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Home My WebLink About2017-01-09 - Board of Directors Meeting Agenda Packet AGENDA YORBA LINDA WATER DISTRICT BOARD OF DIRECTORS WORKSHOP MEETING Monday, January 9, 2017, 4:00 PM 1717 E Miraloma Ave, Placentia CA 92870 1. CALL TO ORDER 2. PLEDGE OF ALLEGIANCE 3. ROLL CALL J. Wayne Miller, President Al Nederhood, Vice President Andrew J. Hall, Director Phil Hawkins, Director Brooke Jones, Director 4. PUBLIC COMMENTS Any individual wishing to address the Board is requested to identify themselves and state the matter on which they wish to comment. If the matter is on the agenda, the Board will recognize the individual for their comment when the item is considered. No action will be taken on matters not listed on the agenda. Comments are limited to matters of public interest and matters within the jurisdiction of the Water District. Comments are limited to three minutes. 5. DISCUSSION ITEMS This portion of the agenda is for matters that cannot reasonably be expected to be concluded by action of the Board of Directors at the meeting, such as technical presentations, drafts of proposed policies, or similar items for which staff is seeking the advice and counsel of the Board of Directors. Time permitting, it is generally in the District’s interest to discuss these more complex matters at one meeting and consider formal action at another meeting. This portion of the agenda may also include items for information only. 5.1. Status of Refunding Revenue Bonds, Series 2017A 5.2. Municipal Market Disclosure Training 6. ADJOURNMENT 6.1. The next Regular Board of Directors Meeting will be held Thursday, January 12, 2017 at 8:30 a.m. Items Distributed to the Board Less Than 72 Hours Prior to the Meeting Pursuant to Government Code section 54957.5, non-exempt public records that relate to open session agenda items and are distributed to a majority of the Board less than seventy-two (72) hours prior to the meeting will be available for public inspection in the lobby of the District’s business office located at 1717 E. Miraloma Avenue, Placentia, CA 92870, during regular business hours. When practical, these public records will also be made available on the District’s internet website accessible at http://www.ylwd.com/. Accommodations for the Disabled Any person may make a request for a disability-related modification or accommodation needed for that person to be able to participate in the public meeting by telephoning the Executive Secretary at 714-701-3020, or writing to Yorba Linda Water District, P.O. Box 309, Yorba Linda, CA 92885-0309. Requests must specify the nature of the disability and the type of accommodation requested. A telephone number or other contact information should be included so the District staff may discuss appropriate arrangements. Persons requesting a disability-related accommodation should make the request with adequate time before the meeting for the District to provide the requested accommodation. ITEM NO. 5.1 AGENDA REPORT Meeting Date: January 9, 2017 To:Board of Directors From:Marc Marcantonio, General Manager Presented By:Delia Lugo, Finance Manager Prepared By:Delia Lugo, Finance Manager Subject:Status of Refunding Revenue Bonds, Series 2017A DISCUSSION: Mr. Robert Porr, of Fieldman Rolapp & Associates (District Financial Advisor), will provide a presentation to the Board of Directors and key staff regarding the advance refunding of the 2008 Certificates of Participation and credit review processes. ATTACHMENTS: Name:Description:Type: Refunding_and_Credit_Presentation.pdf Presentation Backup Material Board of Directors Meeting Overview of Refunding & Credit Process Monday, January 9, 2017 CREDIT OVERVIEW Yorba Linda Water District 1 2 What is a Credit Rating Rating process is a thorough independent examination of many factors and is a report card of how an agency’s management,operations and financial results compares with its peers Credit is the foundational basis for determining (in large part)the extent to which lenders will loan money and the cost of borrowing that money – borrowed money is considered debt 3 Levels of Credit Ratings Municipal and corporate ratings are assigned by three nationally recognized independent rating agencies Standard & Poor’s, Moody’s Investor Service and Fitch Ratings Credit ratings are independent assessments of the ability and willingness to repay debt; ratings are assigned