HomeMy WebLinkAboutA002 - Memo from Finance Director dated February 12, 1996 - report from Evensen-Dode M E M O FINANCE DEPARTMENT
CITY OF AMES
TO: Steve Schainker, City Manager
FROM: Alice Carroll, Director of Finance
DATE: February 12, 1996
SUBJECT: Sewer Revenue Bonds Refunding
Attached is a letter from Evensen-Dodge which contains an u dated report regarding the
proposed issuance of refunding bonds for the outstanding sei ter revenue bonds. As you
recall, the City Council approved the sale at their June 13, 19 5, meeting and authorized
the City Manager and Finance Director to set the tern s and the date of sale.
Subsequently, the market became less attractive and the savings decreased. Based on
Evensen-Dodge's recommendation of October 10, 1995, we decided to postpone the
issuance of the refunding bonds and continue to monitor the market.
At this time, it is projected that a refunding would yield a present value savings as a
percent of refunded par of 5.96%, debt service savings of $2 7,852. It is recommended
that the City proceed with the refunding issue with a sale date of March 5, 1996.
EVENSEN DODGE INC
February 9, 1996
Mr. Steve Schainker, City Manager
Ms. Alice Carroll, Finance Director
City of Ames
515 Clark Avenue
Ames, IA 50010
Re: Summary of Proposed Refunding Transaction
Sewer Revenue Refunding Bonds, Series 1996
Dear Alice and Steve:
The purpose of this letter is to explain the purpose of the bonds, summarize the results of
the proposed refunding structure and estimated savings, identify important accounting,
refunding and tax issues and provide a list of assumptions regarding the attached
refunding schedules [see Exhibit A]. Based upon previous conversation and consistent
with those discussions, we recommend the City proceed with the proposed refunding
program.
Purpose of Refunding Bonds
The Refunding Bonds are issued to current refund the City's outstanding $4,230,000
Sewer Revenue Bonds, Series 1987, dated May 1, 1987 maturing from December 1, 1996
to 2002 and $2,375,000 Sewer Revenue Bonds, Series 1987B, dated December 1, 1987
maturing from December 1, 1996 through 2002 (together, the "1987 Bonds"). Both
issues of 1987 Bonds are callable on June 1, 1996 at par. The refunding provides reduced
uniform debt service from fiscal years 1997 to 2003. The Refunding Bond proceeds will
be used to defease the 1987 Bonds on the next optional redemption date of June 1, 1996.
Summary of Refunding Structure
The current structure of the Sewer Revenue Refunding Bonds, Series 1996 provides for
uniform annual savings. The timing of the annual savings is on a bond year basis as the
Refunding Bonds must have a December 1 payment date based upon indenture
requirements. The savings are presented annually beginning in FY 1997 and projected to
exceed $30,000 each year on a"net" debt service basis.
The structure of the Refunding Bonds will also require the partial liquidation of the
existing reserve fund from the 1987 Bonds to assist in the payment of the 1987 Bonds on
June 1, 1996. The balance of the reserve fund will be transferred to the Refunding
Bonds. The City can maintain the current investments for that portion transferred to the
Refunding Bonds.
Savings Summary
The results shown below are based upon present market conditions and are subject to
change. The savings are shown net of all issuance costs, and underwriter's discount. The
sources and uses of funds and savings report for each scenario are attached as exhibits.
The savings are summarized below:
601 Second Avenue South, Suite 5100, Minneapolis, MN 55402
371099 612/338-3535 800/328-8200 FAX 612/338-7264
February 9, 1996
Page 2
Savings Summary
Current Market
Par Amount of Refunding Bonds $3,510,000
Estimated Costs of Issuance $ 40,000
Underwriter's Discount ($4.50/1,000) $ 15,795
Total Debt Service Savings $ 267,852
Total Savings as a%of Refunded Par 6.96%
Present Value of Debt Service Savings $ 229,423
PV Savings as a% of Refunded Par 5.96%
Important Accounting Issues and Assumptions
The callable maturities of the 1987 Bonds will be legally defeased upon the redemption
date of the 1987 Bonds and will be replaced on the Crty's balance sheet by the Refunding
Bonds. The City will continue to make the scheduled June 1, 1996 interest payments on
the 1987 Bonds. Beginning December 1, 1996, the City will make the principal and
interest payments on the Refunding Bonds.
We have attached the list of assumptions used in preparing this analysis as Exhibit A.
The list of assumptions represents our best estimates pursuant to conversations with the
concerned parties involved.
The resolution for the 1987 Bonds has an additional bonds test of 1.25 times coverage if
the proposed refunding issue was an advance refunding. However, because the proposed
transaction is a current refunding and will close within three months of the redemption
date of the 1987 Bonds. Therefore, no additional bonds test is necessary.
