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Home My WebLink About04/05/1994, C-15 - REFINANCING OF 1986 LEASE REVENUE BONDS �I`lu^lylll�lllllll�l�y�p�Il ll�lll MEETING DATE: city iIIIR ilfYiNll OrSA1 1 LUI5 OBISpO ITEM NUMBER: COUNCIL AGENDA REPORT FROM: William C. Statler, Director of Finance',', SUBJECT: REFINANCING OF 1986 LEASE REVENUE BONDS CAO RECOMMENDATION Direct staff to continue evaluating the cost effectiveness of refinancing the 1986 Lease Revenue Bonds and to return with necessary bond documents for Council approval if this analysis confirms that the City will experience sufficient savings to justify the refinancing. DISCUSSION During the past three years the City's financial advisor, Evensen Dodge, has periodically performed comprehensive analyses of the potential savings if we refinanced some or any of our outstanding bond issues. This would be similar to refinancing an existing home mortgage in light of today's lower interest rate market. In the past, the resulting conclusion has been that not enough savings would ensue to justify the costs associated with refinancing any of our currently outstanding bond issues. However, their most recent analysis indicates that refinancing the 1986 Lease Revenue Bonds (originally issued in the amount of $13.9 million in order to fund parking and street improvements) at this time will result in interest savings that are sufficient to offset the other costs that will be incurred if we refinance this issue. Factors to Consider in Addition to Interest Rates Even though interest rates have come down significantly over the past several years (we expect the net interest cost on the refunding to be 5.75% compared with the current rate of 8.04%), there are at least four factors that partially offset projected interest savings: ■ Interest costs during escrow. Issued in 1986, these bonds cannot be "called" for 10 ten years - or until 1996 under the terms of the bond indenture. This means that if we want to refinance this issue at today's interest rates, we must issue what is called an "advance refunding". Under this approach, we issue bonds now to refinance the 1986 lease-revenue bonds, but hold onto the proceeds for two years before paying off the existing bonds. For this interim two year period, we will in essence have two issues outstanding: the original issue and the refunding. Although we will pay interest on the refunding issue during this period, we will also earn interest on these funds, which will be placed in an escrow account and administered by a third party trustee on behalf of the bond holders. However, it is highly likely that interest earnings on the escrow funds will be less than the interest costs on the bonds. (Long term rates - which we will pay on the bonds - are almost always higher than short term rates - which we will earn on the escrow funds.) ��►ii(►IIIIIIIIIII�� IIUIII city of San LUIS OBISpo COUNCIL AGENDA REPORT This "negative arbitrage" is one of the costs of the refinancing that reduces the benefit of lower interest rates. As we get closer to the call date, this cost is reduced. This argues for waiting longer to refinance this issue until the call date, which has been part of our strategy, along with periodic review of changes in interest rates. However, if we wait an additional two years, there is no guarantee that the favorable interest rates present today will be available at that i time. This is a judgement call. Based on current market factors, and the results of our financial advisor's analysis of savings under existing and projected conditions, we believe that we should go forward with the refinancing at this I time. i ■ Issuance costs. There will be one-time costs associated with this refinancing (like "points" on a mortgage loan) for bond counsel, financial advisor, printing,. trustee, and underwriter fees. These will be paid from the proceeds of the refunding issue. ■ Early call penalty. There is a 2% penalty for an early call which is paid to the current bond holders. These will also be paid from the proceeds of the refunding issue. I ■ Interest earnings on the reserve fund. The "reserve fund" on this issue (about $990,000) is invested in a long tern treasury bond at 8.5%, which is a higher yield the underlying interest rate on the bonds. Since these bonds were issued before new arbitrage rebate rules were put in place in 1987, we are able to keep the positive interest earnings. With the refunded issue, we will not be able to do so. This lost "net earnings" on the reserve also becomes a cost factor in considering the benefits of refinancing this issue. This will be partially offset, however, by the capital gain we should earn when we sell this investment as part of the refunding. After considering all of these factors, we believe that it will be cost effective to refinance this issue at this time. The City's bond counsel (Jones Hall Hill & White) and Evensen Dodge are proceeding with the necessary paperwork to initiate the refinancing process. It should be noted that Evensen Dodge continues to perform extensive analyses to ensure the amount of savings to the City is sufficient before finally committing to the refunding. Term Considerations in Addition to