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HomeMy WebLinkAboutAgenda Statement 1987/11/12 Item 8• COUNCIL AGENDA STATEMENT Item 8 Meeting Date 11/12/85 ITEM TITLE: Ordinance ~~ ~'" Authorizing the issuance of not to exceed $300 million City of Chula Vista, California, Public Safety Communications Center Program Funding Bonds, authorizing the sale not to exceed Series 1986-A Bonds, approving Form of Indenture and Series 1986-A Supplement, approving official statement relating to Series 1986-A Bonds, and authorizing official action SUBMITTED BY: Director of Finance~~ REVIEWED BY: City Manager (4/5ths Vote: Yes No X ) At its meeting of October 14, 1986, the City Council discussed the concept of doing a taxable bond issue and directed staff to further evaluate the proposal and return to the Council with additional information. RECOMMENDATION: That Council approve first reading of the Ordinance authorizing the City to proceed with the issuance of taxable revenue bonds based on two conditions: • 1. That issue size be a minimum of $50 million, and 2. That the City realize a minimize net revenue amount of 0.5% on the bond issue ($250,000 on a $50 million issue). DISCUSSION: Newman and Associates, an investment banking firm from Denver, Colorado, are proposing that the City do a taxable bond issue that, because of existing conditions in the interest rate markets, could result in substantial revenues to the City. As discussed at the Council meeting of October 14, 1986, the basic concept is as follows: 1. The City issues taxable revenue bonds, thus the restrictions and laws that normally govern tax exempt financings will not apply. ^. The City would loan the bond proceeds to a "AAA" rated insurance company through a Guaranteed Investment Contract (GIC). Under the GIC, the insurance company would borrow the funds from the City for the same term as the revenue bonds and guarantee to pay a higher rate of interest to the City on those borrowed funds than the interest rate being paid by the City to the bond holders. This interest rate "spread" and Guaranteed Investment Contract will produce enough earnings to fully pay off the bond issue and allow for a certain • amount to be set aside for City use. Page 2, Item ~ Meeting Date 1- 1{~86 Additional Information The pity's Bond Counsel of Jones Hall Hill and White has completed their analysis of the legal issues and are of the opinion that there are no legal obstacles preventing the City from utilizing this concept as a means of raising revenue. The documents before you tonight have been prepared by the City's Bond Counsel. Copies of the Preliminary Official Statements and Indenture are on file with the City Clerk and Finance Director for Council review. Following is additional information and answers to questions raised by staff and Council: 1. Guaranteed Investment Contract (GIC) - Guaranteed Investment Contracts are brief, straightforward documents that clearly spell out the GIC provider's obligation to pay the predetermined cash flow. The strength of the GIC is only as strong as the paying ability of the GIC provider. The City therefore will accept a GIC only from an insurance company that has a Standard and Poor's AAA claims paying ability rating. As you know, very few corporations are still rated AAA, hence the AAA rating signifies Standard and Poor's opinion that the GIC provider (and therefore the GIC and bonds) is very secure. • GICs are fairly common instruments and are used for many purposes for which someone desires to have a very secure fixed i ncome cash flow. Some examples are: a debt service reserve fund on a tax exempt bond issue, a corporation matching a future liability such as a balloon payment in a mortgage, or a pension fund to fund a future liability. They are also used by Deferred Compensation Programs that offer a guaranteed minimum interest rate on employees' deferred savings. 2. Size of Issue - Newman and Associates suggests that in order to obtain GICs at the most competitive levels and at the same time achieve economies of scale and liquidity on the taxable bond issue, a series of bond issues is probably most viable with each bond issue being between $30 million and $100 million (with $50 million being the most likely). A series of issues might occur at two week or several week intervals, depending on market conditions. The Trust Indenture is set up as a master indenture to minimize additional legal work. 3. Potential Revenue to City - Newman and Associates estimate that the City could receive an upfront sum of between $500,000 to $1 million for each $100 million of bonds issued. If, alternatively, the City decided to take an annual fee rather than a one-time upfront payment, it is estimated that for a ten year bond issue, the payment per year would be about $112,000 per $100 million of bonds issued. • 4. Costs of Issuance - Because these transactions are based on a very narrow spread between the GIC and the taxable bonds, it is important that the total costs be significantly less than on tax exempt • Page 3, Item 8 Meeting Date -Il/12/~6 issues. The underwriters spread should not exceed 1.6% (on most tax exempt i ssues i t i s 2.5% to 3.5°~) and the costs of i ssuance shoul d not exceed 0.25% of the bond issue ($250,000 on a $100 million bond issue). 5. Use of Arbitrage Revenue By City - The City's Bond Counsel would like to have a specific public purpose identified for the use of the revenue the City will receive through this type of financing. For purposes of the Ordinance, staff has identified the Public Safety Communications Center to be funded from the revenue. This project is currently included in the Capital Improvement Project Budget for the years' 1986-87 and 1987-88 in the amount of $l.l million. 6. Risk to City - The taxable revenue bonds would be a special obligation of the City of Chula Vista and the full faith and credit and taxing ability of the City would not be pledged as security to the bonds. The only pledge of security is the revenue the City will receive under the Guaranteed Investment Contract. This will be fully disclosed to all potential bond buyers so that they are aware of the risks and the limited liability of the City. If the insurance company has financial problems or enters into bankruptcy proceedings, the City would be paid off first prior to the insurance company paying any other debts. • 7. Long Term Impact On Bond Market - It i s very 1 i kely that i f a 1 arge number of these taxable bond issues are done by local government entities that the market would tend to correct its inefficiencies and the opportunity to earn the spread on the arbitrage would probably be eliminated. There is also a possibility that some type of federal legislation may be passed placing restrictions on local governments ability to issue these types of bonds. SUMMARY The proposed bond issue with the investment of proceeds in a Guaranteed Investment Contract and the earning of arbitrage revenue by the City of Chula Vista will only work under certain market conditions. These market conditions may exist for only short periods of time and at intervals. The action by Council tonight will put the City in a position to act immediately if and when a "window of opportunity" presents itself. Staff also recommends that certain thresholds be placed on the issuance of bonds, i.e., that the City proceed only if the minimum bond size is $50 million and that the spread is sufficient for +:t,e City to realize a minimum of 0.5% on the bond issue ($250,000 on a $50 million issue). FISCAL IMPACT: There is a potential for the City to realize several hundred thousands of • dollars in revenue that can be used to finance needed projects. WPC 0379E ~l