HomeMy WebLinkAboutRDA TOWN CTR BONDS 01-03-94AGEND
RDA .NO. 5
1-3-94
DATE: D~.CE)mER 22, 1993
TO: WILLIAM A. HUSTON, CITY MANAGER
FROM' RON/tLD A. NAULT, DIRECTOR OF FINANCE
SUBJECT: REFUNDING 1987 TOWN CENTER REDEVELOPMENT BONDS
if--
RECOMMENDATION:
Authorize staff to proceed with the advance refunding of the 1987
Town Center Redevelopment Bonds and direct staff to solicit
proposals for Financial Advisor services.
FISCAL IMPACT:
Estimated present value debt service savings from' refunding,
$323,000-
DISCUSSION=
In 1982 the Redevelopment Agency issued $8.5 million of Tax
Allocation Bonds for the Town Center Project Area. During 1987
Advance Refunding Bonds were issued in the amount of $8.06 million
that saved the Agency approximately $340,000 in reduced debt
services expense due to a reduction in net interest cost. A
recently completed analysis by Bartle Wells and Associates
indicates that the trend in declining interest rates has continued
to the point that the Agency can realize an additional savings of
about $323,000 if the outstanding Bonds were to be refunded again.
The total interest savings for both refundings will exceed
$600,000, a 4.3 percent savings in interest expense from the
original 1982 issue.
This is a very straight forward refunding that should sell very
well in the open market. There appears to be a window of
relatively stable interest rates that may indicate a bottoming of
rates. Given an issuance schedule of 60-90 days and, adding about
30 days to RFP Financial Advisors, we should be able to complete
the process by late May early June, 1994.
~o~a~4~a. Nault
Director of Finance
RAN: t s/At t achaent/a: re f undng, wah
August 24, 1993
Ronald A. Nault, Finance Director
City of Tustin
15222 Del Arno Avenue
Tustin CA 92680
Bartle Wells Associates
1630 Bush Street
San Francisco 94109
415/775-3113 FAX 415/775-4123
Charter member
National Association of
Independent Public Finance Advisors
Re: Refunding Town Center Redevelopment Bonds
The Tustin Community Redevelopment Agency issued $8,500,000 of tax incre-
ment bonds for the Town Center Redevelopment Project. These bonds were
advance refunded in 1987 to reduce interest costs. The original amount of the
1987 issue was $8,060,000; as of November 1, 1993, $6,610,000 of the 1987
refunding bonds are outstanding. Interest rates on the 1987 bonds range from
5.9 percent in 1994. to 7.5 percent in 2006. the final maturity. The bonds
were insured by MBIA and bear a AAA raring.
Today, interest rates are substantially lower than the rates on the 1987 bonds.
The Bond Buyer Index, which was 7.67 percent when the 1987 bonds were
sold, is now 5.40 percent, the lowest level since 1974. The 1987 bonds can
be refunded once more under current tax laws. We believe that the Redevel-
opment Agency should seriously consider refunding the bonds at todafs low
interest rates. This letter describes the refunding process, estimated savings
from the refunding, and a schedule of events to complete the refunding.
Refunding Process
The process which would be used to refund the 1987 bonds is called advance
refunding. This was the same process which was used in 1987. In the advance
refunding, the Agency issues refunding bonds now, even though the bonds can-
not be called until 1997. The proceeds of the new issue are deposited in an'
escrow fund. The escrow fund--both the original deposit and the interest earn-
ingsmare used to pay debt service on the refunded bonds until their call date,
and call the remaining bonds at the earliest call date (in this case, Novem-
ber 1, 1997).
The escrOw fund is held by an escrow bank, which makes the payments on the
refunded bonds. The Agency then pays the lower debt service on the new re-
funding bonds.
..
Part or all of an issue may be refunded. Frequently only the callable portion
of an issue is refunded. In that case, the Agency continues to pay debt service
on the portion of the original issue which was not refunded, as well as debt
service on the new bonds.
The amount of the refunding issue is generally larger than the amount of out-
.standing debt to be refunded. This is true for two reasons. First, the new
~ssue must fund the amount of bonds to be called, the prepayment premium,
and the costs of issuing the new bonds. Secondly, the yield on investment of
the escrow fund is less than the yield on the outstanding bonds; in order to
earn enough money to pay debt service on the old, higher-rate issue, more
principal must be deposited in the escrow fund and invested.
Ronald A. Nault
August 24, 1993
Page 2
Restrictions on Refunding
Advance refunding is a relatively complex process, subject to detailed IRS rules.
The size of the refunding issue must be very precisely determined, based on
the interest rates on the refunding issue, the costs of issuance, and the rein-
vestment rates on the escrow fund. The reinvestment rate on the escrow fund
is also controlled. The escrow fund must be invested in federal securities and
can by invested only at the interest rate paid on the refunding bonds. If yields
on federal securities in the open market are too high, the escrow fund must be
invested within the yield limit in special investments purchased directly from
the Treasury called State and Local Government Securities (SLGS).
