Half Moon Bay leaders will vote on a multifaceted plan to pay down the city’s long-term bond debt tonight in a consequential decision that could save tens of millions of dollars.
Council members will review a recommended course of action at a special meeting tonight. Financial advisers believe their plan would ultimately save $12 million and pay off the debt entirely in 2019. The plan calls for immediately buying back as many of the city’s bonds on the open market as possible and making use of two windows to pay the bonds early before they accrue decades of interest.
But paying back the city’s debts is an extremely complicated proposition and could be impacted by changes in the bond market, U.S. federal budget negotiations or IRS regulations.
“This is very complex and it’s not as simple as a home mortgage,” said city financial director Jan Cooke. “They’re all projections. They’re our best estimates at this point related to the payment.”
The plan for reducing the city’s debt follows the announcement last week that Half Moon Bay will receive an additional $3.15 million as part of a final settlement with its former liability insurer. That money is being added to $10 million the city received last year from the same insurer in an arbitration case ruling.
The two insurance awards and the city’s bond debt are all rooted in the Beachwood case, a lawsuit the city lost in 2007. More than five years ago, a federal judge ordered Half Moon Bay to pay a developer $41 million as part of a longstanding land-use battle. The city ultimately agreed to pay $18 million through a settlement, and officials raised most of that money by issuing two sets of bonds: $5.7 million in “Series A” judgment obligation bonds and $10.9 in federally subsidized “Build America Bonds.”
Following the lawsuit, the city pressed its own case against the Insurance Company of the West, a firm that provided liability coverage for the city in the early 1990s. That case went to legal arbitration and resulted in the two settlements totaling $13.15 million.
The City Council directed staff to devise the best way to use that money with the help of Jones Hall law firm and William Euphrat Municipal Finance advisers.
The recommended plan released this week would first involve hiring a securities broker to buy back the city’s bonds at “advantageous” prices on the open market. The Euphrat consultants reported this could be most cost-effective way for the city to pay off its bonds, but it would depend on whether bondholders were willing to sell and at what price.
“We don’t know whether they’ll be available or for what price,” said City Attorney Tony Condotti. “The bonds (are owned by) mom and pop investors to mutual funds.”
Under the plan, Half Moon Bay would use any remaining money to set up two accounts to pay down its two separate bond programs. Each bond program has its unique payment structure, interest and payback windows. The city could pay off its $5.7 million “Series A” bonds starting in 2014; the $10.9 million “Series B” could be redeemed in 2019.
Some uncertainties could still change this picture. The federal government is currently defaulting on a wide array of obligations as part of the budget sequestration negotiations, including the city’s bond subsidy. Attorneys are still investigating whether this could merit an “extraordinary event,” a clause writing in bond issuance providing an opportunity to pay off the bond early.
Another uncertainty is whether the City Council will tweak the recommended strategy. City leaders have indicated previously they would use the insurance money to pay off the debt, but recently some elected leaders have questioned whether some should be set aside for other purposes.
Mayor Rick Kowalczyk suggested using some money now for a new local library might save the city money if the plan is to eventually take out another bond to finance it.
“I also have to step back to ask what’s the best thing for Half Moon Bay,” the mayor said. “Is the best thing to pay down the debt, or is there an alternative use that I should consider?”
Half Moon Bay leaders will hear staff and public suggestions tonight, at a meeting scheduled for 6 p.m. at the city’s Department Operations Center, 535 Kelly Ave.