HomeMy WebLinkAbout5C - Referendum Financing Strategy
AGENDA #:
PREPARED BY:
SUBJECT:
DATE:
INTRODUCTION:
BACKGROUND:
DISCUSSION:
5C
RALPH TESCHNER, FINANCE DIRECTOR & STEVE
MATTSON, FINANCIAL CONSULTANT
CONSIDER REFERENDUM FINANCING STRATEGY
APRIL 7, 1997
The City' financial advisor Steve Mattson of Juran and Moody has
requested the opportunity to discuss fmancing strategy with the City
Council regarding the issuance of the general obligation bonds
associated with the recent successful parks and library referendum.
The ultimate goal is to market the bonds in a fashion that would
provide the maximum dollars available for construction purposes
and at the same time obtain the most favorable interest rates
possible.
A 7.8 million dollar parks and library referendum question was
endorsed by the Prior Lake voters on February 25, 1997.
Subsequently on February 26, 1997 the City Council canvassed the
election returns which indicated that of the 1505 votes that were
cast, 52% supported the tax proposition and thereby approved
Resolution 97-09.
With the funding approval of the 1997 park bonds now a reality a
few questions arise concerning the proposed bond issue:
When should the bonds be marketed?
The simple answer is at the exact time when interest rates are at their
lowest and the economics of supply and demand are weighted to our
advantage. It appears that we have a window of time from April
through May in 1997 to attempt to time the market and to
accomplish the necessary funding that would accommodate the
Parks Department purchase timetable.
What type of structure do we want for the issue?
A 20 year bond amortization schedule was originally projected and
utilized for tax levy analysis and property tax impact upon the
homeowner. The rating agencies (Moody's Investors Service and
Standard & Poors) much prefer the shorter average life of a 20 year
schedule versus a 25 or 30 year time period which is allowable.
While the longer time frame will allow for a lower average annual
tax levy, the added 5 or 10 years increase the interest cost to the city
taxpayers.
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16200 Eagle Creek Ave. S.E., Prior Lake, Minnesota 55372-1714 / Ph. (612) 447-4230 / Fax (612) 447-4245
AN EQUAL OPPORTUNITY EMPLOYER
We anticipate a December 1 payment date for principal and interest.
The advantage of December is that the bonds mature one year earlier
than a January or February payment date. (For instance, a December
1, 1999 payment date would be sold as a 1999 bond versus a January
1 payment date of the year 2000. While only a month longer in
actual time - to the bond buyer it is a year difference and a higher
interest rate as a 2000 bond usually requires a higher interest rate
coupon than a 1999 bond.)
Should the City insure the bonds to enhance the marketing or sell
the bonds on the City's existing "A" rating?
We believe that both avenues should remain open at this time. While
we anticipate that the "A" rating will entice enough demand to
minimize rates, we may want a bond insurer like MBIA to qualify
this issue for insurance. What an insurer will do is guarantee the
bonds as to timely principal and interest payments. The insurance
results in a "AAA" rating from Moody's which will lower the
average coupon rate on the bonds. We will only pay the premium if
the lower rates achieved will be sufficient to recoup the premium
and some additional interest dollars. (Note: The City has utilized
such insurance in the past when warranted.)
What method of sale should Prior Lake use to market the issue i.e..
public sale or negotiated sale?
While traditional marketing of bond issues are accomplished
through the public sale method, we believe that the negotiated
method offers some additional benefits that merit a closer look at
this process. As mentioned earlier, the number one time to sell
bonds is when supply/demand is favorable enough to give the City
the lowest interest costs. The public sale method picks a date weeks
in advance to open bids on bonds. The biggest problem here is that
you are locked into that date and the City is at the mercy of the
market and the bond buyers on that day.
It may be a very bad day to sell bonds because of a number of
reasons. Most recently Alan Greenspan made a public comment on
the Federal Reserve policy to raise interest rates if inflation is
perceived to be heating up. The City would definitely not want to
sell bonds immediately following such a public comment that would
adversely affect interest rates. The first and second Mondays are
also bad days to market bonds, because typically other "independent
financial advisors" are marketing bonds of other public entities at
regularly scheduled meetings. Therefore, by avoiding trouble in the
marketplace, the City can sell bonds when all or most factors are in
the City's favor.
Under a negotiated sale to Juran & Moody, Juran would get every
thing ready for the issuance and wait for the market to accept the
bonds at a good rate. Juran would show the City what like public
sale issues have most recently sold for to assure the Council and
H:\AGENDA \A9704.DOC
Staff that the interest rates are fair market rates. This may
necessitate a special meeting called on short notice but the rewards
will be a lower rate over 20 years. In addition the negotiated sale
will cut a month off of the delivery of proceeds. A negotiated sale
can be closed within three weeks while a public sale requires at least
6 to 8 weeks to complete. Also, if Juran & Moody purchases the
bonds, they will waive the financial advisor fee ($29,000 for an
issuance of this size) which will allow the City to net additional
bond proceeds from the issue.
It used to be a statutory requirement that all bond issue sales of
$1,200,000 or higher were required to be sold on a public sale basis.
