How Oxnard got a refunding deal done after years of turmoil
LOS ANGELES — Oxnard, California, officials call a recent water and wastewater refunding deal a success with investors, overcoming years of local turmoil that included a voter-approved reversal of a rate increase and an unsuccessful recall effort targeting the mayor and city council members.
“The story they heard from Jesus Nava, [Oxnard’s assistant city manager] in terms of the positive trends came through,” said Mike Meyer, a vice president with NHA Advisors, the financial adviser on the deal.
Oxnard's wastewater and water rates have been a hot potato in local politics.
When the City Council voted to steeply raise rates in one fell swoop in 2015, residents, led by local businessman Aaron Starr, revolted. Starr got Measure M on the ballot in 2016 and more than 70% of residents voted to reverse the rate increase.
The city government had a bad image.
An investigation by the Ventura County District Attorney’s office in 2012 created distrust though the DA ultimately found that none of the gifts received by city officials from firms that did business with the city rose to the level of criminal activity.
“Several multi-million dollar transactions were examined in detail and no criminal activity was discovered,” according to the DA’s 2012 report. “The evidence does not support the allegation that the officials had financial interests in the contracts they approved.”
The DA turned the matter over to the Fair Political Practices Commission, which levied fines against some city officials for not reporting gifts, and for accepting gifts over annual thresholds allowed for government officials. The gifts were mainly dinners, travel and tickets to sporting events.
The city council later approved a lower and phased-in set of rate increases for the two systems, to which Starr responded by gathering petitions to force a recall election seeking to remove three council members and the mayor. Voters rejected the recall May 1.
City officials had said that without rate increases the city would fall below rates required in covenants for existing water revenue bonds.
Ahead of the deal, S&P upgraded the wastewater revenue refunding bonds two notches to A-minus from BBB and assigned a stable outlook. The water revenue refunding bonds received an A rating. Both deals carried AA ratings from S&P because of Build America Mutual insurance.
“The raised rating reflects our view of the steps taken by the city to de-risk its debt portfolio by refunding its existing variable-rate bonds with this series 2018 fixed-rate bonds and terminating a swap agreement to which it is a party,” S&P analysts Malcolm N D’Silva and Tim Tung wrote Nov. 6.
The wastewater revenue bonds priced to yield between 1.98% for the 2019 maturity and 3.86% for the 2034 maturity. The water revenue bonds priced to yield between 2.13% for the 2020 maturity and 4.07% for the 2036 maturity.
The city achieved $4.8 million present value savings on the water refunding; and $1.8 million present value savings on the wastewater refunding. The savings are inclusive of the termination of a swap agreement with RBC.
“Investors responded by saying, 'You got your act together and finances have improved greatly,'” Nava said. “We think you have a brighter future ahead and have confidence that those are attractive investments.”
Even before marketing to investors, the city had to convince residents that refunding out of variable-rate debt and the resultant savings were necessary and beneficial; and that rate increases were needed to pay prior bonds and update the water system, Meyer said.
The district issued the series 2018 bonds to refund existing series 2006 obligations for annual debt service savings. The city had roughly $173 million in water debt outstanding at the end of fiscal 2018, according to S&P.
The finance team included JPMorgan as book runner, Ramirez & Co., Inc. as co-manager and Best Best and Krieger LLP as bond counsel.
Some of Oxnard's accounting irregularities and failures to correctly report expenses stemmed from turnover in financial staff after the 2008 recession, said Nava, who worked for the Santa Clara Water District before coming to Oxnard in December 2016.
Nava will retire at the end of the year. City Manager Alex Nguyen, who came over from Riverside this summer, recently signed a five-year contract, which should help provide continuity, Nava said.
The city still has work to do to establish solid accounting practices, according to S&P’s ratings report.
"A lingering, but diminishing, credit weakness, in our view, is the city's legacy of management deficiencies, which the city started to confront publicly in 2015 upon the release of a consultant study that included a list of 128 governance improvement ideas," S&P analysts Chris Morgan and Christopher Grant wrote in an Oct. 18 report that affirmed the city’s issuer rating at A and its long-term rating at A-minus, with a stable outlook.
The city has provided updates on each line item for governance improvements on its to-do list, but has fully addressed less than half, analysts said. The city has made better progress in dealing with internal control and management practices whittling a list of 96 items down to five, which S&P postulated will be removed from the auditors’ findings by the city's fiscal 2018 audit.
“We think Oxnard is experiencing the tail end of a period of institutional stress and political conflict, with ineffective wastewater utility management earlier in the decade leading to dramatic rate increases and political conflict culminating in a recall election that saw voters turn down the opportunity to replace the mayor and three council members,” Morgan and Grant wrote.
The city will have roughly $457 million in direct debt outstanding at the end of fiscal 2019, according to S&P.
The city went to court to challenge the referendum that rejected the earlier rate increase, but Ventura County Superior Court Judge Rocky Baio ruled against Oxnard in March.
“It is unclear at this point whether city will be required to make refund payments to affected customers, or if the refunds can take the form of credits against future billings,” S&P's Tung wrote. “Based on recent audited and unaudited cash and investment balances, we believe that the system has the capacity to make these refunds without adversely affecting credit quality at the current rating level.”
The city has estimated the maximum cost of refunds at $5.2 million, which S&P said city coffers could absorb.
S&P said the refunding deal reduces risk for the Oxnard water and wastewater enterprises.
“Although pro forma savings associated with the transaction were modest, the city was able to simplify its debt portfolio by removing risks associated with renewing letter-of-credit support for its variable-rate demand bonds and administrative complexities inherent to variable-rate debt and swap agreements,” Morgan and Grant wrote in the Oct. 18 report.
“Standard & Poor's upgrade of Oxnard's wastewater bonds vindicates the City Council's decision to raise wastewater rates,” said Tim Flynn, Oxnard’s mayor. “It's a welcome acknowledgment of the Council's ability to take a tough vote, and a clear sign of Oxnard's continuing financial stability."
The city completed a rate setting process in 2017 and implemented the first two of five approved rate increases that led to a significant improvement in the city’s fiscal 2017 financial performance, S&P analysts wrote in the Nov. 8 report.
“We anticipate that the approved rate plan will drive stronger performance in the near future,” S&P analysts D’Silva and Tung wrote.
It took city officials and the financial advisors more than a year and a half to get to the refunding, said Craig Hill, a principal with NHA Advisors.
“It was a two-year stormy adventure for the city, but the city staff and city council were able to stay the course,” Hill said. “They made the beachhead and were able to do what others before us said they need to have to access the capital markets. It was a case study in maintaining a strategic plan that didn’t deviate. It ended up being a win for the city.”