SFPUC authorizes up to $1.53 billion in water bonds, approves plan to refund Build America bonds amid subsidy uncertainty

The San Francisco Public Utilities Commission on June 10 authorized the issuance of up to $1.53 billion in water revenue bonds to fund capital projects and to retire commercial paper and potentially refund outstanding Build America bonds (BABs).

Commissioners approved a resolution that delegates authority to the general manager to appoint underwriters and finalize bond purchase contracts consistent with city procurement rules. The motion passed unanimously: President Stacy, Vice President Arce, Commissioner Jamdar, Commissioner Leverone, and Commissioner Thurlow voted aye.

The vote followed an earlier training for commissioners on federal securities-law disclosure obligations led by disclosure counsel from Orrick, Harrington & Sutcliffe. Counsel explained that preliminary and final official statements used in municipal bond offerings must not contain material misstatements or omissions under the Securities Act of 1933 and the Securities Exchange Act of 1934, referencing rules including SEC rule 10b-5 and municipal market rule 15c2-12. Counsel urged commissioners to focus on big-picture risks and to “include the information rather than omit it” when in doubt.

Nikolai Sklaroff, SFPUC capital finance director, described the structure and purpose of the financing. He said the transaction includes: subseries D and E (new-money borrowing to fund water capital projects and to retire up to $474 million of commercial paper) and a subseries F to refund certain taxable Build America bonds (reported in staff materials as up to roughly $1.056 billion). Sklaroff said the transaction was downsized from prior plan projections and is intended to keep projects funded while managing refinancing opportunities.

Sklaroff and counsel emphasized that the biggest near-term uncertainty is the federal subsidy for BABs. The American Recovery and Reinvestment Act originally provided a 35% federal subsidy on BAB interest; sequestration and subsequent budget actions have reduced the payment to roughly 33%, producing an estimated cumulative revenue loss of about $25 million for SFPUC to date. Staff said that if sequestration or other federal actions change, the savings from refunding BABs could vary widely; current market pricing produced a small net-present-value savings on the refunding (staff said savings are “just barely in the money” on the day’s pricing). Sklaroff said the transaction could be staged: proceed with the new-money series to maintain project cash flow and delay the BABs refunding if market or legislative conditions make the refunding unattractive.

Sklaroff provided context for the utility’s debt profile: about $4.5 billion of water-related debt outstanding and roughly $350 million in annual water-related debt service. He said the PUC uses commercial paper for short-term liquidity and issues bonds to refinance paper as needed, and that the rate impact assumptions in the adopted 10-year plan remain the guiding baseline for affordability.

Commissioners probed market timing and the mechanics of refunding taxable BABs (which can require a special extraordinary redemption or payment calculated using taxable-rate discounting rather than a standard par call). Commissioners requested a prompt post-sale briefing so the commission can review final pricing and the results of any refunded series.

The commission voted unanimously to approve the authorization. The general manager will return a bond sale report after pricing and any executed transactions.

Ending: The SFPUC will report back to the commission after pricing and any refunding transactions are executed; commissioners asked staff for a follow-up update at a June meeting if the transaction proceeds.