It is recommended that the City Council authorize staff to proceed with the issuance of City of Sunnyvale Solid Waste Revenue Refunding Bonds, 2002 Series A (the "2002 Bonds") to refund the Sunnyvale Financing Authority’s Utility Revenue Bonds, 1992 Series B (Solid Waste Materials Recovery and Transfer Station) (the "1992B Bonds"). It is recommended that the 2002 Bonds be sold through a negotiated sale.

Staff further recommends that the Council award two contracts: the first to the law firm of Jones Hall of San Francisco as Bond Counsel and Disclosure Counsel and the second to Ross Financial of San Francisco as Financial Advisor.

On June 9, 1992, the City of Sunnyvale entered into an agreement with the Cities of Mountain View and Palo Alto titled the Second Memorandum of Understanding (the "MOU"). The MOU laid out the agreement between the three cities for the construction and operation of the Sunnyvale Materials Recovery and Transfer Station (SMaRT StationÒ ). The percentage distribution of debt service payments on funding provided for the construction is also included in the MOU. Under the MOU, the City of Sunnyvale is responsible for 55.28% of the debt service. Pursuant to that agreement, in December 1992, the Sunnyvale Financing Authority (the "Authority") sold $24,160,000 of Utilities Revenue Bonds, 1992 Series B (the "1992B Bonds"), which closed in early January of 1993. The 1992B Bonds, proceeds of which were used to finance the construction of the SMaRT Station, were issued on a parity with the Authority’s $23,485,000 Utilities Revenue Bonds, 1992 Series A (Wastewater Reuse and Sludge Management Facilities) (the "1992A Bonds").

In December 2001, the Authority refunded the 1992A bonds with the Authority’s $32,115,000 Water and Wastewater Revenue Bonds, Series 2001 (the "2001 Bonds") but were unable to do the same with the 1992B bonds as they were not yet eligible for refunding. The 1992B Bonds are now eligible for refunding.

By the time of the refunding, scheduled for November 2002, $18,230,000 of 1992B Bonds will be outstanding. The 1992B Bonds carry interest rates ranging from 5.80% in 2003 to 6.00% in 2017. The 1992B Bonds are rated "Aaa" by Moody’s Investors Service and "AAA" by Standard & Poor’s. These ratings and interest rates reflect a bond insurance policy from MBIA that guarantees payment of principal and interest to bondholders. At the present time, bond interest rates are at lower levels than they have been in many years. These falling interest rates present the opportunity for the City to reduce debt service through refinancing the 1992 Bonds.

In addition, refunding the 1992B Bonds also will allow the City to complete the restructuring of its outstanding utility debt that commenced with the refunding of the 1992A Bonds. The 2002 Bonds will contain equivalent provisions to the 2001 Bonds, including a more flexible rate covenant and more limited revenue pledge.

Today’s interest rates are at lower levels than seen for many years. Ten-year Treasury interest rates are at approximately 4.50%; and insured California municipal bonds yield rates of approximately 4.75% in fifteen years, the final maturity for the 1992B Bonds. These low interest rates present the opportunity for the City to enjoy a reduction in annual debt service through refunding the 1992B Bonds.

Assuming interest rates at the time that this report was prepared, a refunding would reduce the three cities' annual debt service payment by an average of $115,000 for each of the remaining fifteen years of the debt. This assumes that the 2002 Bonds will be structured to mature in 2017, the original maturity of the 1992B Bonds. At such assumed interest rates, the total savings over the life of the 2002 Bonds would be approximately $1.7 million; and present value savings would be approximately $1.3 million. This represents net savings to the City after payment of all costs of issuing the 2002 Bonds.

At the assumed interest rates, the true interest cost of the 2002 Bonds would be approximately 4.53%. Of course, interest rates may change by the anticipated market date in early November. The City, therefore, will not know the precise savings until the 2002 Bonds are sold.

Increased Flexibility

In addition to the considerable savings to be realized, refinancing the 1992B Bonds will allow the City to incorporate a more flexible rate covenant in the 2002 Bonds. The new rate covenant will allow the City to consider: (1) payments made by the Cities of Palo Alto and Mountain View for their respective share of debt service on the 2002 Bonds, and (2) a portion the City’s unreserved solid waste system cash balances in setting rates. This kind of covenant is common in utility revenue bond financing and is similar to the rate covenant incorporated in the 2001 Bonds.

The 2002 Bond documents may contain other changes from the original bond documents as the financing team prepares the 2002 Bonds for sale. Staff will inform Council as to any material changes in the next applicable staff report.

The 2002 Bonds will be issued by the City rather than the Authority. State law permits this approach for debt issued only to refund outstanding obligations. This approach will simplify the bond structure and the documentation.

The 1992B Bonds are secured by a combined pledge of revenues from the City’s wastewater, water and refuse enterprises. Bond Counsel advises us that such a combined pledge may no longer be permissible after the adoption by California voters of Proposition 218. Accordingly, the 2002 Bonds will be secured and payable only from solid waste system revenues and deposits made to the SMaRT Station Operating Fund.