from least likely to default “AAA” to investment grade “BBB” to defaulted borrowings “D” The District’s current ratings are “AA+” and “AA” from S&P and Fitch, respectively Higher ratings mean lower interest rates and lower overall project costs Credit Spreads have Widened since the Presidential Election Source: Thomson Municipal Market Monitor4 (1) (1) Municipal Market Data; benchmark index for municipal rates Customers: Classification & Wealth Legal Structure: Additional Bonds Test & Rate Covenant Capital & Capital Needs: Funding Sources, Amounts and Timing Governance: Establishing Policy and Rate Setting Management: Experience and Abilities to Plan and Execute Financial Ratios: Coverage, Days’ Cash, Free Cash/Depreciation Policies: Debt, Reserve & Investment 5 Credit Rating Criteria Credit Rating Cash Flow 6 Revenues Pledged Revenues: •Water Sales •Property Taxes •Interest Income •Other Cash only revenue items Expenses Operation and Maintenance Expenses •Water costs •Personnel Services •General and administrative •Other Cash only expenses, No Debt Debt Service Outstanding Debt Obligations •2012 and 2008 Debt service payments 7 Credit Review KEY METRICS CREDIT REVIEW MARKET/ ECONOMIC INDUSTRY FINANCIAL MANAGEMENT CREDIT RISKS DEBT SERVICE COVERAGE LIQUIDITY OPERATING RATIO NET REVENUES VS. DEBT SERVICE MONEY ON HAND VS. OPERATING EXPENSES REGULATORY/ LEGISLATIVE FREE CASH AS % OF DEPRECIATION 8 District Credit Summary Single Family Residential 22,914 Multi-Family Residential 160 Commercial/ Industrial 903 Irrigation 887 Fiscal Year 2016 Number of Connections by Customer Category Customer FY 2016 Water Sales Revenues Percent of Total City of Yorba Linda $1,949,735 7.01% Placentia-Yorba Linda USD 249,396 0.90% The Hills at Yorba Linda 146,595 0.53% RRE Yorba Linda Holdings 134,905 0.48% Yorba Linda Villages 117,461 0.42% Aspetic Tech 108,087 0.39% Fairmont Hill Community Association 85,340 0.31% Lake Park Mobile Home Community 74,579 0.27% Cartel Electronics 64,384 0.23% Cal Water 60,935 0.22% TOTAL TOP TEN $2,991,417 10.75% Total FY 2016 Water sales revenue $27,820,638 $77,390 $110,143 $52,814 $78,986 $81,465 $63,566 $55,551 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 2016 Median Household Income Source: Nielsen.com; The District $0 $10 $20 $30 $40 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016MillionsDistrict Revenues and Expenses Comparison Expenses Water Sales Ad Valorem Tax Revenues Interest Income Other REFUNDING OVERVIEW As of January 3, 2017 9 2008 Certificates Overview 10 Yorba Linda Water District Public Financing Corporation Yorba Linda Water District Trustee Issuer of 2008 Certificates Installment Payments made by the District Assigned by Financing Corporation to Trustee 2008 Certificate Holders Principal and Interest due on Certificates Refunding Opportunity: Interest Rates The 2008 Certificates have interest rates between 4.00% and 5.00% Net Present Value savings is approximately 10.3%, or about $2.9 million* The municipal market has seen dramatic increases in yields since the Presidential Election (about 50-60 basis points since November 8th) In the past two weeks the market has stabilized and seen a small recovery in “AAA” municipal market benchmark yields 11 *Based on market conditions as of January 3, 2017 1.501.651.801.952.102.252.402.552.702.853.003.153.303.45 Change in 'AAA' MMD Yields (November 1, 2016 through January 3, 2017) 'AAA' MMD 10-Year Yields 'AAA' MMD 30-Year Yields Savings Table* Certificates are callable on October 1, 2017 without premium Advance refunding the Certificates would generate ~$2.9 million (10.3% of refunded amount) in NPV savings Produces estimated annual savings of approximately ~$185,000 Escrow efficiency of 90% 12 *Based on market conditions as of January 3, 2017 Period Ending Existing 2008 Bonds Debt Service(1) Refunding Debt Service Annual Savings Present Value Annual Savings 6/30/2018 2,086,755.40 1,904,250.00 182,505.40 179,596.86 6/30/2019 2,088,055.40 1,904,375.00 183,680.40 175,558.19 6/30/2020 2,087,955.40 1,902,750.00 185,205.40 171,926.48 6/30/2021 2,086,455.40 1,899,375.00 187,080.40 168,672.44 6/30/2022 2,088,455.40 1,904,000.00 184,455.40 161,512.10 6/30/2023 2,083,955.40 1,901,500.00 182,455.40 155,152.63 6/30/2024 2,082,955.40 1,897,000.00 185,955.40 153,574.37 6/30/2025 2,084,574.15 1,900,250.00 184,324.15 147,838.19 6/30/2026 2,082,974.15 1,896,125.00 186,849.15 145,555.52 6/30/2027 