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CITY OF SANTA BARBARA

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CITY OF SANTA BARBARA

    Agenda Item No._____________

    File Code No. 560.04

    CITY OF SANTA BARBARA

     COUNCIL AGENDA REPORT

AGENDA DATE: April 14, 2009

TO: Mayor and Councilmembers

FROM: Administration Division, Finance Department

    SUBJECT: Airport Terminal Project City Financing Of Joint Use Rental Car

    Facility

RECOMMENDATION: That Council:

    A. Authorize the Airport Director to execute, in a form acceptable to the City Attorney,

    Amendment Number 2 to the Airport Promissory Note dated July 1, 2008, in the

    amount of $7.8 million, to extend the maturity date of said promissory note from

    June 30, 2009, to July 13, 2009;

    B. Authorize the Airport Director to execute, in a form acceptable to the City Attorney,

    a $7.3 million Airport Promissory Note at an interest rate of the higher of 6.5% or

    the LAIF rate, but not to exceed 9%, and with a 20-year term, to finance the

    recently constructed Joint Use Rental Car Facility; and

    C. Authorize the Finance Director to purchase the Airport’s 20-year Airport Promissory

    Note on behalf of the City’s investment portfolio. EXECUTIVE SUMMARY:

    The Airport Terminal Project includes the construction of a new joint use rental car facility

    (the “facility”) for use by the rental car companies serving the Airport. Interim financing for

    the facility has been provided by the issuance of a $7.8 million Airport promissory note that

    the City purchased into its investment portfolio. This mechanism provided the Airport with

    interim financing for the facility while earning an above-market return for the City’s investment portfolio.

    The original plan was to repay the promissory note from the proceeds of the Airport’s

    Terminal Project bond issue. However, Staff is now recommending that, rather than

    include financing for the facility in the Terminal Project bond issue, the City finance the

    facility through the issuance of a 20-year Airport promissory note at an interest rate of the

    higher of 6.5% or the LAIF rate, but not to exceed 9%, which would be purchased into the

    City’s investment portfolio. Doing so will accomplish at least three things:

Council Agenda Report

    Airport Terminal Project City Financing Of Joint Use Rental Car Facility

    April 14, 2009

    Page 2

1. Simplify the issuance of the Terminal Project bonds by removing a separate,

    taxable component for the facility. This will result in a more standard, totally tax-

    exempt Terminal Project bond issue which will likely be easier to market. 2. Provide a secure investment for the City’s portfolio at a rate of return well above

    rates currently available from other permitted City investments. 3. Provide the Airport with significant savings in the financing costs for the facility. The

    recommended 6.5% interest rate is well below the rate the Airport would pay to

    finance the facility though the issuance of bonds. There are also no costs of

    issuance.

    DISCUSSION: In July 2008, the City Council approved the issuance of a $7.8 million Airport promissory

    note which the City purchased as an investment. The promissory note was issued at an

    interest rate of 6.5%. The proceeds of the promissory note allowed the Airport to begin

    construction of a new joint use rental car facility prior to the issuance of the Airport

    bonds and the commencement of the main terminal project. This was necessary

    because the existing rental car facility had to be demolished prior to beginning

    construction of the Terminal Project. It was therefore necessary to construct the

    replacement rental car facility before the main Terminal Project began. Construction of

    the new rental car facility is now almost complete. In December, 2008, Council

    authorized an amendment to the Airport promissory note, extending the maturity date to

    June 30, 2009.

    When the promissory note was approved by Council, it was anticipated that it would be

    repaid by the Airport from the proceeds of the Terminal Project bond issue. Those

    bonds will be issued later this month. Unlike the bonds for the main Terminal Project,

    the bonds issued to finance the rental car facility would be taxable bonds because the

    rental car facility is leased to for-profit businesses. Therefore, the Airport bonds would

    need to be issued in two series a tax-exempt series for the main Terminal Project and

    a taxable series for the joint use rental car facility. The Airport’s financial advisors

    indicate that the taxable bonds would sell in today’s market at an interest rate of

    approximately 8.5%.

