MEMORANDUM

2008 FISCAL NOTE

Department:	Contact Person/Phone:	DOF Analyst/Phone:
DOF	Regina Carpenter 4-0836	Michael van Dyck 4-8347

Legislation Title:

AN ORDINANCE relating to the municipal water system of The City of Seattle; amending Ordinance 121939 to authorize the issuance and sale of water system refunding revenue bonds for the purpose of refunding outstanding water system adjustable rate revenue bonds.

· Summary of the Legislation:

This legislation provides authority to refund $93 million of Water System Variable Rate Demand Bonds (VRDB) with fixed rate bonds in order to mitigate risks associated with the recent financial market crisis.

· Background:

The Water System currently has $93 million of 1995 and 2002 A&B VRDB outstanding. Historically, interest rates on VRDB have been very low, saving rate payers millions of dollars. Recently, the market for VRDB has become extremely unstable. Over the past 10 months, rates have ranged from about 0.96% to 8.7% with dramatic swings from week to week. Over the past 4 weeks, $13 million of these bonds have been put back by investors. Fortunately, the remarketing agents have successfully found alternative investors for all but $3 million of this total. The City, itself, is currently holding this $3 million as an investor. Fixing the interest rate on these bonds will eliminate significant risk associated with the current crisis.

Interest rates on the refunding bonds are estimated to range from 2.3%-5.8%, depending on maturity length. Rates on the refunded VRDB had been estimated to be 4% in 2009, but it is not possible to predict what actual rates on VRDB will be in the future. They could be substantially higher or lower. It is also not possible to know whether the VRDB market will continue to function. Nevertheless, refunding these bonds with fixed rates will provide certainty about future debt service costs.

If the City were not to refund these bonds, it would face interest rate risk and the risk of failed remarketing. In a failed remarketing, bonds would be purchased by the letter of credit bank (assuming it is solvent), and the City would be required to start repaying all bonds held by the bank in equal quarterly installments over a very short, three-year period, together with accrued interest. If all $93 million were held by the bank, the Water System would be required to redeem $7.75 million per quarter ($31 million per year) until fully repaid.

The City’s current policy for coverage is 1.7 x on Water System parity lien debt. This policy excludes subordinate lien debt, such as the VRDB. Refunding the VRDB will elevate their lien to a parity status which will reduce parity lien coverage, as it is defined by the policy, by approximately 0.16 x (from 1.72 x to 1.56 x in 2009). It will also increase the size of the reserve to be funded with bond proceeds from $6 million to $10 million.

· Please check one of the following:

____ This legislation does not have any financial implications.

X___ This legislation has financial implications.

· Estimated Debt Service (in $1,000s):

The refunding bonds will be structured to provide the same level of debt service in 2009-2011 as assumed by the recent rate proposal and then level debt service over their remaining term. Annual debt service is expected to be about $6.5 million in 2009-2011, about $8.1 million from 2012-2025, and $4.7 million from 2026-2032.

· What is the financial cost of not implementing this legislation?

Given the unprecedented nature of the current financial market crisis, it is not possible to determine the cost of not implementing this legislation. While long term rates have risen significantly over the past year, they are still low by historical standards, so fixing the rate on these bonds is an attractive risk mitigation strategy.

· Is the legislation subject to public hearing requirements? (If yes, what public hearings have been held to date)

· Other Issues (including long-term implications of the legislation):

None