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HomeMy WebLinkAbout8/15/2023 Item 6b, Jackson - Staff Agenda CorrespondenceCity of San Luis Obispo, Council Memorandum City of San Luis Obispo Council Agenda Correspondence DATE: August 15, 2023 TO: Mayor and Council FROM: Emily Jackson, Finance Director VIA: Derek Johnson, City Manager SUBJECT: ITEM 6B - APPROVING THE SALE OF LEASE REVENUE BONDS, SERIES 2023 (CULTURAL ARTS DISTRICT PARKING PROJECT) IN AN AGGREGATE PRINCIPAL AMOUNT NOT TO EXCEED $50,000,000, EXECUTION OF BOND DOCUMENTS AND RELATED ACTIONS After finalizing the Council Agenda Report for this item, staff received formal notification that S&P Global Ratings had assigned a rating of ‘AA’ for the 2023 Series Lease Revenue Bonds for the Cultural Arts Parking Project. As a part of this report, S&P Global Ratings also affirmed its ‘AA+’ issue credit rating on the City and its ‘AA’ long -term rating on the City’s lease revenue bonds outstanding. S&P Global Ratings’ report notes that the outlook for the ratings is stable. A ‘AA’ rating indicates a very strong capacity to meet financial commitments. The report from S&P is attached to this correspondence an d provides the rationale supporting the rating. In addition, staff noted an error in the Council Agenda Report after it was published. The Agenda Report notes that the underwriter’s discount will not exceed 4% of the par amount of the bonds (shown below). The 4% should be revised to 0.4%. ATTACHMENT S&P Global Ratings Report Summary: San Luis Obispo Public Finance Authority San Luis Obispo, California; Appropriations; General Obligation Primary Credit Analyst: Amahad K Brown, Dallas + 1 (214) 765 5876; amahad.brown@spglobal.com Secondary Contact: Alyssa B Farrell, Englewood + 1 (303) 721 4184; alyssa.farrell@spglobal.com Table Of Contents Credit Highlights Outlook Related Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 11, 2023 1 Summary: San Luis Obispo Public Finance Authority San Luis Obispo, California; Appropriations; General Obligation Credit Profile US$46.025 mil lse rev bnds (San Luis Obispo) (Cultural Arts Parking Project) ser 2023 due 12/01/2053 Long Term Rating AA/Stable New Credit Highlights • S&P Global Ratings assigned its 'AA' rating to San Luis Obispo (SLO), Calif.'s proposed $46 million series 2023 lease revenue bonds, issued by the San Luis Obispo Public Finance Authority. • S&P Global Ratings also affirmed its 'AA+' issuer credit rating (ICR) on the city and its 'AA' long-term rating on the city's lease revenue bonds outstanding. • The outlook is stable Security The lease revenue bonds are secured by lease payments made by the city, as lessee, to the authority, as lessor, for the use of the leased assets. In our view, the lease features and terms are standard for an abatement lease, and the leased asset meets our minimum threshold for seismic risk during the life of the bonds. Late budget adoption risk is mitigated by debt service due dates that fall well within the fiscal year (June and December). We rate these obligations one notch lower than our view of the city's general creditworthiness to account for the risk of nonappropriation associated with the lease payments. Although revenues are not specifically pledged to the bonds, we understand that the city will use revenues from its parking fund to finance the debt service payments on the series 2023 bonds, reducing general fund exposure to the new debt. Proceeds from the series 2023 bonds will be used to finance the construction of a new parking structure in SLO's cultural arts district. In addition, a portion of the proceeds will be used to refund the city's series 2012 lease revenue bonds for debt service savings. The ICR reflects our view of the city's general creditworthiness and does not incorporate the features of any particular debt instrument. Credit overview The city remains well positioned financially, with a local economy that has continued to expand post-pandemic. SLO's credit fundamentals are supported by a strong and institutionalized framework of financial management including regular budget monitoring and long-term planning. In recognition of the city's need for additional resources to support long-term fiscal stability and infrastructure maintenance, voters in the city approved the Measure G-20 sales tax (no WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 11, 2023 2 sunset), which increased the local sales tax rate by 1% and replaced the 2014 local sales tax measure. The Measure G-20 sales tax has contributed about $20 million of additional annual revenue to the city. This level of local support has been key to allowing SLO to fund local priorities without affecting the general fund budget or requiring significant debt financing. Despite these credit strengths, we believe that the city's exposure to large retirement liabilities remains its most salient credit weakness. As of the latest measurement date (June 30, 2021), the city reported a total California Public Employees' Retirement System (CalPERS) pension liability of about $145 million with a funded ratio of 70%. However, we understand that SLO continues to evaluate improvements to its pension funding through various means, including making additional discretionary payments to its CalPERS plans, most recently in 2022 when it made an additional $12 million discretionary payment. The city's commitment to addressing its long-term retirement obligations is now guided