Selma approves $7M bond for sewer infrastructure

Selma City Council narrowly approves a lease revenue bond agreement for wastewater infrastructure vital to future residential, commercial development

The Selma City Council discusses regular business during its meeting Feb. 5, 2024. (Serena Bettis)
The Selma City Council discusses regular business during its meeting Feb. 5, 2024. (Serena Bettis)
Serena Bettis
Published February 7, 2024  • 
2:00 pm

SELMA – Development and growth on the east side of Selma has moved one step closer to reality after the Selma City Council approved a $7 million lease revenue bond agreement intended to fund wastewater infrastructure in the Amberwood area. 

The Selma City Council unanimously voted to authorize the issuance of lease revenue bonds at the meeting on Feb. 5; however, Selma Mayor Scott Robertson first introduced a motion — which failed 3-2 — to table the item until the city held a workshop on the agreement, citing inadequate time ahead of the meeting for the council and residents to review the material.

“Given this is 144 pages, I would still like the public to be able to weigh in on this and ask informed questions,” Robertson said. “My position on this is that we should table this for another meeting, have a workshop … and put this on the agenda at the next council meeting that’s a couple weeks away. We can wait two weeks; we’ve waited a long time for homes in that area.” 

Robertson and Councilmember Sarah Guerra said they were not comfortable approving the item immediately. With just a few days to review the bond documents, they wanted more time for residents to be able to understand the bond and provide their opinions.

In compliance with California state law, which requires public meeting agendas be posted at least three days before a meeting, the city of Selma published the agenda and related materials to its website the morning of Feb. 2, but the bond agreement was made up of lengthy legal documents. 

City staff said that tabling the item was an option, but if the council did not approve the bond agreement at that time, the city would lose the interest rate it had been provided and would be at risk of having to accept a higher interest rate based on daily fluctuations of the economy.

Mayor Pro Tem Beverley Cho and Councilmembers Blanca Mendoza-Navarro and John Trujillo were in favor of passing the item immediately and voted against Robertson’s motion to table the item. 

Mendoza-Navarro and Trujillo then motioned to approve both items, which included separate resolutions from both the City Council and the Selma Public Financing Authority (SPFA) to authorize the issuance of the bonds. 

In their comments on the bond, Mendoza-Navarro and Trujillo placed more emphasis on the fact that the council has discussed the topic in the past and that the infrastructure project has been a long-time coming and is needed to continue development in the city.

“You can’t have growth if you don’t have the proper sewage, if you don’t have the proper water lines, if you don’t have the proper electricity,” Mendoza-Navarro said. 

At the meeting, four representatives from consulting firms that have been working with the city as the financing team on the matter were present to explain the terms of the agreement, what a lease revenue bond is and to answer any questions. 

The financial advisor on this bond is NHA Advisors, the bond counsel is law firm Norton Rose Fulbright and the placement agent is Oppenheimer & Co. 

Terms of the agreement

In order to fund wastewater infrastructure projects in Selma, the city and the SPFA are entering into a lease/leaseback revenue bond agreement with Capital One.

The agreement approved by the council is for a bond amount that is not to exceed $8 million, paid over 25 years with a fixed interest rate of 4.93%. The exact par amount issued is expected to be approximately $7 million.

According to the staff report provided to the council, the city would make annual level payments — which would come from the general fund and be allocated in the city budget each year — of approximately $566,000 through Feb. 1, 2049. Payments would begin Aug. 1, 2024. 

The total amount paid with interest is estimated to be just over $14 million, according to good faith estimates prepared for the city by NHA Advisors.

Jeff Land, executive director of Brandis Tallman, a division of Oppenheimer & Co., said that in order to lock in the specific interest rate, the city needed to approve the term sheet by Feb. 6; Capital One provided the interest rate on Feb. 1, and Land said that the city caught the interest rate at a good time. 

Interest rates decreased after an announcement from the Federal Reserve on Jan. 31, but increased again on Feb. 2, Land said. 

By approving the agreement, the council was not yet committing the city to the bond, however; the bond has a 60-day closing window, during which the city could back out of the agreement or make changes to it. If the city were to do that, it would lose the 4.93% interest rate and have to obtain a new interest rate from Capital One.