Estimated Savings from the Refunding
The average interest rate on the outstanding 1987 bonds is 7.3 percent, and the
rates in 2005 and 2006 are 7.5 percent. In today's market the rates On'insured
bonds would range from less than 3 percent on the first maturity (1994) to
about 5.0 to 5.1 percent tn 2006.
We have analyzed refunding of all of the outstanding bonds and of the callable
bonds only. The results are very close, as shown below:
FULL PARTIAL
REFUNDING REFUNDING
Bonds refunded ........................ $6,610,000
New bond issue ........................ 7,405,000
Total savings .......................... 442,300
Percent of outstanding bonds ............... 4.90%
Present value savings ................. ~ ..323,700
Percent of outstanding bonds ............... 4.37%
$5,145,000
5,854,000
454,300
6.28%
323,000
5.53%
The choice of approach depends on the city's preference in having one or two
bonds ou. tstanding from now through 1997. Tables 1 and 2 show estimated
savings in each year with a full and a partial refunding. Table 3 is the debt
serxdce schedule on the !987 bonds.
Selling Refunding Bonds
Refunding bonds can be sold be competitive or negotiated sale. They are very
frequently sold at negotiated sale, to allow flexibility in timing when markets
are volatile or when smaE movements in interest rates will produce large varia-
tions in the savings from the refunding. The market has been basically steady
and improving, and manx' refundings are currently being done competitively.
Competitive sales are pa~icularly attractive right now in the face of the cur-
rent investigations of negotiated sales of municipal bond issues. Investigations
are being conducted of bond issues in Massachusetts, New Jersey, and Louisi-
ana dealing with agreements between underwriters which were not revealed to
the issuers. There was ~-~$o a recent situation in Los Angeles in which the
selection of an underwri:er and the question of competitive or negotiated sale
was seriously debated by :he city council. Many issuers are choosing to use
competitive sales as clear evidence that the bonds were sold based only the
most favorable interest
Ronald A. Nault
August 24, 1993
Page 3
This should be a very straightforward refunding, and the savings levels are
significant and should not vary greatly in the current market. The bonds can
be successfully sold by competitive or negotiated sale.
Recommendation
We recommend that the Agency proceed promptly with the refunding. The
process can be halted at any time if the market moves away. The process of
selling the bonds will take about 60 to 90 days, whether is it done by competi-
tive or negotiated sale. If we are authorized to proceed in September, the re-
funding can be completed by the end of the year.
Very truly yours,
BARTLE V~LLS ASSOCIATES
Eora J~all, CIPF^
Principal
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TABLE 3 - TUSTIN COMMUNITY REDEVELOPMENT AGENCY
TOWN CENTER PROJECl - DEBT SERVICE, 1987 REFUNDING BONDS
FISCAL CAIDIDAR PRINCIPAL CPN ~ ~ SVC
DATE DATE PAYMENT RATE PA~ 7UFALS
11/94 05/01/1994 0.00 234,807.50 234,807.50
05/95 11/01/1994 335,000.00 5.900 234,807.50 569,807.50
11/95 05/01/1995 0.00 224,925.00 T24,925.00
05/96 11/01/1995 355,000.00 6.200 224,925.00 579,925.00
11/96 05/01/1996 O. 00 213,920.00 213,920.00
05/97 11/01/1996 375,000.00 6.400 213,920.00 588,920.00
11/97 05/01/1997 0.00 201,920.00 201,920.00
05/98 11/01/1997 400,000.00 6.700 201,920.00 601,920.00
11/98 05/01/1998 0.00 188,520.00 188,520.00
05/99 11/01/1998 425,000.00 7.000 188,520.00 613,520.00
11/99 05/01/1999 ' 0.00 173,645.00 173,645.00
05/00 11/01/1999 455,000.00 7.100 173,645.00 6~,645.00
11/00 05/01/2000 0.00 157,492.50 157,492.50
05/01 11/01/2000 490,000.00 7.200 157,492.50 647,492.50
11/01 05/01/2001 0.00 139,852.50 139,852.50
05/02 11/01/2001 525,000.00 7.300 139,852.50 664,852.50
11/02 05/01/2002 0.00 120,690.00 la, 690.00
05/03 11/01/2002 560,000.00 7.300 120,690.00 680,690.00
11/03 05/01/2003 0.00 100,250.00 100,250.00
05/04 11/01/2003 605,000. O0 7.400 100,250. O0 705,250.00
11/04 05/01/2004 0.00 77,865.00 77,865.00
05/05 11/01/2004 645,000.00 7.400 77,865.00 722,865.00
11/05 05/01/2005 0. O0 54,000.00 54,000.00
05/06 11/01/2005 695,000.00 7.500 .54,000.00 749,000.00
11/06 05/01/2006 O. O0 27,937.50 O, 937.50
05/07 11/01/2006 745,000.00 7.500 27,937.50 772,937.50
TOTALS: 6,610,000.00 3,831,650.00 10,441,650.00
YEtRLY
DEBT SERVICE
234,807.50
794,732.50
793,845.00
790,840.00
790,440.00
787,165.00
786,137.50
787,345.00
78'5,542.50
780,940.00
783,115.00
776,865.00
776,937.50
772,937.50