by a formal policy introduced with the 2023-2025 financial plan. Without material and sustained improvements in plan funding, SLO remains exposed to potential cost escalations and higher fixed costs associated with its CalPERS liabilities. However, we do not expect these liabilities to meaningfully affect budgetary performance in the near term, particularly given increasing primary revenues. The rating reflects our view of the city's: • Stable local economy that is anchored by government employment, tourism, and a higher education presence that includes California Polytechnic State University; • Strong financial profile characterized by a track record of positive operating results, maintenance of robust reserves, and a revenue profile that is largely supported by local taxes including sales, property, and transient occupancy taxes; • Comprehensive collection of financial policies and practices including a robust budget development framework, quarterly budget and investment monitoring, long-term capital and financial planning, formalized policies for debt and investments, and formal reserve policies requiring balances of at least 20% of expenditures for the general fund contingency and the capital reserve tied to the Measure G-20 sales tax; • Strong institutional framework score; and • Modest debt burden but exposure to elevated fixed costs and large long-term pension liabilities. Environmental, social, and governance We analyzed the city's environmental, social, and governance (ESG) risks relative to its economy, management, financial measures, and debt-and-liability profile. In our view, SLO is exposed to acute physical risks including flooding, wildfires, and earthquakes. Of note, it experienced two widespread flooding events in early 2023 that caused an estimated $9 million-$12 million in damages that the city considers to be a high priority, including expenditures associated with road repairs and debris removal. However, given its strong reserve and liquidity position, SLO has been able to absorb these one-time costs without materially affecting its financial position while it files for potential reimbursement from Federal Emergency Management Agency. In our view, social and governance risks are neutral within our credit analysis. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 11, 2023 3 Summary: San Luis Obispo Public Finance Authority San Luis Obispo, California; Appropriations; General Obligation Outlook The stable outlook reflects our expectation that SLO will be able to maintain its strong financial profile supported by positive momentum in the local economy and a robust framework of financial planning and budget monitoring. Downside scenario We could lower the rating if the city enters a period of sustained budgetary weakness leading to an erosion of general fund reserves without a credible plan to restore them. Upside scenario We could raise the rating if SLO is able to demonstrate meaningful steps to sustainably improve the funding of its pension plans, thereby mitigating budgetary exposure and cost escalations tied to its CalPERS pension plans. San Luis Obispo, California -- key credit metrics Most recent Historical information 2022 2021 2020 Very strong economy Projected per capita EBI % of U.S.114 111 110 106 Market value per capita ($)246,617 234,921 221,051 203,609 Population 46,069 46,365 46,762 County unemployment rate(%)3.0 5.3 7.8 Market value ($000)11,361,385 10,822,584 10,249,056 9,521,174 Ten largest taxpayers % of taxable value 5.3 6.3 6.1 6.7 Strong budgetary performance Operating fund result % of expenditures 4.2 16.5 2.6 Total governmental fund result % of expenditures 21.6 23.0 11.7 Very strong budgetary flexibility Available reserves % of operating expenditures 38.9 44.5 44.2 Total available reserves ($000)33,113 35,821 33,651 Very strong liquidity Total government cash % of governmental fund expenditures 210 186 180 Total government cash % of governmental fund debt service 9145 6685 5595 Very strong management Financial Management Assessment Strong Adequate debt & long-term liabilities Debt service % of governmental fund expenditures 2.3 2.8 3.2 Net direct debt % of governmental fund revenue 55 16 19 23 Overall net debt % of market value 1.7 Direct debt 10-year amortization (%)35 Required pension contribution % of governmental fund expenditures 16.7 18.1 18.4 OPEB actual contribution % of governmental fund expenditures 1.3 1.1 2.0 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT AUGUST 11, 2023 4 Summary: San Luis Obispo Public Finance Authority San Luis Obispo, California; Appropriations; General Obligation San Luis Obispo, California -- key credit metrics (cont.) Most recent Historical information 2022 2021 2020 Strong institutional framework EBI--Effective buying income. OPEB--Other postemployment benefits. Data points and ratios may reflect analytical adjustments. Related Research Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022 Ratings Detail (As Of August 11, 2023) San Luis Obispo ICR due 12/01/2055 Long Term Rating AA+/Stable Affirmed San Luis Obispo Long Term Rating AA/Stable Affirmed San Luis Obispo Public Finance Authority, California San Luis Obispo, California San Luis Obispo Pub Fin Auth APPROP Long Term Rating AA/Stable Affirmed San Luis Obispo Pub Fin Auth (San Luis Obispo) Long Term Rating AA/Stable Affirmed Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. 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