Title
Ordinance Authorizing Amendment of Prior Water System Bond Ordinances to Allow for Issuance of Taxable Obligations (Ordinance S-47195)
Description
An ordinance authorizing the City Manager, or his designee, to amend ordinance S-33635 adopted Jan. 10, 2007, ordinance S-34858 adopted March 19, 2008, ordinance S-42635 adopted June 15, 2016 and ordinance S-45429 adopted March 6, 2019 relating to the issuance, sale and refunding of water system revenue obligations to allow the issuance of taxable obligations.
Report
Summary
Generally, the City issues tax-exempt bonds which is permitted by federal law. This means that interest earnings on municipal bonds are exempted from federal taxes making them appealing to bond holders. The tax-exemption coupled with the City's high credit rating allows the City to issue tax-exempt municipal bonds for low interest rates.
However, there are instances when issuing taxable bonds is beneficial to the City. In December 2017, the federal government passed the "Tax Cuts and Jobs Act." This action eliminated the City's ability to advance refund tax-exempt bond issuances on a tax-exempt basis. Further, tax-exempt bond issuances have regulations which limit the use of the bond proceeds. Current market conditions for taxable bonds make them appealing with interest rates continuing to fall over the last few years. Current taxable interest rates are now lower than historical tax-exempt interest rates, providing potential savings opportunities to refund previously issued tax-exempt bonds with taxable bonds. The current economic conditions and this significant decrease in interest rates has also caused the cost difference between tax-exempt interest rates and taxable interest rates to decrease, making new issuances of taxable bonds a viable alternative. This authorization will allow the City to take advantage of the current market conditions for taxable bonds and to refund previously issued bonds at a lower cost. The Finance Department is targeting a taxable advance refunding opportunity for the Water System assuming current market conditions continue through Spring 2021.
Financial Impact
The existing bond authorization amounts are sufficient for the Water System. If current market conditions continue, the refunding opportunity could result in savings of $30 million over the life of the bonds.
Concurrence/Previous Council Action
This ordinance would amend authorizations adopted Jan. 10, 2007 (S-33635), March 19, 2008 (S-34858), June 15, 2016 (S-42635) and March 6, 2019 (S-45429).
Department
Responsible Department
This item is submitted by City Manager Ed Zuercher and the Finance Department.