2,078,485.40 1,894,625.00 183,860.40 139,100.82 6/30/2028 2,076,209.15 1,890,625.00 185,584.15 136,370.90 6/30/2029 2,076,193.52 1,889,000.00 187,193.52 133,599.49 6/30/2030 2,072,934.14 1,889,500.00 183,434.14 127,149.48 6/30/2031 2,071,284.14 1,887,000.00 184,284.14 124,069.36 6/30/2032 2,071,821.64 1,886,375.00 185,446.64 121,264.63 6/30/2033 2,069,434.14 1,882,500.00 186,934.14 118,724.17 6/30/2034 2,065,009.14 1,880,250.00 184,759.14 113,998.56 6/30/2035 2,063,009.14 1,879,375.00 183,634.14 110,078.29 6/30/2036 2,061,884.14 1,874,750.00 187,134.14 108,990.00 6/30/2037 2,061,384.14 1,876,125.00 185,259.14 104,828.16 6/30/2038 2,056,384.14 1,873,250.00 183,134.14 100,678.79 6/30/2039 763,350.93 579,125.00 184,225.93 98,506.63 Total Savings $4,067,395 Net Present Value Savings $2,998,188 Percentage savings of refunded bonds 10.31% (1)Existing Debt Service assumes forgone earnings on prior debt service reserve fund earn at a rate of 3.00%. MARKET UPDATES As of December 30, 2016 13 Municipal Market UpdateMarket Movements 14 ____________________ Source: Thomson Municipal Market Monitor. Note: Far right red column is for the month of October, 2016. Municipal Market Update Tax-Exempt Interest Overview 15 ____________________ Source: Thomson Municipal Market Monitor. Next Steps Continue to monitor savings of 2017 Refunding Revenue Bonds Continue to correspond with rating agencies regarding timing of issuance 16 Disclaimer 17 The scenarios are being provided for informational purposes only,and do not reflect any specific recommendation regarding a financial transaction.These materials include an assessment of current market conditions,and include Fieldman,Rolapp &Associates,Inc. assumptions about interest rates,execution costs,and other matters related to municipal securities issuance or municipal financial products.These assumptions may change at any time subsequent to the date these materials were provided.The refinancing and refunding scenarios presented herein are not intended to be inclusive of every feasible or suitable refinancing alternative. Fieldman,Rolapp &Associates,Inc.is an SEC-registered Municipal Advisor,undertaking a fiduciary duty in providing financial advice to public agencies.Compensation contingent on the completion of a financing or project is customary for municipal financial advisors.To the extent that our compensation for a transaction is contingent on successful completion of the transaction,a potential conflict of interest exists as we would have a potential incentive to recommend the completion of a transaction that might not be optimal for the public agency. However,Fieldman,Rolapp &Associates,Inc.undertakes a fiduciary duty in advising public agencies regardless of compensation structure. ITEM NO. 5.2 AGENDA REPORT Meeting Date: January 9, 2017 Subject:Municipal Market Disclosure Training DISCUSSION: Mr. Cyrus Torabi, of Straddling Yocca Carlson & Rauth (District Bond Counsel), will provide a presentation to the Board of Directors regarding securities laws and regulations applicable to municipal agencies that issue debt in the public capital markets. ATTACHMENTS: Name:Description:Type: Disclosure_Responsibilities_Presentation.pdf Presentation Backup Material January 9, 2017 Disclosure Responsibilities Under the Federal Securities Laws Presented by: E. Kurt Yeager, Esq. Cyrus Torabi, Esq. Bond Counsel Presentation to Yorba Linda Water District ∗The District issues securities in the public capital markets ∗Investors in municipal securities have rights under federal securities laws ∗All “material”information must be disclosed Why Is Disclosure Necessary? ∗1933 Act has two substantive rules: ∗Registration requirement ∗Antifraud rule ∗Municipal securities are exempt from the registration requirement,but are subject to antifraud rule ∗Two standards of culpability: Negligence (Section 17(a)) vs. Recklessness or Willful intent to defraud (Rule 10b-5) The Securities Act Of 1933 ∗The 1934 Act creates ongoing disclosure requirements for public companies ∗Regulates brokers and dealers such as underwriters of District financings ∗Also contains antifraud provisions ∗1975 amendments to the 1934 Act make it clear that antifraud provisions apply to government issuers Securities Exchange Act Of 1934 Rule 10b-5 “It shall be unlawful for any person . . . a)To employ any device,scheme or artifice to defraud, b)To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made,in