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HomeMy WebLinkAbout2/16/2005 - STAFF REPORTS (33) DATE: February 16, 2005 TO: City Council FROM: Director of Finance & Treasurer RE: Sale of Vehicle License Fee (VLF) Gap Loan RECOMMENDATION: It is recommended that the City Council approve the sale of VLF Gap Loan of$746,070 to California State Communities Development Authority (CSCDA) for an amount not less than $671,000, with the proceeds coming from CSCDA's taxable bond issue. SUMMARY: The State of California underpaid the vehicle license fees due to the City in FY 03-04 by $746,070, and has promised to repay that amount by August 15, 2006. The proposed action would sell that receivable to CSCDA, which would issue bonds secured by the State's promise of repayment. The actual amount received will depend on interest rates available at the date of issuance. BACKGROUND: Cities have received a major portion of Vehicle License Fees ("Car Tax") from the State for many years. Although the right to this revenue is part of the State Constitution, the State Legislator has the ability to change the amount charged. The State did this starting in 1999 and for several years made up the difference between the normal amount due to cities and the amount actually charged to vehicle owners out of State General Fund revenues. This was known as the State "backfill." The State's budget problems and the recall of Governor Davis combined to produce the underpayment in July through September, 2003. The State booked this as a "loan" from the cities and counties to the State, hence the term "VLF Gap Loan." The State has promised to repay this by August, 2006. There is a risk that the State will renege on its promise to pay back the VLF Gap loans. Via the CSCDA's bond issue, the City has the opportunity to shift this risk to the banks that underwrite the bond issue. The cost to the City of this risk transfer will be $70,000. If the State doesn't fulfill its promise (a very real possibility), the City could not be held responsible. Bank underwriters of the bond issue would have recourse only to the State. CSCDA will issue both taxable and tax exempt components in the bond issue. Staff is recommending participation in the taxable portion because it maximizes the City's flexibility on how the money can be spent. The proceeds from a tax-exempt issue would have to be spent on capital projects and would have time limitations. Because the CSCDA's bond issue will only be for 14 to 18 months, the additional interest cost of a taxable issue is fairly minimal, about $7000 on the City's portion. Z, �. Page 2 Attached are copies of the 11/17/04 memo and a 12/14/04 memo from the League of California Cities which add a few details to the proposal. The resolution was prepared by the bond counsel for the VLF Gap Loan Financing Program, Orrick, Herrington & Sutcliffe, LLP. Submitted by: Approved: v rill Thomas M. Kanarr David H Ready Director of Finance & Treasurer City Manager ` Attachments: 11/17/04 Memo 12/14/04 Memo Resolution DATE: November 17, 2004 MEMO TO: City Manager FROM: Director of Finance & Treasurer RE: Sale of Vehicle License Fee (VLF) Gap Loan At the 11/10/04 Study Session, I briefly mentioned that the City should seriously consider selling the VLF Gap Loan receivable. Attached is a memorandum from the underwriter, E.J. De La Rosa & Co., Inc., which explains the process In detail. To summarize, the main points are: 1) the City has a $746,070 receivable from the State of California due to an underpayment of the VLF in FY 02-03 2) the State has promised to repay the VLF Gap Loan sometime after August, 2006 3) the California State Communities Development Authority (CSCDA) has offered to purchase the receivable at a price somewhere between 90% and 96% of the face value, meaning the City could receive somewhere between $671,000 and $716,000. 4) the CSCDA will raise the money for the purchase of the VLF Gap Loans from a bond issue secured solely by the State's promised repayment, 5) The City would have no further obligation to the buyers of the CSCDA's bond issue. I strongly recommend that the City move forward on accepting this proposal. The benefit to the City is that it • eliminates the uncertainly of collecting the VLF Gap Loan from the State. • enables the City to invest the proceeds of the sale at least 18 months earlier then would be available by waiting for the State to pay. • provides additional funds immediately that could be used for capital projects, reducing the current year's operating deficit, or be held in reserves. Assuming we accept the program, the major choice facing the City is whether to dedicate the proceeds of the sale to capital projects or to use the proceeds for operations. The former would allow the City to participate in the tax-exempt portion of CSCDA's bond issue, and realize a higher payment because of the lower interest rates. The latter choice would require the City to participate in the taxable portion of CSCDA's bond issue. This would reduce the amount received by about $7,000, but would allow the maximum flexibility