel to the City since 1992 at a prior firm) and served in this capacity with respect to the remarketed 1993 Subordinated Agency Bonds and the 2003 Authority Bonds.

Financial Advisor:  Ross Financial has served as the Financial Advisor for City, Authority and Agency bond issues since 1997 and served in this capacity with respect to the remarketed 1993 Subordinated Agency Bonds and the 2003 Authority Bonds.

Underwriters: De La Rosa & Co. Inc. and Wedbush Morgan Securities have been retained as bond underwriters. De La Rosa & Co. Inc., senior manager, has underwritten and marketed numerous transactions for the City, Authority and Agency and served as underwriter/remarketing agent with respect to the remarketed 1993 Subordinated Agency Bonds and the 2003 Authority Bonds. Wedbush Morgan Securities, co-manager, will assist in the marketing of the 2007 Authority Bonds, in particular with regard to retail investors.  Wedbush staff has significant experience and expertise with regard to a broad spectrum of bond issues at all levels of local government.  Having two firms on the transaction  broadens the market base for the sale of the bonds, and helps ensure the bonds are marketed to a wide spectrum of potential buyers, both private and institutional.

Trustee: Wells Fargo Bank. Wells Fargo currently serves as trustee with respect to the 2003 Authority Bonds and the remarketed 1993 Subordinated Agency Bonds.

BOND DOCUMENTS

A series of bond documents has been prepared by Bond and Disclosure Counsel, Quint & Thimmig LLP. These documents are attached in Exhibit B and include:

First Supplemental Indenture to Subordinated Agency Bond Indenture � This agreement is between the Agency and Wells Fargo Bank, National Association, as Trustee for the 1993 Subordinated Agency Bonds. This First Supplemental Indenture amends the Indenture of Trust relating to 1993 Subordinated Agency Bonds to include a purchase in lieu of redemption provision. The consent of FGIC, as insurer of the 1993 Subordinated Agency Bonds, is required.

Third Supplemental Indenture to Senior Agency Bond Indenture � This agreement is between the Agency and Wells Fargo Bank, National Association, as Trustee for the 1993 Senior Agency Bonds. This Third Supplemental Indenture amends the Indenture of Trust relating to 1993 and 2003 Senior Agency Bonds to allow for minimum denominations of Authority-held bonds issued under this Indenture.

1993 Subordinated Agency Bonds Assignment and Purchase Agreement � This agreement is among the Authority, the Agency and Trustee. This agreement provides for the purchase by the Authority of the 1993 Subordinated Agency Bonds on the call date in lieu of redemption and the assignment of such Bonds to the Trustee.

Agency Bonds Assignment and Transfer Agreement � This agreement is among the Authority, Agency and Trustee. This agreement provides that, upon the refunding of a portion of the 2003 Authority Bonds, a portion of the underlying 1993 and 2003 Senior Agency Bonds will be transferred to the Trustee to provide security for the 2007 Authority Bonds.

Indenture of Trust. This agreement is between the Authority and Wells Fargo Bank, National Association, as Trustee. This Agreement authorizes the issuance of the 2007 Authority Bonds, describes the terms of such Bonds, establishes various funds applicable to 2007 Authority Bond proceeds and the pledged revenues, contains certain covenants of the Authority relative to the 2007 Authority Bonds, and appoints Wells Fargo Bank, National Association to serve as trustee for the payment of the 2007 Authority Bonds.

Escrow Deposit and Trust Agreement.  This agreement is between the Authority and Wells Fargo Bank, National Association as Escrow Bank (the �Escrow Bank�). This Agreement instructs the Escrow Bank to purchase certain Treasury Securities in connection with the refunding of a portion of the 2003 Authority Bonds.

Bond Purchase Agreement.  This agreement is between the Authority and De La Rosa & Co. Inc. and Wedbush Morgan Securities (the �Underwriters�) as purchasers of the 2007 Authority Bonds. This Agreement sets forth the Underwriters� obligation to purchase the 2007 Authority Bonds at the interest rates and prices set forth in the agreement, subject to certain conditions that are standard in the marketplace. The interest rates on the 2007 Authority Bonds will be set on the sale date and are subject to market conditions.

