SFPUC authorizes up to $1.53 billion in water revenue bonds; staff flags Build America bond subsidy risk

At a meeting of the San Francisco Public Utilities Commission, commissioners authorized the issuance of up to $1,530,000,000 in water revenue bonds and delegated authority to the general manager to appoint underwriters and finalize sale documents.

The action, presented by Capital Finance Director Nikolai Sklaroff and discussed with disclosure counsel from Orrick, Harrington & Sutcliffe, covers multiple subseries that will fund water-enterprise capital projects, retire up to $474,000,000 of commercial paper and permit refunding of certain Build America bonds (subseries F) of up to $1,056,000,000. Sklaroff said the financing is intended to “keep projects underway” and described the PUC’s long-term programmatic approach to financing multiple simultaneous projects.

Disclosure counsel Erin Pham told commissioners that preliminary official statements and other offering materials “cannot contain any material misstatements or omissions of material fact,” and reviewed federal anti‑fraud standards and Rule 15c2‑12 compliance that the PUC must satisfy when selling bonds.

Why it matters: the commission’s authorization allows staff to enter the market to refinance commercial paper and provide funds for water projects. Commissioners and staff spent extended time on the refunding of Build America bonds (issued with a federal interest subsidy after the 2009 ARRA law) because federal budget sequestration reduced the subsidy from the original 35% to about 33% and litigation and subsequent congressional actions have left the long‑term federal treatment uncertain. Sklaroff said the PUC has about $4,500,000,000 of water debt outstanding and roughly $350,000,000 in annual debt service.

Discussion and options: staff and outside advisors described two components of the transaction: (1) new-money series to refinance commercial paper and support projects, and (2) a refunding of taxable Build America bonds intended to mitigate the long-term risk from subsidy reduction. Sklaroff said markets have been volatile and that subseries F (the BAB refunding) could be delayed if market pricing is not favorable. He told commissioners the team could proceed with the new‑money series immediately and pause the BAB refunding if it looked like it would produce a net present‑value loss.

Commission questions focused on market timing, the team of advisors working on the financing, and what the PUC should expect for rate impacts. Sklaroff said the financing had been included in the PUC’s 10‑year plan and that successful market pricing would likely yield borrowing costs lower than the 6% assumed in the plan.

Public comment: Peter Drechmeyer of the Tuolumne River Trust urged the commission to look at debt capacity and the Alternative Water Supply Plan in a workshop, saying he heard the PUC might be near borrowing limits.

Outcome: Commissioners voted to approve the resolution and delegate authority to staff. The motion passed unanimously.

What’s next: staff will continue market monitoring, finalize financing documents with disclosure counsel and other advisors, and report back to the commission after the sale and on any follow‑up mitigation for remaining Build America bonds.