the light of the circumstances under which they were made,not misleading ....” Rule 10b-5 ∗“[w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest.” ∗Materiality is determined in context of all the facts and circumstances,but usually on a retroactive basis ∗Guidance comes primarily from court decisions and SEC enforcement cases The “Materiality” Standard ∗Negligence ∗Recklessness ∗Intent to defraud (“scienter”) Levels Of Culpability ∗Unlike corporate securities, there is no “line item” set of rules for what goes into an Official Statement (“OS”) ∗Starting in 1975, leaders in the municipal market created a set of guidelines for OS content ∗Other groups have suggested disclosure for particular market segments ∗Look at practices in the industry;recent developments (e.g.New Jersey,Pension,Continuing Disclosure Compliance ) ∗In the end, the District must use its own good judgment What Should Be Disclosed? ∗New offerings ∗Annual Report under Rule 15c2-12 ∗Any other circumstance where the District is “speaking to the market” •Public statements by officials –whether this will be considered “speaking to the market”will depend on the official making the statement and the audience. •Investor website •At this time,securities law does not impose a requirement to update or correct any statement previously made,if there is no other reason to be making a statement to the market. •EXCEPTION:If an OS is found to contain a misstatement with respect to prior compliance with a Continuing Disclosure Undertaking (discussed below),such misstatement must be disclosed. When Do Disclosure Rules Apply? ∗Audited Financial Statements (NOTE: CAFR not required to be filed) ∗Financial information (i.e.tables)and operating information (identified in Continuing Disclosure Undertaking,but should be comprehensive)of the type found in the Official Statement) ∗The mere fact that information is presented in tabular format for clarity or ease of reference does not require the District to update such information in a Continuing Disclosure Undertaking Content of Annual Reports ∗Opportunity for additional voluntary information ∗Consider Rule 10b-5 implications –is there moreyoushouldbesayingwithrespecttosuchtables? ∗Has anything happened since the date of theauditedfinancialstatementsthathasmateriallyimpactedtheDistrict’s financial or operatingcondition? Content of Annual Reports (continued) ∗No obligation to communicate with investors individually ∗Tension between market (and SEC)desire for transparency and potential issuer liability ∗No corollary to Regulation FD (requiring public companies to disseminate specified information which it provides to any investor) ∗Establish a single point of contact ∗Consider voluntary dissemination of information provided to specific investors Investor Communications •May be “speaking to the market” •Has to be an official with responsibility for such disclosures •Should not include statements made in other, non market-driven contexts Speeches/Presentations ∗Official Statement is offering document to investors ∗equivalent to prospectus ∗Must contain all material information for the particular bond sale ∗Official Statement is the District’s document ∗Underwriters,financial advisors and lawyers can help develop the Official Statement,but the District is ultimately responsible for content District Disclosure ∗Broad description of District’s financial,operating and economic condition ∗Description of Water System ∗Description of budget process,major revenue sources and expenditure programs ∗Information on recent and current budgets –“structural” deficit? Disclosure Principles ∗Description of particular program ∗Sources of payment of bonds and parity obligations ∗Description of loan process,funding sources,program criteria ∗Description of borrowers and outstanding loans ∗Information on debt –types and amounts –and derivatives ∗Information on operations ∗Litigation Disclosure Principles –(cont.) ∗Provide main points but do not overwhelm readers with detail ∗Highlight important developments “up front” ∗Determine appropriate level of importance for any particular event or budgetary item ∗Bringing all these factors together into final product is ongoing process of give and take Disclosure Principles –(cont.) ∗Progression of an offering ∗POS/sale/final OS/closing ∗Supplements are possible ∗Very rare and may be disruptive after sale ∗Be mindful of public actions or releases likely to occur ∗State budget, District financial statements, mid-year reports Timing Considerations For Bond Sale ∗Obtain input from involved departments ∗Empower staff at all levels to raise issues ∗While District coordinates,counsel helps pull information together and maintains document ∗Drafts reviewed by working group ∗“Due diligence”meeting before distribution of Preliminary Official Statement Process ∗Pace of recovery from recession ∗Status of fund balance and reserves ∗Expected increases in retirement related payments; unfunded liabilities (pension and OPEB) ∗Potential effect of new GASB standards ∗Past compliance with Continuing Disclosure Undertakings ∗State and Federal issues (i.e.drought;DHCCP;MWD Capital Program;Salton Sea;desalination;sequester) ∗Derivative exposure ∗Bankruptcy considerations Current Hot Topics ∗Tomorrow’s “hot topic”may be different than today’s –For example,disclosure re recession and effect on housing market is no longer timely –should be recrafted as a risk factor ∗Disclosure must evolve to reflect changing circumstances ∗Read the disclosure with “fresh eyes” ∗If you think something may be a concern,raise the issue with colleagues and the working group ∗There are no “stupid questions” ∗Political sensitivity and confidentiality considerations are not exceptions to disclosure Disclosure Considerations ∗Orange County –(Board approved Official Statement without review.Failed to disclose risk of pool investments). ∗Board that authorizes securities is responsible for disclosure ∗Reliance on professionals must be reasonable What Can Go Wrong? –Major Prior Enforcement Actions ∗San Diego (City voluntarily files secondary market disclosure on pension and retiree healthcare liability and errors in financial statements.) ∗Conclusions from review: ∗“the City’s procedures,policies and practices for disclosure and financial reporting are inadequate in major respects.Undermining the reliability of its public disclosure have been,among other factors,(1)the City’s excessive reliance on outside professionals to generate its disclosure documents,(2)its lack of procedures to verify the accuracy of those documents and (3)the absence of high-level oversight to judge the clarity and completeness of information provided to the investment markets.” What Can Go Wrong? –(cont.) ●Orange County —Emphasized that disclosure is issuer’s responsibility;relianceonprofessionalsmustbereasonable ●San Diego —Focus on lack of disclosure procedures and excessive relianceonoutsideprofessionals —Some individuals paid fines from their own pocket ●Incomplete or Misleading Pension Disclosures —States of New Jersey,Illinois and Kansas --first SEC actionsagainstaState —Reinforced lessons of San Diego;importance of disclosurepoliciesandtraining Lessons Learned from SEC Actions ∗West Clark Community Schools District (Indiana)–The SECchargedthattheDistrictincludedfraudulentmisstatementina2007OfficialStatementwhenitstatedthatitwasincompliancewithitsdisclosureobligationsrelatedtopriorbondofferings.However,the District had not submitted any of the requiredannualreportsornoticesforaprevious2005bondoffering,andtheunderwriterdidnotconductadequateduediligencewithrespecttocontinuingdisclosurecompliance.(The District enteredintoconsentordertosettlethecharges.) ∗City of Harrisburg (Pennsylvania)–The SEC charged the City withsecuritiesfraudbasedonmaterialmisstatementsinbudgetdocuments,audited financial reports and public statements.Generally SEC actions are based on Official Statements orcontinuingdisclosurefilings;however the SEC stated that,sincetheCityfailedtomakerequiredannualdisclosurefilings,investorswereforcedtorelyonthepublicdocumentsandstatements.(TheCityenteredintoaconsentordertosettlethecharges.) Recent Enforcement Actions ∗City of Miami (Florida)–The SEC charged the City and its BudgetDirectorwithmakingmateriallyfalseandmisleadingstatementsandomissionstoinvestorsandratingagenciesaboutcertaininterfundtransfersinbondofferingsandinthecity’s audited financial reports.SEC Report:“[the Budget Director]orchestrated the transfers fromthecity’s Capital Improvement Fund to its General Fund in order tomaskincreasingdeficitsintheGeneralFund,which is viewed byinvestorsandbondratingagenciesasakeyindicatoroffinancialhealth.”