    After careful analysis and discussions with the bond financing team, Staff is now

    recommending that the City provide the financing for the facility rather than including it

    in the Terminal Project bond issue. This would be accomplished by authorizing the

    issuance of a 20-year Airport promissory note at an interest rate of 6.5% which the

    City’s Finance Director would then be authorized to purchase on behalf of the City’s

    investment portfolio.

    As mentioned above, doing so provides advantages to both the Airport and the City. For

    the Airport, this will provide cost-effective financing at less than market rate for a taxable

    bond and will do so without incurring any transaction costs. For the City, purchase of the

    Airport promissory note will provide a secure investment at rates well above what the

    City earns at present on its portfolio. The investment will be secure because it has a

Council Agenda Report

    Airport Terminal Project City Financing Of Joint Use Rental Car Facility

    April 14, 2009

    Page 3

    dedicated source of repayment. As Council may recall, debt service on the rental car facility will be paid by a rental car Customer Facility Charge (CFC) that has been in place since January 1, 2006. The CFC is a $10 surcharge per rental car contract on all rentals at Airport rental car locations. Since inception, the City has collected just over $2 million in CFC revenue. A portion of the CFC revenue was used to design the facility and we currently have approximately $900,000 in unspent CFC revenue. Staff is recommending that $500,000 of the CFC revenue currently on hand be used to lower the principal amount of the promissory note from the $7.8 million on the interim promissory note to $7.3 million for the long-term promissory note now recommended by Staff.

    Attachment 1 is an amortization schedule for the proposed Airport promissory note. The annual debt service on the note will be $670,482. This amount is almost exactly the amount of annual CFC revenue projected to be collected over the next several years. Beginning in 2011, CFC revenue is projected to grow at approximately 2% per year which, if realized, may permit the Airport to accelerate payment on the debt. While staff believes that the assumptions and projections are reasonable, even if the reality over the next several years falls below projections, the Airport should have no problem making at least interest payments on the debt.

    Permitted Investment

    The purchase on the Airport promissory note by the City’s investment portfolio is

    expressly permitted under both the State public investing code and the City’s investment policy. Section 53601 of the State’s public investing code authorizes investments in:

    53601 (a) Bonds issued by the local agency, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency. 53601 (e) Bonds, notes, warrants, or other evidence of indebtedness of any local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency or by a department, board, agency, or authority of the local agency.

    The State public investment code does, however, limit City investments to a maximum term of five years from the date of purchase unless the legislative body (the City Council) has granted express authority for the purchase of an investment of longer than five years no less than three months prior to making the investment. In order to comply with this State code requirement, Staff is recommending that Council approve an amendment to the current short-term Airport promissory note, currently due to mature thon June 30, 2009, extending the term to July 14. The long-term promissory note will

    then be issued as of July 14, 2009 and will mature on June 30, 2029. As mentioned, Staff recommends that the initial interest rate be 6.5%. In order to protect the City’s

    investment portfolio from potential rising market interest rates in the future, Staff further recommends that the promissory note contain a provision setting the interest rate at 6.5% or the LAIF rate, whichever is higher, but not to exceed 9%. As Council will recall,

Council Agenda Report

    Airport Terminal Project City Financing Of Joint Use Rental Car Facility

    April 14, 2009

    Page 4

LAIF (Local Agency Investment Fund) is the money market fund run by the State

    Treasurer which Santa Barbara, like most cities throughout the State, uses for overnight

    investments. Currently, the LAIF rate is approximately 1.9%.

    Summary

    Having the City finance the Airport’s joint use rental car facility will simplify the marketing of the tax-exempt Terminal Project bonds, will provide the Airport with lower

    cost financing without transaction costs and the City’s investment portfolio with a secure

    investment at a rate of return well above the current market rates available to the City

    on its investments. Staff recommends Council approval of this financing option.

    ATTACHMENT: Airport Promissory Note Amortization Schedule SUBMITTED BY: Robert D. Peirson, Finance Director APPROVED BY: City Administrator's Office

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