Procedural Matters
A number of additional steps are required for a refunding transaction. They typically
include hiring, if desired by the City or bond counsel, a certified public accountant and
escrow agent to verify the escrow account cash flow and manage the escrow account. For
a current refunding, an escrow account is optional. Typically, we assist the City in the
selection and hiring process for verification and escrow agents. Whereas the above
professionals are required for advance refundings, it is not unusual for them to be utilized
for a current refunding. Their fees are generally less than for an advance refunding.
The dynamics of a refunding bond issue require the ability of the City to change the par
amount and individual maturity amounts based upon market conditions at the time of sale
and the final issuance costs. This sensitivity analysis is prepared just before the
prelimin official statement is mailed to prospective bidders. Because the Refunding
bonds will need to be resized and restructured as a result of the actual interest rates
received from the winning bidder, it is necessary to have at least three hours between the
time of sale and time of award.
The City has the option to purchase or to authorize Evensen Dodge to purchase the
escrow securities on its behalf, if necessary. The escrow securities are purchased after the
bids have been received for the bonds, the final issue structure has been determined and
the City has been presented up-to-the-moment summary of the savings.
371099
February 9, 1996
Page 3
Tax Consequences
Similar to the refunding of the City's Electric Revenue Bonds, the City will need to
transfer the existing reserve fund monies to its unrestricted retained earnings where those
monies are not subject to Federal tax requirements. The City has the option of funding
the 1996 Bond's reserve fund from either existing unrestricted retained earnings or bond
proceeds. In either case, the 1996 Bond's reserve fund will be unrestricted to yield; but
subJ'ect to arbitrage rebate. This means investment earnings in excess of the bond yield
will be rebated to the Internal Revenue Service. All savings presented are net of any
potential loss on investment earnings related to the reserve fund.
Sale Date Activities
The sale date requires a number of activities which must be performed to determine the
final savings and bond size. The sale date activities include:
♦ Finalize issuance costs;
♦ Receive bids;
♦ Verify bids;
♦ Prepare refunding results;
♦ Present value savings results to the City;
♦ Purchase escrow securities;
♦ Receive verbal verification of escrow cash flow and bond yields by CPA
(if necessary); and
♦ Award refunding bonds to low bidder.
If you have any questions or comments on this analysis, please feel free to call Dave
Dirks or myself.
Sincerely,
EVENSEN DODGE, INC.
0,A(
Brian T. McQuillan
Vice President
Enclosure
cc: Bob Helmick
Dave Dirks
Wayne Burggraaff
Chuck Uperaft
371099
EXHIBIT A
CITY OF AMES, IOWA
Sewer Revenue Refunding Bonds, Series 1993
List of Assumptions
1. Dated date: March 15, 1996
2. Delivery date: March 15, 1996
3. First interest payment date: December 1, 1996
4. First maturity payment date: December 1, 1996
5. Last maturity payment date: December 1, 2002
6. Fiscal year end: June 30, 1993
7. The Refunding Bonds are expected to be rated:
Moody's Al
S & P A+
8. Bond insurance: Qualify Refunding Bonds for
insurance
9. Issuance costs: $40,000
10. Underwriter's discount: $4.50/$1,000
11. Refunding Bonds' redemption date: Not subject to redemption
12. Equity contribution from the City: To be determined.
13. The Sewer Electric Revenue Bonds, Series 1987 to be refunded are identified
below:
Maturities IncludedRedem tion Redemption
Series Par Amount From 10 Date Premium
A $2,450,000 1996 2002 6/l/96 PAR
B 1.400.000 1996 2002 6/l/96 PAR
$3.850.000
14. Escrow account securities: To be determined.
371099
■
EXHIBIT B
Scenario: Current Market as of February 8, 1996
City of Ames, Iowa
$3,510,000 Sewer Revenue Refunding Bonds, Series 1996
Scenario: Current Refunding 11 Market as of 2/08/96
-------------------------
-------------------------
Sources and Uses of Funds
-------------------------
-------------------------
Delivery Date: 3/15/96
Sources of Funds
----------------
----------------
Par Amount of Bonds................... $3,510,000.00
+Premium /-Discount................... $0.00
Bond Proceeds... .... ............................... 3,510,000.00
Reserve Fund (Series 1987 A and B Bonds)................ 708,837.50
Projected Investment Earnings........................... 38,464.08
-------------------
$4,257,301.58
Uses of Funds
Redemption Price of Series 1987 A Bonds................. 2,450,000.00
Redemption Price of Series 1987 B Bonds................. 1,400,000.00
Costof Issuance........................................ 40,000.00
Underwriters Discount................................... 15,795.00
Debt Service Reserve.................................... 351,000.00
Contingency............................................. 506.58
-------------------
$4,257,301.58
Prepared by Evensen Dodge, Inc.
Micro-Muni Sizing Date: 02-08-1996 51 10:29:59 Filename: AMES-S Key: REF-C
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