San Diego Council Gives Initial OK To First Public Bond Sale in 5 Years

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SAN FRANCISCO - The San Diego City Council preliminarily approved the city's first public bond issues in five years this week.

California's second-largest city hopes to return to the market in January with as much as $309 million of water revenue refunding bonds, followed by a $329 million mix of new-money and refunding debt in April or May.

San Diego has been frozen out of the market since a pension and municipal disclosure scandal. The Securities and Exchange Commission sanctioned the city for securities fraud in 2006 for failing to disclose billions of dollars in unfunded pension and retiree health care obligations when it issued bonds in 2002 and 2003.

"This public offering is an important milestone as our city recovers from its financial past," Mayor Jerry Sanders said in council testimony this week. "After a five-year wait, we're ready to reenter the bond markets and reestablish ourselves on Wall Street."

It's been a long road for San Diego, which replaced its top administrators and its mayor after the scandal. The city spent years working to catch up on delayed certified annual financial reports and to create new audit and disclosure practices.

Officials expect to present the council with a final version of their 2007 CAFR with an unqualified opinion on Nov. 10, when they seek final approval for the January bond deal.

The Series 2009A water revenue refunding deal in January will refinance $57 million of maturing short-term notes that were sold in a private placement in 2007, when San Diego couldn't access capital in the public market, said Laksmi Kommi, the city's debt management director. As part of that deal, the city is also considering an economic refunding for another $245 million of debt sold in 1998.

The senior debt will be issued by the San Diego Public Facilities Financing Authority and structured as fixed-rate debt that matures over 20 to 30 years. The city will seek ratings from the three major credit rating agencies.

San Diego's parity senior-lien water system bonds are rated AA-minus by Standard and Poor's, A2 by Moody's Investors Service, and BBB-plus with a positive outlook by Fitch Ratings.

Morgan Stanley is senior manager on the lead underwriter and JPMorgan is co-senior manager on the January deal.

The deal has been through an arduous vetting process because of new disclosure requirements the city put in place after the pension scandal. The preliminary official statement has gone through numerous drafts that outside consultants and city staff had to submit for approval by the city's disclosure practices working group and the council. The city attorney and the mayor have to certify that there are no material misstatements or omissions in the POS.

Each sentence, table, and fact in the preliminary official statement- which took eight months to produce - has been footnoted, and even the footnotes have footnotes, John McNally of Hawkins Delafield & Wood LLP, the city's disclosure counsel, said in council testimony.

Disclosure and bond counsel fees on the deal are expected to total $435,000, according to city documents. McNally said San Diego's practices are now a model for other issuers.

Fulbright & Jaworski LLP is bond counsel.

That may be a daunting act to follow for other cities, where public officials spend two or three minutes approving a simple water revenue bond deal.

But in San Diego - where the City Council members continue to face criticism over their quick approvals of the 2002 and 2003 deals - policymakers were at pains to show they were paying close attention this time.

The councilors spent a couple of hours discussing disclosure on this deal. That followed disclosure training for the staff of the water and finance departments, as well as the council, and individual meetings to review the POS with individual council members.

Even after that, one council member, Donna Frye, refused to vote for the bonds on the grounds that San Diego's pension fund is rapidly losing money in the current stock market rout, making her worry that the full extent of the current losses may not be disclosed to bond market investors.

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