However the Legislature recognized the potential cost savings
associated with the negotiated sale method and removed this cap
approximately 3-4 years ago. Now bonds may be negotiated in an
unlimited amount as long as long as an independent fairness opinion
accompanies those issues exceeding $1.2 million dollars. This is
basically a statement certifying that the rates were negotiated on a
competitive basis. The City's most recent bond issue which involved
$2,430,000 of refunding existing bonds was a negotiated sale that
took place on October 24, 1996.
ALTERNATIVES
The following alternatives are available to the City Council:
1. Authorize Juran and Moody to proceed with the negotiated sale
method.
2. Select the public sale method and direct Staff and Juran &
Moody to prepare the necessary bond sale resolution.
RECOMMENDATION: Staff along with the city's financial advisor would recommend
Alternative #1. In summary, there are three distinct advantages of
negotiating the sale of the 7.8 million dollar general obligation
bonds:
1. The City is in a much better position to time the market
thereby lowering our interest costs.
2. By eliminating the financial advisors fee we are able to
maximize the available dollars for construction purposes.
3. Negotiated sales provides for a competitive market rate while
accelerating the delivery of bond proceeds.
Steve Mattson of Juran & Moody, Inc. will give a presentation to the
City Council regarding all the choices laid out here with respect to
the referendum financing strategy for Council consideration. Also
attached is a bond analysis projecting costs, and interest rates based
upon today's market plus estimated property tax impact.
ACTION REQUIRED: Motion to direct Juran & Moody to proceed with the negotiated sale
process for the issuance of $7,800,000 in general obligation bonds.
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Approved by:
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IFILE PL VOTED PARK 7.SOM\1 1997
DATEOFA."ALYSlS: MARCH 27. 1997
DATED DATE OF ISSL"E: Jl:"NE I. 1997
CITY OF PRIOR LAKE, MINNESOTA
GENERAL OBLIGATION PARK BONDS OF 1997
PAR AMOUNT: $7,800,000
(A)
(H)
(e)
(I))
(E)
(F)
EST. TOTAL
(12.1) [NIElEST DEBT STATl,.ORY
YEAR PRINCIPAL RUES IJ\'TEREST SERVICE 0.00'ii:
[997 209.135.00 209,135.00 209.135.00
1998 75.000.00 4.0M< 418,270.00 493,270.00 493.270.00
1999 100.000.00 4.20% 415,270.00 515,270.00 515,270.00
2000 125.000.00 4.40% 411.070.00 536.070.00 536,070.00
2001 140.000.00 4.50% 405,570.00 . 545.570.00 545.570.00
2002 150.000.00 4.60% 399,270.00 549,270.00 549.270.00
2003 185.000.00 4.70% 392.370.00 577,370.00 577.370.00
2004 225.000.00 4.8M< 383.675.00 608.675.00 608.675.00
2005 250.000.00 4.90'lt 372.875.00 622.875.00 62:.875.00
2006 275.000.00 5.00'lt 360.625.00 635.625.00 635.625.00
2007 300.000.00 5.10% 346.875.00 646.875.00 646.875.00
2008 350.000.00 5.20% 331.575.00 681,575.00 681.575.00
2009 400.000.00 5.30% 313,375.00 713,375.00 713.375.00
2010 450.000.00 5.40% 292.175.00 742.175.00 742.175.00
2011 500.000.00 5.45'lt 267.875.00 767.875.00 767.875.00
2012 550.000.00 5.50% 240.625.00 790.625.00 790,625.00
2013 600.000.00 5.55'lt 210,375.00 810,375.00 810,375.00
2014 675.000.00 5.60% 177.075.00 852.075.00 852.075.00
2015 750.000.00 5.65% 139.275.00 889.275.00 889.275.00
2016 820.000.00 5.70% 96.900.00 916.900.00 916.900.00
2017 880.000.00 5.70% 50.160.00 930.160.00 930,160.00
7.800.000.00 6,234.415.00 14.034.415.00 14.034.415.00
APPLlCA no!" OF F'UI\.'DS
PAR AMOv.-.,. OF ISSVE
LESS: COSTS OF ISSVANCE
DISCOt..,.,,. FACTOR (1.96% OF PAR)
CAm AUZED INTEREST (6 MONTHS)
ESTIMATED REGISTRATION COSTS (ONE TIME)
ESTIMATED ANA.NaAL AD\olSOR
ESTIMATED BOND PRlJ\7ING &: RATING
ESTIMATED lElAL SERVICES
SUBTOTAL
ADD: 1J\'\'ESTME'o." !:'1COME OS COh'S!R ACCOUNT
$7.800.000.00
(152.880.00)
(209,135.00)
(4.800.00)
(29,000.00)
(7.000.00)
(6.500.00)
57,390.685.00
5300.000.00
A" AIUBlE FOR CONSTR &: OTHER HARD COSTS
r---------,
,_ _ ~2'~~~D2!
