City of Santa Paula Saves Water Customers $10 Million with Bond Restructing

On December 12, the City of Santa Paula, through the Santa Paula Utility Authority, successfully sold $37,165,000 of 2019 Water Revenue Bonds. The bond sale locked in a much lower interest rate to refund bonds originally issued in 2010.  The proceeds will also fund an additional $3 million for various energy efficiency projects. 

The municipal bond market was very receptive to the 2019 Bond offering with the bond sale receiving more than $85 million in orders to buy the $37 million in bonds offered. The 2019 Bonds will be repaid over 20 years and have an average interest rate of 2.5%. The refinancing of the 2010 Bonds will generate in excess of $10 million in net present value savings for the benefit of the City’s water system. 

“This is a monumental step forward for our water customers through the reduction of our debt,” stated Dan Singer, Santa Paula City Manager.  “The City Council was asked to make some tough decisions about increasing water rates starting next year and this bond restructuring will assist us in guaranteeing safe, reliable drinking water for our customers, without even higher rate increases” Singer said. 

The option to sell the 2019 Bonds was previously unavailable to the City due to declining water net revenues. However, recent City Council action, most notably adopting new water rates, facilitated the City’s efforts to substantially lower future interest costs and properly maintain the water system.


Get Citizensjournal.us Headlines free  SUBSCRIPTION. Keep us publishing – DONATE

0 0 votes
Article Rating
Subscribe
Notify of
guest
2 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
Sheryl hamlin

Here is what actually happened…
The city exercised a “call” provision in the bonds, which means they paid off the existing investors with cash from the sale of new bonds. They reissued new bonds at very similar coupon rates to the old bonds which were snapped up by investors. Why? Because they old interest rates are much higher than possible now (range of 3-5%, as the link showed in the list of transactions) so investors who need to maintain that interest rate on their portfolios for cash flow purposes will pay the premium to keep it. Here is the shakedown: the investors paid a premium for the new issue of several percent, so instead of paying par at 100% they paid 103% or 105% which means the city took in more cash than the face value of the bonds. The city will still be paying the same coupon payment but now has a wad of cash as the press release states. The city can put this cash away in the sinking fund to reduce its required payments to the sinking fund (conservative approach) or they can spend the monies on “projects” as Mayor Araiza said to the Chamber right after the sale. The problem, of course, is that these were water bonds so water bond sales must be used for water projects, unless of course the water fund “loans” some other fund the cash for the projects. The consultant’s presentation at council was also misleading because it used the “yield to maturity” as the new yield, but this is a term for investors, whose yield to maturity is now very low because they paid the premium.

Sheryl hamlin

https://emma.msrb.org/IssueView/Details/ER396173

Based on these coupons and trades, it appears that the “savings” represented to the public is really the premium paid on these high coupon bonds. There is little actual cash flow savings year to year.

This approach requires diligence not to spend the premium.

Furthermore, water bonds should be used for water projects.

Press Release is misleading.