Administrators managing Livermore’s obligations are set to refinance nearly $59.3 million in debt following a financial storm that shook the municipal bond market in March.
A plan approved by the city council last week anticipates issuing new tax-exempt securities called certificates of participation in June to pay off one outstanding certificate issued in 2011 and two from 2014.
The bond-like certificates have been used to pay for a number of municipal projects, including the Civic Center Campus, new Airport Administration Building, a 2-mile extension of Jack London Boulevard.
The strategy aims to lock in better terms for repayment for the life of the debt, while interest rates remain historically low.
For more than 80% of the debt, which is held in complex variable-rate demand certificates that reset daily, the debt restructuring plan means eliminating significant exposure to market volatility that could threaten the city’s ability to borrow and see its cost of debt increase by millions annually.
The city estimates it will be able to refinance the variable rate certificates at a fixed rate of 2.8% for $9 million that matures in 2041 and 1.6% for about $35 million that will mature in 2030.
“Having some certainty around part of the equation is huge,” said Douglas Alessio, Livermore’s administrative service director.
In March, investors responded to the spread of the COVID-19 pandemic in the U.S. with a swift and dramatic selloff of billions of dollars in municipal debt.
To attract investors, short-term variable municipal interest rates skyrocketed to above 7%, even as the central bank slashed its overnight lending rate to near zero. After paying the fees, the daily rate on Livermore’s variable-rate debt reached 9% in March before declining back down to .02% as of the April 22 reset.
While the market for municipal debt has since stabilized, Alessio said his office has closely watched interest rates and it appears the prudent time to restructure the city’s debt is now.
The city could wait to see if variable rates will remain low and adjust if they start to climb, Alessio said, but with that approach “by the time you realize it, it’s too late.”
The variable rate certificates kept interest costs low over the past nine years and helped the city regain its financial health coming out of the Great Recession.
“It feels like we’re stealing, it's been so low; it’s been terrific,” Alessio said. “Knock on wood, it's been so good.
The variable-rate demand certificates are payable on demand. Investors can request a repayment of the entire debt amount at their discretion – in Livermore’s case more than $44 million – and the funds must be repaid immediately, instead of on its final maturity date.
To avoid a liquidity problem if buyers for redeemed securities could not be found, the certificates are backed by a Letter of Credit, a bank guarantee of timely repayment of interest and principal on the debt.
While the most likely risk of staying the course is an increased cost of debt service, there are other factors to consider, like administration costs for the remarketing agent to adjust the interest rates, and other associated fees, including the cost for the letter of credit.
Livermore’s current LOC, last updated in 2017, is set to expire soon.
The 2011 certificates were used to raise nearly $17.5 million to fund the cost of design and construction of a new Airport Administration Building, a two-mile extension of Jack London Boulevard, including a bridge over Arroyo Las Positas, and water, sewer and electrical utilities.
They were financed with a debt repayment structure that started with 3% interest in the initial years and are set to gradually rise to 5.25% toward the end of the debt term in 2041.
Refinancing the existing fixed rate certificates is expected to result in an average annual savings of more than $220,000, according to city estimates.
Beginning Aug. 1 this year, the city can without penalty prepay the outstanding principal of nearly $15 million at the current interest rate of 3.4%.
The 2014 certificates of participation are split between Series 2014A certificates and Series 2014B certificates. Both are variable rate demand certificates.
The 2014A series raised an initial $9.4 million that was used to purchase the Bankhead Theater in order to retain the facility as a community theater. The 2014B series raised nearly $50 million and was used to retire 2008 variable rate obligations that were used to finance several essential city facilities, including the civic center campus.
These debts can be prepaid at the daily interest rate without penalty on any business day. The outstanding principal for these certificates is nearly $9 million for the A series and around $35.5 million for the B series certificates.