on how the proceeds are spent. The first step is to complete a non-binding participation form. With your approval, I will do that. Council will need to adopt a resolution authorizing the sale of the VLF Gap Loan in January, 2005, Please let me know if you'd like to have this as a discussion item on a study session first, or simply put on as an action item at a Council meeting. I've discussed this with the City's Financial Advisor, Suzanne Harrell, and at this point, absent a big spike in interest rates, neither of us can see a downside to becoming part of this transaction. If you or the City Council need additional information or have any questions, please let me know. o EAtGty E 1400 K Street, Suite 400 • Sacramento, California 95814 Phone: 916.658.8200 Fax: 916.658.8240 Ll�t C I T I E S www.cacities.org TO: City Managers and Finance Directors FROM: Chris McKenzie, Executive Director DATE: December 14, 2004 SUBJECT: VLF Gap Loan Financing Program You will recall that in FY 2003-2004 the State failed to make 3 months of VLF backfill payments to cities and counties resulting in a VLF funding gap ("VLF Gap Loan"). At that time, the State agreed to make these VLF gap loan payments by August 15, 2006, but many of us have doubts it will happen due to the state's continuing deficit. During the negotiations last summer that led to the approval of SCA 4 (Prop. IA), the League focused on getting the strongest possible guarantee of repayment of the"VLF Gap Loan". In addition to the requirement of SCA 4 (Prop. IA) that the state repay the VLF Gap Loan before the State can ever "borrow" local property taxes, we asked for authority as well for cities and counties to sell this VLF "receivable" to a joint powers authority in which most cities and counties already participate(California Communities). We recently notified cities this program has been developed and is now available. It provides a city or county the opportunity to sell their VLF Gap Loan debt for an upfront fixed price of about 92 to 95% (estimated) of the amount receivable from the state rather than wait for osn sible payment in 2006. California Communities is planning to issue bonds and use the proceeds to purchase the VLF receivables and pay financing costs ("VLF Bonds"). California Communities will pledge the VLF receivables to secure payment on the VLF Bonds. A city's sale of its VLF receivable is irrevocable and investors will have no recourse to the city if the State does not repay the VLF gap loan. Many cities have already expressed interest in this program. Some reasons cities find it attractive are: • Provides immediate cash relief. • Transfers the risk of non-payment by the State to bondholders. • Levels out cash flow from the State over the next few years. One city manager summed it up this way: "This program is great! I wish every city would participate. Besides the immediate benefits to the city, ...it effectively ensures full repayment because receivables sold to bondholders are protected by contract. And even if the State did fail to pay, it would not be the cities'fight." At the California Communities website, it is very easy to find your city's VLF gap loan amount. You'll also find more information, an online application form and resource people to contact. Here's the link: http;//www.cacommunities eom/. It's not too late to enroll. Check out the website, or contact Dan Harrison on the League staff at 916-658- 8267 or dharrison@cacities.org. �B� RESOLUTION NO. CITY COUNCIL OF THE CITY OF PALM SPRINGS A RESOLUTION APPROVING THE FORM OF AND AUTHORIZING THE EXECUTION AND DELIVERY OF A PURCHASE AND SALE AGREEMENT AND RELATED DOCUMENTS WITH RESPECT TO THE SALE OF THE SELLER'S VEHICLE LICENSE FEE RECEIVABLE FROM THE STATE; AND DIRECTING AND AUTHORIZING CERTAIN OTHER ACTIONS IN CONNECTION THEREWITH WHEREAS, certain public agencies within the State of California (the "State") are entitled to receive certain payments payable by the State to each such local agency on or before August 15, 2006, in connection with vehicle license fees pursuant to Section 10754.11 of the California Revenue and Taxation Code ("VLF Gap Repayments"); WHEREAS, the City of Palm Springs (the "Seller") is entitled to and has determined to sell all right, title and interest of the Seller in and to the "VLF Receivable", as defined in Section 6585(i) of the California Government Code (the "VLF Receivable"), namely, the right to payment of moneys due or to become due to the Seller out of funds payable in comnection with vehicle license fees to a local agency pursuant to Section 10754.11 of the California Revenue and Taxation Code; WHEREAS, the California Statewide Communities Development Authority, a joint exercise of powers authority organized and existing under the laws of the State (the "Authority"), has been authorized pursuant to Section 6588(w) of the California Government Code to purchase the VLF Receivable; WHEREAS, the Authority desires to purchase the VLF Receivable and the Seller desires to sell the VLF Receivable pursuant to a purchase and sale agreement by and between the