(In September 2016,the SEC won a verdict against the CityanditsBudgetDirector.The Budget Director was personally fined.) ∗City of South Miami (Florida)–The SEC charged the City with makingmaterialmisstatementsindocumentsprovidedtotheissuerofbondstofinanceaCityproject,which the issuer relied on in connection withtheissuanceofthebonds.The misrepresentations related to theCity’s compliance with various tax requirements,and were notspecificallycontainedintheOfficialStatementforthebonds.(TheCityenteredintoaconsentordertosettlethecharges.) Recent Enforcement Actions –(cont.) ∗City of Victorville (California)–The SEC charged the City with securities fraud in connection with a 2008 bond offering,by utilizing inflated values relating to property securing the bonds.The SEC charged that the City and the bond underwriter were aware of facts that indicated that property values were overstated.(The City is contesting the charges.) ∗State of Illinois –The SEC charged the State with misleading investors by omitting material information relating to the unfunded liabilities of its pension system.(The State entered into a consent order to settle the charges.) Recent Enforcement Actions –(cont.) ∗Greater Wenatchee Regional Events Center Public Facilities District (WA)–The SEC charged the District and its Contracts Manager with misleading investors by providing financial projections for the Events Center in the Official Statement that were questioned by two independent reports and falsely stating that no other examination of the financial projections to verify the projections existed.The financial projections included in the Official Statement were also revised upwards based on optimistic statements by the Mayor and the Contracts Manager.(The District and Contracts Manager entered into a consent order to settle the charges.The District agreed to pay a $20,000 penalty and undertake remedial actions) ∗The SEC also charged the Underwriter and its Managing Director with misleading investors.The SEC stated that the Underwriter did not ask to see the two independent reports despite being made aware of their existence.The SEC charged the Underwriter with failing to perform the due diligence necessary to have a reasonable basis for the truthfulness of the misleading statements in the Official Statement.(The Underwriter and the Managing Director entered into a consent order to settle the charges.) Recent Enforcement Actions –(cont.) ∗City of Allen Park,Michigan (2014) ∗SEC alleged City’s Official Statement failed to disclose deterioration of a major development project and a budget deficit.City accepted a C&D order under Rule 10b-5. ∗City Administrator was responsible for Official Statement disclosures, should have known correct facts.He settled with a C&D order,and bar from working in future bond deals. ∗City’s Mayor was alleged to “control”the Administrator and so also be responsible for the improper disclosures.He settled with a C&D order, a bar and a $10,000 fine. Recent Enforcement Actions –(cont.) ∗City of Harvey,Illinois (2014) ∗SEC alleged scheme by City Controller to siphon off bond money for personal use.City’s bond offerings also did not disclose that planned hotel development was abandoned. ∗City agreed to C&D settlement,required to hire SEC- approved disclosure counsel for any deal in next 3 years ∗Controller was found liable for securities fraud in default judgment,barred from future involvement in securities offerings and fined total of $217,000 (Jan.2015) ∗SEC had earlier obtained a restraining order in June 2014 to prevent a planned bond sale Recent Enforcement Actions –(cont.) ∗SEC Investigation –fees for lawyers and consultants ∗Adverse publicity ∗Reduced market access ∗May have to impose new procedures and oversight to settle SEC actions ∗Obligation to disclose SEC actions in future Official Statements ∗Rating Downgrades (triggers increased credit / liquidity provider fees) ∗Fines against issuer or culpable officials (increasing) Consequences of Bad Disclosure ∗Have the right people involved –make sure that the personnel involved in disclosure preparation can reasonably be expected to know material information ∗Empower everyone in the organization ∗Give the investors all the material facts,and let them decide ∗Full and transparent disclosure is essential ∗Investors must be provided all material information when making their investment decision ∗Officials participating in the disclosure process must be in a position to know material information (i.e.,“the right people must be in the room”) ∗Vigorous disclosure program requires buy-in and encouragement from top levels Summary