HomeMy WebLinkAboutA003 - Memo from Finance Director dated February 20, 1997 M E M O FINANCE DEPARTMENT
CITY OF AMES
TO: Mayor and City Council
FROM: Alice Carroll, Director of Finance
DATE: February 20, 1996
SUBJECT: Sewer Revenue Bonds Refunding
At their meeting May 31, 1995, the City Council approved Resolution 95-226 setting the
date of hearing for the issuance of not to exceed $4,500,000 Sewer Revenue Refunding
Bonds, and authorizing the City Manager and the City Finance Director to set the terms
and the date for the sale of such bonds. Resolution 95-254, passed June 13, 1995,
determined that the refunding bonds may be issued.
Subsequent to the City Council authorization, the bond market became less attractive and
the projected savings decreased to less than acceptable. The City's financial consultants
have continued to monitor the market and have advised us that this would be a favorable
time to proceed with the refunding issue. A sale date of March 5, 1996, has been
established. The bids will be received until 11 :00 a.m. on that date and the results will
be presented to the City Council for consideration at the meeting scheduled for 7 p.m.
March 5, 1996.
The refunding bond will current refund the City's outstanding $4,230,000 Sewer Revenue
Bonds, Series 1987A dated May 1 , 1987, and $2,375,000 Sewer Revenue Bonds, Series
1987B, dated December 1 , 1987. A schedule of projected net debt service savings is
attached. The scenario is based on the market of February 8, 1996. A portion of the
existing reserve fund will be liquidated resulting in a loss of earnings which is offset
against the total savings. The balance of the reserve fund will be transferred to the
refunding bonds. Present value savings is projected to equal $229,423.25 or 5.96% of
the refunded bond's par amount.
cc: Steve Schainker
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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 resented 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:
001 Second \�onu(� Smith, Suite i10O. .`Minneapolis, :'1N 31402
371099 61 -1'i38-3i4i 8O0r328-8200 FAX hl-2rii4-7204
February 9, 1996
Page
Savings Summan•
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 City'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
preliminary 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
subjject 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 fiord.
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.
Brian T. McQuillan
Vice President
Enclosure
cc: Bob Helmick
Dave Dirks
Wayne Burggraaff
Chuck Uperaft
371099