Seller and the Authority in the form presented to this City Council (the "Sale Agreement") for the purposes set forth herein; WHEREAS, in order to finance the purchase price of the VLF Receivable from the Seller and the purchase price of other VLF Receivables from other local agencies, the Authority will issue its taxable and tax-exempt notes (the "Notes") pursuant to Section 6590 of the California Government Code and an Indenture (the "Indenture"), by and between the Authority and Wells Fargo Bank, National Association, as trustee (the "Trustee"), which Notes will be payable solely from the proceeds of the VLF Receivable and such other VLF Receivables; WHEREAS, the Seller acknowledges that the Authority will grant a security interest in the VLF Receivable to the Trustee and any credit enhancer to secure payment of the Notes; and WHEREAS, a portion of the proceeds of the Notes will be used by the Authority to, among other things,pay the purchase price of the VLF Receivable; Taxable DOCS01:795390.1 WHEREAS, the Seller will use the proceeds received from the sale of the VLF Receivable for any lawful purpose as permitted under the applicable laws of the State; NOW THEREFORE, the City Council of the City of Palm Springs hereby resolves as follows: Section 1, All of the recitals set forth above are true and connect, and this City Council hereby so finds and determines. Section 2. The Seller hereby authorizes the sale of the VLF Receivable to the Authority for a price no less than the Minimum Purchase Price set forth in Appendix A. The form of Sale Agreement presented to the City Council is hereby approved. An Authorized Officer(as set forth in Appendix A) is hereby authorized and directed to execute and deliver the Sale Agreement on behalf of the Seller, which shall be in substantially the form presented to this meeting, with such changes therein, deletions therefrom and additions thereto, as such Authorized Officer shall approve, which approval shall be conclusively evidenced by the execution and delivery of the Sale Agreement. Section 3. Any Authorized Officer is hereby authorized and directed to send, or to cause to be sent, an irrevocable written instruction to the State Controller notifying the State of the sale of the VLF Receivable and instructing the disbursement pursuant to Section 6588,5(c) of California Government Code of the VLF Receivable to the Trustee, on behalf of the Authority. Section 4. The Authorized Officers and such other Seller officers, as appropriate, are hereby authorized and directed,jointly and severally, to do any and all things and to execute and deliver any and all documents, including but not limited to one or more tax certificates, if required, appropriate escrow instructions relating to the delivery into escrow of executed documents prior to the closing of the Notes, and such other documents mentioned in the Sale Agreement or the Indenture, which any of them may deem necessary or desirable in order to implement the Sale Agreement and otherwise to carry out, give effect to and comply with the terms and intent of this Resolution; and all such actions heretofore taken by such officers are hereby ratified, confirmed and approved. Section 5. All consents, approvals, notices, orders, requests and other actions permitted or required by any of the documents authorized by this Resolution, whether before or after the sale of the VLF Receivable or the issuance of the Notes, including without limitation any of the foregoing that may be necessary or desirable in connection with any default under or amendment of such documents, may be given or taken by an Authorized Officer without further authorization by this City Council, and each Authorized Officer- is hereby authorized and directed to give any such consent, approval, notice, order or request, to execute any necessary or appropriate documents or amendments, and to take any such action that such Authorized Officer may deem necessary or desirable to further the purposes of this Resolution. Section 6. The City Council acknowledges that, upon execution and delivery of the Sale Agreement, the Seller is contractually obligated to sell the VLF Receivable to the Authority pursuant to the Sale Agreement and the Seller shall not have any option to revoke its approval of the Sale Agreement or to determine not to perform its obligations thereunder. Taxable o DOCS01:795390.r 2 Section 7. This Resolution shall take effect from and after its adoption and approval. PASSED AND ADOPTED by the City Council of the City of Palm Springs, State of California, this day of 2005, by the following vote: AYES: NOES: ABSENT: Mayor Attest: City Clerk Approved as to form SELLER'S COUNSEL By Dated: Taxable DOCSSF1:795390.1 3 APPENDIX A CITY OF PALM SPRINGS Minimum Purchase An amount equal to or greater than$671,000.00 (the"Minimun Price: Purchase Price"). Authorized Officers: City Manager Asst City Manager Director of Finance &Treasurer any designee of any of them, as appointed in a written certificate of such Authorized Officer delivered to the Trustee. Taxable DOCSSF1;795390.1 ��