On November 10, 2015, the Garden Grove Public Financing Authority issued $24,790,000 of Lease Revenue Bonds, Series 2015A (the Bonds).  The Bonds were issued to refund the outstanding balance of the 2002 Certificates of Participation Series A in the amount of $17,100,000, and to finance the acquisition and construction of a fire station, the renovation of the police facility, and other public capital improvement projects. The Bonds carry an interest rate ranging from 2.0% to 5.0% over a 30-year term, with maturity date of March 1, 2045.  The City has been making debt service payments on a semi-annual basis.  As of September 30, 2023, the Bonds carry a principal balance of $20,715,000, with interest rate of 5.0% for the remaining term of the Bonds.      

In June 2022, the City initiated the Civic Center Revitalization Project, with the purpose of improving the civic center area and replacing the police safety facilities to better meet the needs of the community for all current and future residents. 

Several parcels in the civic center area are pledged for the Bonds.  To facilitate the Civic Center Revitalization Project and ensure its delivery feasibility and cost efficiency, it is in the best interest of the City to remove the liens pledged for the Bonds. 

In June 2023, the City and the Garden Grove Housing Authority executed a purchase and sale agreement to convey certain parcels in the civic center area located at 11390-11400 Stanford Avenue to the Housing Authority.  Acquiring the property is necessary for the Housing Authority to explore future housing production opportunities.  The sale of the property is contingent upon the removal of the lien.

Staff has been working with the City’s bond counsel and municipal advisor searching for the best approach to remove the liens pledged for the Bonds.  Several alternatives were discussed, including replacing the pledged properties with other unencumbered City properties with equal value, cash fund a portion of the outstanding debt to release the properties pledged, and defease the Bonds in its entirety.  Taking consideration of the cost, timeline, future impact on the Civic Center Area, current cash position of the City, and the current market condition, staff and consultants reached consensus that defeasing the Bonds in its entirety is the best alternative.

The Bonds are call-protected until March 2026.  Therefore an escrow account is required to defease the Bonds.  Securities will be purchased so that interest earnings will be available between now and March 2026 to fund for partial debt service payment from March 2024 to September 2025.  An Escrow Agreement and a Termination Agreement have been prepared by the City’s bond counsel accordingly.  If the City Council approves to proceed with the defeasance, the Bonds will be considered fully redeemed on December 5, 2023.

The City is currently paying 5.0% interest on the Bonds.  The defeasance escrow requirement is $22.1 million, with the purchase of securities to fund for the escrow, cash flow requirement would be $20.8 million, equivalent to the outstanding principal amount.  In addition, the City will be saving $10.6 million in interest cost over the remaining life of the Bonds by paying it off early.  Net against a potential loss of investment earning in the amount of $6.7 million, assuming the funds were invested at the current two-year constant maturity treasury rate, the benchmark of the City’s investment portfolio, there will be net cash flow savings of approximately $3.9 million by defeasing the Bonds. 

The recommended actions will authorize staff and consultants to initiate the proceedings to defease the Bonds which will remove all the liens against the properties within the civic center area.  This not only will allow the Housing Authority to purchase the parcels located at 11390-11400 Stanford Avenue from the City, it will also remove potential challenges related to parcel encumbrances for the Civic Center Revitalization Project.

The defeasance of the Bonds will not result in additional taxes or fees to our tax payers.

It is recommended that the City Council in a joint action with the Garden Grove Public Financing Authority:

• Adopt the Resolution authorizing the defeasance of the Garden Grove Public Financing Authority Lease Revenue Bonds, Series 2015A, the execution of an escrow agreement and a termination agreement, and approving certain acts in connection therewith and certain other matters (Attachment 1);

• Approve the form and authorize the City Manager/Executive Director to execute the Escrow Agreement by and among the City of Garden Grove, the Garden Grove Public Financing Authority, and U.S. Bank Trust Company, as escrow agent (Attachment 2); and

• Approve the form and authorize the City Manager/Executive DIrector to execute the Termination Agreement by and among the City of Garden Grove, the Garden Grove Public Financing Authority, and U.S. Bank Trust Company, as 2015 Trustee (Attachment 3).