The properties being leased are the old police station, Fire Station No. 2, the Selma Arts Center and a collection of city-owned sewer assets. 

The issuance cost for this bond is $250,000, divided between a contingency amount, the financing team of Norton Rose Fulbright, NHA Advisors and Oppenheimer & Co., the trustee US Bank, the bond rating agency Moody’s Investors Service and a fee paid to the state for services provided by the California Debt and Investment Advisory Commission (CDIAC).

Background

The process has been in the works for over a year. At the June 5, 2023, council meeting, the council approved the plan of finance and a request from the city to engage with the financing team on a 3-2 vote. The financing team provided an explanation of the lease revenue bond process at that time as well. 

In June 2023, the financing team brought a plan outline that would have been for a lease revenue bond of more than $20 million for nine wastewater infrastructure projects. The bond approved at the most recent meeting was for just one of those projects: the east Selma wastewater trunk line. 

A wastewater trunk line is a sewer line that receives wastewater from other, small sewer lines and transports it to the wastewater treatment plant. 

The line is necessary for any development, whether residential or commercial, to occur in an area, and the absence of this infrastructure has delayed multiple development projects over the last few years, council members said. 

“This is going to be a real game changer for the city of Selma with regard to facilitating growth in our housing inventory to be able to provide housing options to everyone who wants to live in Selma,” City Manager Fernando Santillan said.

Lease revenue bond process

A lease revenue bond is a type of municipal financing, or loan, that allows governments, school districts and other public entities to fund infrastructure and construction projects and then pay back that money over time. Instead of collecting revenue from a tax and saving up for a project, lease revenue bonds make it so cities can implement these projects immediately. 

Eric Scriven, a principal at NHA Advisors, explained that a lease revenue bond structure involves the lease/leaseback of city-owned assets — properties — with the SPFA acting as a counterparty to the lease agreements with the city. 

Properties are used in these types of agreements to secure the financing; the city retains the right of possession of the property, but cannot sell it while the financing is outstanding. As the bond is paid off, assets are released back to the city.

“The city and the public financing authority do a lease/leaseback between each other, which creates a payment stream from the city paying a lease payment to the public financing authority,” Scriven said. “That lease payment is assigned to the trustee — the trustee is US Bank — and then the trustee then pays the bank — Capital One in this instance — the payment.”

The SPFA has no active role in the financing or project operations, Scriven said. The trustee is there only to hold the account that has the bond funds in it and to make payments between Capital One and the city. 

Moving forward

Santillan said the timeline of the bond agreement benefits the city because it can now issue a Request for Proposal (RFP) for bids on the infrastructure project and show to potential contractors that it has the funding for the project. 

Additionally, the bond agreement grants the city wiggle room in how much the project will cost. City estimates have put the total project cost at approximately $6.75 million, but if the bids that come in are higher than that, the city is able to increase the exact bond par amount, as long as it does not exceed $8 million. 

The RFP will be open for a 30-day window and will be issued within the next week. With the 60-day closing window on the bond agreement, the city can make adjustments if needed, and construction could begin by mid-April, Santillan said.

Other details of the bond agreement that the city found to be favorable included the prepayment options and the wording in the agreement that would allow the city to add a second wastewater infrastructure project to the bond. 

The city will be able to make partial prepayments on the loan, up to 40% of the loan, Land said. This means that the city can make larger payments as it generates funds from development that is impacted by the sewer line, which ultimately reduces the total amount of interest the city has to pay on the bond. 

Santillan said that the property owners of the Amberwood specific plan entered into an agreement with the city that requires them to pay a fixed reimbursement amount over six years for a portion of the sewer line. 

“They’re planning on building in the first phase about 270 homes for Amberwood, and so whether they build those homes or not, they’re still required to pay the city … until their full fair share is reached,” Santillan said.

The city is also working on establishing development impact fees that any other developers would have to pay when building residential and commercial properties that are within the impact area of the sewer line. 

Further, Land said the city will have the ability to access additional funding later on to use for the Dinuba Avenue trunk line that brings the total bond amount up to $16 million. 

Santillan said the city also has a reimbursement agreement with a property owner who wants to build a subdivision north of Dinuba Avenue, which will help the city pay for that line as well.

Serena Bettis
General Assignment Reporter