Preliminary Official Statement. This is the offering document by which the Underwriters will market the 2007 Authority Bonds. It describes the 2007 Authority Bonds, the use of proceeds, security and sources of repayment, the Agency, the Golden State Redevelopment Project, various risk factors and other matters that a potential investor may consider relevant in its decision to purchase the 2007 Authority Bonds. The Official Statement will be signed by a representative of the Authority and the Agency.

Continuing Disclosure Certificate. This document sets forth the responsibility of the Agency to provide an annual report to the marketplace about the 2007 Authority Bonds. The annual report consists of the Agency�s audited financial statements and updates on certain information provided in the Official Statement.

RATINGS/BOND INSURANCE/TIMING

Standard and Poor�s, Moody�s Investor Services and Fitch Ratings have been requested to provide a bond rating.  Bond insurance is expected to be obtained from FGIC, Ambac or MBIA Insurance Corporation.

Current market conditions will dictate when the 2007 Authority Bonds will be priced and the ultimate savings to be attained.  Should the market conditions not generate a minimum of 3% net present value savings the 2007 Authority Bonds will not be issued.

FISCAL IMPACT

The proposed purchase in lieu of redemption and refunding transaction anticipates a total net present value savings of up to $2,150,000 related to the Project Area after payment of all transaction costs.  The anticipated net present value savings will change pending final pricing of the proposed 2007 Authority Bonds.  Compensation for the Financing Team will be paid from the proceeds of the 2007 Authority Bonds.

CONCLUSION

Staff has identified an opportunity to reduce City costs, by taking advantage of today�s relatively low bond interest rates.  Although the proposed financing is complex, the strategy is essentially no different than that of refinancing a home mortgage, where existing debt is being refinanced at lower interest rates.  Instead of lowering annual bond debt payments, the savings from the lower interest rates are being taken up front, as net proceeds.  The net proceeds, estimated at between $1.8 million and $2.2 million, may then be used on any City capital project, thereby benefiting the entire community.

RECOMMENDATION

Staff recommends that the Burbank Public Financing Authority, Redevelopment Agency and City Council adopt the proposed resolutions.

GOLDEN STATE:

1.         Adoption of proposed Burbank Public Financing Authority resolution entitled: A RESOLUTION OF THE BURBANK PUBLIC FINANCING AUTHORITY AUTHORIZING ISSUANCE OF REVENUE BONDS, APPROVING THE FORMS AND AUTHORIZING AND DIRECTING EXECUTION OF CERTAIN BOND FINANCING DOCUMENTS AND AUTHORIZING AND DIRECTING ACTIONS WITH RESPECT THERETO (GOLDEN STATE PROJECT AREA).

2.         Adoption of proposed Redevelopment Agency resolution entitled:

A RESOLUTION OF THE REDEVELOPMENT AGENCY OF THE CITY OF BURBANK APPROVING THE ISSUANCE OF REVENUE BONDS BY THE BURBANK PUBLIC FINANCING AUTHORITY, APPROVING THE FORMS AND AUTHORIZING AND DIRECTING EXECUTION OF CERTAIN BOND FINANCING DOCMENTS AND AUTHORIZING AND DIRECTING ACTIONS WITH RESPECT THERETO (GOLDEN STATE PROJECT AREA).

3.         Adoption of proposed City Council resolution entitled:

A RESOLUTION OF THE COUNCIL OF THE CITY OF BURBANK MAKING FINDINGS WITH RESPECT TO, AND APPROVING THE ISSUANCE OF, REVENUE BONDS BY THE BURBANK PUBLIC FINANCING AUTHORITY,  AND  APPROVING THE SALE THEREOF. (GOLDEN STATE PROJECT AREA)

Exhibit A -     Flow of funds diagram

Exhibit B -     Golden State Draft Bond Documents, including Preliminary Official      Statement

FS/K/Admin/Bond Financings/RDA staff report � bonds april 20072

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