Financing Costs Although not directly related to the basic refinancing analysis, another factor to be considered is the term of the refunding. Assets pledged as security for the Parking Fund portion of this issue are the parking structures themselves, the assets pledged for the General Fund portion are City Hall and the Police Station. In considering the economics of the refunding itself, we assume that the term of the refinancing will be the balance of the original period remaining - in this case, fourteen years. However, we may also want to consider extending the refinancing term beyond this period, especially since the facilities being financed - such as the parking structures - have useful remaining lives significantly in excess of fourteen years. This is a ►��i ��IIIII�Illln ��ll city of San LUIS OBISp0 COUNCIL AGENDA REPORT separate analysis we will also be performing as part of this refinancing, and is again very similar to a personal mortgage refinance, where it is common to refinance for a new 30 year term. We anticipate bringing the results of this analysis and our recommendations regarding refinancing the 1986 Lease Revenue Bonds to the Council at the April 19, 1994 meeting. If the outcome of this analysis results in a recommendation to refinance this issue, we will also be requesting Council approval of the bond documents necessary to complete the refinancing at that time. Background on the 1986 Lease Revenue Bonds These bonds were issued in 1986 in the amount of $13.97 million in order to fund the construction of parking structures, acquisition of necessary land, purchase of the 860 Pacific building, and construction of street improvements along Madonna Road and South Higuera to High Street. The principal amount currently outstanding is $11.56 million. Annual debt service payments on this issue are about $1.47 million, of which $545,000 is paid by the General Fund (for street improvements and the 860 Pacific building) and $929,000 is paid by the Parking Fund (for land acquisition and parking structures). Attached is an excerpt from the 1993-95 Financial Plan which summarizes all of the outstanding debt service obligations of the City. As discussed above, the benefits of refinancing each of these issues has recently been comprehensively evaluated by our financial advisor. Based on their analysis, which they reviewed in-depth at a recent briefing with the CAO, Assistant CAO, and Finance Staff, only the refinancing of the 1986 Lease Revenue Bonds is recommended for serious consideration at this time. ATTACHMENTS Excerpt from the 1993-95 Financial Plan summarizing the City's outstanding debt service obligations ON FILE IN THE COUNCIL OFFICE Analysis by Evensen Dodge, Inc. of the potential benefits of refinancing the City's outstanding debt service obligations. DEBT SERVICE REGt_•REMENTS OVERVIEW This section summarizes the debt service obligations of the City as of the beginning of the 1993-95 Financial Plan period (July 1, 1993). These obligations represent the City's annual installment payments of principal and interest for previous capital improvement plan projects or acquisitions funded through debt financings. The City's debt management policies are comprehensively discussed in Section B (Capital Financing and Debt Management) of the Financial Plan. The following is a description of each lease or bond obligation existing at July 1, 1993: 1959 Whale Rock Reservoir General Obligation Bonds -Series A and B • Purpose: Constructing the City's share of the Whale Rock Reservoir. • Maturity Date: 1999 Interest Rate: 3.75% to 4.00% • Original Principal Amount $3,900,000 Funding Source: Water Fund • July 1, 1993 Principal Outstanding: $1,140,000 1986 Lease Revenue Bonds • Purpose: Constructing parking structures ($5,758,400) as well as road improvements and facility acquisitions ($4,450,000). • Maturity Date: 2006 Interest Rate: 4.25% to 8.25% • Original Principal Amount $13,970,000 Funding Source: Debt Service and Parking Funds • July 1, 1993 Principal Outstanding: $11,555,000 1988 Water Certificates of Participation • Purpose: Constructing various water system improvements. • Maturity Date: 2008 Interest Rate: 6.70% to 7.25% • Original Principal Amount $5,000,000 Funding Source: Water Fund July 1, 1993 Principal Outstanding: $4,310,000 1990 Certificates of Participation • Purpose: Acquiring land for open space, rehabilitating the City's Recreation Center, and acquiring land for a fire station site. • Maturity Date: 2010 Interest Rate: 6.00% to 6.70% • Original Principal Amount $4,500,000 Funding Source: Debt Service Fund • July 1, 1993 Principal Outstanding: $4,310,000 1992 State Revolving Fund Loan • Purpose: Upgrading the City's water reclamation plant and collection system to meet discharge standards. • Maturity Date: 2012 Interest Rate: 3.00% to 3.20% • Original Principal Amount $31,227,400 Funding Source: Sewer Fund July 1, 1993 Principal Outstanding: $31,084,100 1993 Water Revenue Bonds • Purpose: Upgrading the City's water treatment plant to meet water quality standards. • Maturity Date: 2023 Interest Rate: 5.00% to 5.50% • Original Principal Amount $10,890,000 Funding Source: Water Fund • July 1, 1993 Principal Outstanding: $10,890,000 F-1