1. T E F R A H E A R I N G T E F R A H E A R I N G CITY OF STOCKTON TAX-EXEMPT CERTIFICATES OF PARTICIPATION SERIES 2003 (UNITED CHRISTIAN SCHOOLS) Presented to: Stockton City Council December 9, 2003

2. TOPICS FOR PRESENTATION Tonight’s presentation covers four topics: Under what authority does United Christian Schools qualify for tax-exempt financing? Under what circumstances has the Council acted as a “conduit issuer” in the past? Are there other “conduit issuers” which UCS could avail themselves? Summarize the method of the refinancing and components of the issue.

3. BACKGROUND United Christian Schools (‘UCS’) is a not-for-profit corporation which operates four educational facilities within the City. The School has requested that the City assist in the refinancing of an existing taxable mortgage by acting as a “conduit issuer” of tax-exempt Certificates of Participation. A “conduit issuer” is any governmental agency that issues debt on behalf of a qualified nongovernmental borrower.

4. BACKGROUND (cont.) Private organizations exempt from federal Income tax under Section 501(c)(3) of the IRS Code, may avail themselves of the benefits of conduit tax-exempt financing. Tax law allows 501(c)(3) organizations to borrow on a tax-exempt basis only by involving a state or local government unit which can issue debt. In order for the financing to proceed the governmental unit which has jurisdiction over the area in which the project to be financed is located must conduct a public hearing (i.e., TEFRA Hearing).

5. BACKGROUND (cont.) As a “conduit issuer”, bonds or Certificates of Participation are issued on behalf of qualified non-profit corporations, institutions or other legal entities. Bonds are issued to private investors. No pledge of revenues or funds by the City. Legal agreements remove the City from incurring financial liability. Repayment of the debt and assumption of liability is the responsibility of the borrower.

6. BACKGROUND (cont.) Tonight, Council is being asked to take two actions, including: Conduct a public hearing (i.e., the TEFRA Hearing); and Approve execution and delivery of the documentation and agreements. Notice of the TEFRA Hearing must be advertised at least 14 days in advance of the hearing. Notice of this hearing was published in the RECORD on November 17, 2003.

7. CONDUIT ISSUER Council adopted an Ordinance in 1984 declaring it necessary and essential that the City assist health institutions that provide essential services to Stockton residents. Council has acted as a “conduit issuer” by issuing revenue bonds to finance and refinance local health facilities, including: Dameron Hospital (1997/2002); O’Connor Woods, a local convalescence home (1991/1993/2001).

8. CONDUIT ISSUER (Cont.) Council has conducted several TEFRA Hearings for locally based projects for which another authority served as “conduit issuer”. For example: California Statewide Communities Development Authority issued tax-exempt revenue bonds. Kaiser Permanente (2002) Aspire Public Schools (Charter School)/(2002) Beyond the Health Facilities Ordinance, Council has no policy regarding the use of its decision making authority as a “conduit issuer”.

9. CONDUIT ISSUER (Cont.) Optional “conduit issuers” include: County of San Joaquin. Association of Bay Area Governments Authority for Non- profit Corporations. California Statewide Communities Development Authority. Later two are Joint Powers Authorities which act as a conduit issuer on behalf of not-for-profit agencies. Administrative fees apply, including: Application fee Issuance fee ($5,000 to $15,000) Annual fee assessed against remaining principal. If approved, the City will receive an Issuance Fee of approximately $5,250.

10. METHOD OF REFINANCING Under terms of the proposed refinancing, the City will issue Certificates of Participation, the proceeds which are used by UCS for the purpose of refinancing their existing mortgage. No pledge of funds by the City. By Agreements, the obligation to pay the principal and interest payments becomes the sole responsibility of UCS. The City and UCS will assign their rights to a Trustee who is responsible for holding the funds and protecting the interest of the certificate holders. The obligation of UCS to make principle and interest payments is secured 100% by a Irrevocable Letter of Credit from a large regional bank.

11. SOURCES & USES OF FUNDS The par amount of the Certificates is projected at $5 million. Amount includes approximately $4.7 million, which is required to prepay the existing loan; Approximately $57,243 for expenses associated with the letter of credit; and Approximately $112,207 for cost of issuance.

12. DEBT SERVICE & SAVINGS The current interest rate on the existing taxable commercial loan is at 6.875%. The method of finance proposes the use of a 7- day variable rate with interest obligations at 1-1/4% to 1-1/2%. Annual support costs for the letter of credit, remarketing agent and Trustee total approximately 1.4% - for an overall interest rate of approximately 2.9%. Annual interest savings are approximately 3.975%.

13. SUMMARY CONCLUSIONS The role of Council as a “conduit issuer” in this transaction is one of policy. Council has adopted an Ordinance specifying its role in financing & refinancing health related facilities. Council has no policy regarding this type of conduit transaction. UCS could use another “conduit issuer”. Use of a JPA would require the Council to conduct the TEFRA Hearing. If the County of San Joaquin were involved, they could either defer the hearing to the City or seek the City’s permission to conduct the hearing.

14. KEY TERMS - FINANCING Non-recourse to the City. Obligation to make principal and interest payments is expressly limited to funds pledged by the school. No pledge of revenues or cash flows by the City is required or permitted. No credit risk. Financing is 100% secured by a Irrevocable Letter of Credit from a large regional California Bank. No administrative requirements. Other than conducting the TEFRA Hearing, no administrative requirements are imposed on the City.

15. COUNCIL ACTION UCS requested that I mention the following items. Those in attendance can provide detail: Municipal markets have significant redemptions in early December meaning investors are keenly interested in reinvesting their proceeds. Any delay may cause prospective investors to go elsewhere. Closing in mid-December would allow the School to experience significant interest savings on its existing loan (i.e., $25,000 to $30,000/month). The Letter of Credit commitment expires on December 31, 2003, and the School would need to receive the Bank’s agreement for an extension.

16. RECOMMENDATION If it is Council’s intent to approve this matter, at the conclusion of the TEFRA Hearing adopt a Resolution: Approving, authorizing and directing execution of a certain trust agreement, installment purchase agreement and installment sale agreement. Approving the form and authorizing distribution of a preliminary official statement and final official statement Approving a Certificates Purchase Agreement Authoring and directing certain actions for the purpose of refinancing an existing loan and deed of trust on educational facilities of UCS.