There are two ways that the City can sell bonds: competitive and negotiated. In a negotiated sale, the City works with an underwriter to prepare the bonds for sale. Bonds sold at negotiated sale typically have complex structures and require more presale marketing or are sold in particularly volatile markets. As a result of such presale marketing, a negotiated sale typically will result in a better interest rate than if such securities are sold at competitive sale as discussed below.

A negotiated sale is recommended for the 2002 Bonds. The reasons are twofold. First, solid waste revenue bonds often require greater presale marketing than other kinds of municipal obligations. The 2002 Bonds are also more complicated than traditional solid waste revenue bonds because of the involvement of Palo Alto and Mountain View with the SMaRT Station. Second, the timing for the 2002 Bonds may coincide with the issuance of several billion dollars of electric power revenue bonds by the State of California and the Los Angeles Department of Water and Power ("LADWP"). The City will benefit from having an underwriter premarket the 2002 Bonds to investors under the circumstances of such heavy potential issuance of bonds.

While staff and the Financial Advisor will attempt to time the sale of the 2002 Bonds to avoid this massive issuance by the State and LADWP, the timing will ultimately be determined by the general level of interest rate levels for California bonds.

Staff will evaluate the advantages and disadvantages of procuring insurance for the 2002 Bonds. Upon completion of this evaluation, staff will make an informed decision that will provide the best financial advantage for the City.

Staff is recommending that the City use the services of E. J. De La Rosa & Company to serve as the underwriter of the 2002 Bonds. This firm will be responsible for premarketing the 2002 Bonds to investors and pricing the bonds at the lowest interest rate available in the market at the time of sale.

De La Rosa served as the underwriter for the 2001 Bonds, the City's Variable Rate Certificates of Participation financing for the Government Center Site Acquisition Project, the Mello-Roos financing for the Downtown Parking Project and other City financing activities. De La Rosa has offices in San Francisco and Los Angeles and participates in numerous bond issues for public agencies throughout California.

The Underwriter receives compensation for the sale of the bonds through an Underwriter’s Discount which is agreed to in a Contract of Sale. Typically, the Underwriter’s Discount does not exceed 1%. De La Rosa has agreed to underwrite the 2002 Bonds for the same discount that the City would otherwise have obtained in connection with a competitive sale of the 2002 Bonds. De La Rosa will receive no fee for structuring the 2002 Bonds. The Financial Advisor, Ross Financial, will review the proposed pricing with the Director of Finance prior to sale in order to ensure that the City receives the most favorable rates. Council will be asked to approve the contract of sale along with the other bond documents when staff returns to ask for approval of the issuance of the 2002 bonds.

The Bond Counsel is responsible for drafting legal documents and ensuring that the 2002 Bonds are issued in compliance with all applicable state and federal laws. They deliver an opinion that the 2002 Bonds were legally issued and that they qualify for tax-exemption under IRS regulations. In addition, for the 2002 Bonds, Bond Counsel will be serving in the additional role of Disclosure Counsel. In this role, Bond Counsel will draft the Official Statement and provide the City and the Underwriter with an opinion that the Official Statement is accurate in all material respects.

Staff recommends the award of a contract to the law firm of Jones Hall to serve as Bond Counsel and Disclosure Counsel. Jones Hall is a leading bond counsel firm in the State and serves local governments throughout California. The firm has served as bond counsel on the 2001 Bonds, the City’s Variable Rate Certificates of Participation financing for the Government Center Site Acquisition Project and the Mello-Roos financing for the Downtown Parking Project.

The Financial Advisor is responsible for developing the bond structure, running cash flow analyses, managing the rating agency and bond insurer process, assisting in the drafting of the Official Statement, overseeing the bond pricing by the Underwriter and confirming its fairness.

Staff recommends the award of a contract to Ross Financial to serve as Financial Advisor for the proposed 2002 Bonds. Ross Financial is a San Francisco-based financial advisory firm that is focused solely on municipal bonds. Its principal, Peter Ross, has more than twenty years experience in the municipal bond market, having served in the capacities of bond counsel, underwriter and financial advisor over the course of his career. Ross Financial served as Financial Advisor in connection with the 2001 Bonds. In addition, the firm performs work for many prominent municipalities in California, including the Cities of San Jose, San Francisco, and Burbank as well as the Santa Clara Valley Transportation Authority, SamTrans and Peninsula Corridor Joint Powers Board.

The proposed 2002 Bonds will refund the Sunnyvale Financing Authority’s Utilities Revenue Bonds, 1992 Series B (Solid Waste Materials Recovery and Transfer Station). The 2002 Bonds will result in an average annual debt service savings of approximately $115,000, 55.28% of which will be realized by the Sunnyvale Solid Waste Management Fund. Total debt service savings will be approximately $1.7 million with present value savings of approximately $1.3 million.

The cost of the requested contracts will not exceed the following amounts (including professional fees and expenses):

Jones Hall for Bond Counsel and $75,000

Disclosure Counsel services

Ross Financial for Financial Advisor services $61,500

The cost of both contracts will be paid from the proceeds of the 2002 Bonds and is contingent upon their sale and closing.

Staff recommends that the City Council approve Alternative 1.