REVISED SCHEDULE OF MARCH 25, "'7
(G) (H) (I) (1) (K) (L) (M) 0'0, (0) (PI (Q) (Q)
(0) A. '\."IUAL MARI'ET
A."l!\liAL MKT. V ALt.."E TAX MARKET VALt.."E OFPROPERn
CAmAUZED TAX StJRPWS CVML'UTIVE INCREASE € RATE
I!\'TEREST LEVY IDEfJOT BALANCE 4.00'ii: NCREASE $85.000 $100.000 5110.000 5125.000 5150.000 5175.000
5209.135.00 50.00 50.00 SO.OO 620.758.400 O.()(J()()%
493.270.00 0.00 0.00 645.588.736 0.0764'lt 64.95 76.41 M.05 95.51 114.61 133.71
515.270.00 0.00 0.00 671.412,285 0.0767% 65.23 76.74 M.42 95.93 115.12 134.30
536.070.00 0.00 0.00 698.268.'Tn 0.0768'1< 65.26 76.77 M.45 95.96 115.16 134.35
545,570.00 0.00 0.00 726,199.528 0.0751'1> 63.86 75.13 82.64 93.91 11 2.69 131.47
549.270.00 0.00 0.00 755,2A7 .509 0.0727'1> 61.82 72.73 SO.OO 90.91 109.09 127,27
577,370.00 0.00 0.00 785.457.409 0.0735% 62.48 73.51 80.86 91.88 110.26 128.64
608.675.00 0.00 0.00 816.875.706 0.0745% 63.34 74.51 81.96 93.14 111.77 130.40
622.875.00 0.00 0.00 849.550.734 0.0733'lf 62.32 73.32 80.65 91.65 109.98 128,31
635.625.00 0.00 0.00 883.532.763 0.0719% 61.15 71.94 79.14 89.93 107.91 125.90
646.875.00 0.00 0.00 918.874.074 0.0704% 59.84 70.40 77.44 88.00 105.60 123.20
681.575.00 0.00 0.00 955.629.037 0.0713% 60.62 71.32 78.45 89.15 106.98 12-1.81
713.375.00 0.00 0.00 993.854.198 0.0718'1< 61.01 71.78 78.96 89.72 107.67 125.61
742.175.00 0.00 0.00 1.033.608.366 0.0718'it 61.03 71.80 78.98 89.76 107.71 125.66
767.875.00 0.00 0.00 1.074.952.701 0.0714'lf 60.72 71.43 78.58 89.29 107.15 125.01
790.625.00 0.00 0.00 1.117.950.809 0.0707% 60.11 70.72 77.79 88.40 106.08 123.76
810.375.00 0.00 0.00 1.162.668.MI 0.0697'1 59.2-1 69.70 76.67 87.12 104.55 121.97
852.075.00 0.00 c.nl) 1.209.175.595 O.07OS'lf 59.90 70.47 77.51 88.08 105.70 123.32
889.275.00 0.00 0.00 1.257.542.619 0.0707'lf 60.11 70.72 77.79 88.39 106.07 123.75
916.900.00 0.00 0.00 1.307,844.32-1 0.0701'10 59.59 70.11 77.12 87.63 105.16 122.69
930.160.00 O.lX' 0.00 1.360.158.096 0.0684'1< 58.13 68.39 75.22 85.48 102.58 119.68
209.135.00 513.825.280.00 50.00 AVG. A.I\INUAL !NCR. UU4. $7"...]9 $"/9.63 . S'o.4' SI8I.!l9 $126.69
MO""lHL Y INCR. $5.13 : KG '6.14 S7.54 SUI $lU6
(0) THIS \. AI...l:ATION IS THE 1997 ESTIMATED MARKET V ALlIE THAT IS Il'CREASED ON A 4.00'10 CU"MML1.ATIVE BASIS PER YEAR.
BONDS DATED:
:ESilMAiID-;'1;RA(iCOUPO:...-iAli:- - - - -- - - - - - - - - - i4;;~:
'ESTIMATED NET EFFECTIVE RATE: 5.626~ I
I__________________________________________J
JUNE I. 1997
BO!\'DS MATURE:
DECEMBER 1. 1999 THROVGH 2017
I!'JTEREST:
DECEMBER I. 1997 A.'ID SEMJANmJALt..Y TIlEREAFTER
OK EACH JUNE 1 M'D DECEMBER 1.
OPTIOK:
All. BONDS MATVRlNG L" THE YEARS 2005 THROUGH
2017 ARE CAU.ABlE AT THE OPTION OF THE cry ON
DECEBMER I, 2004 OR A."'''' INTERESTPAYME\,. DATE
THEREAFTER AT PAR PLUS ACCRUED J!\'TEREST .
57,647.120.00
PREPARED BY:
JURA.... II; MOODY,rsC.
~~ STE''ES J. MATTSOI' ".P.
611.224-1500
QVINC I.ICJO.'_
PURCHASE PRICE:
PAYING AGEl\,. &:
REGISTRAR:
ESTIMATED CLOSING DATE:
FIRST TRL'ST NATIONAL ASSOOATIOK OF ST. PAUl.
IS BUSINESS DAYS AFTER SALE