2008 FISCAL NOTE

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

Legislation Title:

AN ORDINANCE relating to the electric system of The City of Seattle; amending Ordinance 121941 to authorize the issuance and sale of municipal light and power refunding revenue bonds for the purpose of refunding outstanding municipal light and power adjustable rate revenue bonds.

· Summary of the Legislation:

This legislation provides authority to refund $72 million of Light System Variable Rate Demand Bonds (VRDB) with fixed rate bonds in order to mitigate risks associated with the recent financial market crisis.

· Background:

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, $20 million of these bonds have been put back by investors.  Fortunately, the remarketing agents have successfully found alternative investors for all of these bonds.  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%-5.4%, 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, four-year period, together with accrued interest.  If all $72 million were held by the bank, the Light System would be required to redeem $9 million semiannually ($18 million per year) until fully repaid.

· 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 with level debt service over the same period as the term of the refunded VRDB.  These existing VRDB have various remaining terms, ranging from 3-13 years (final maturities in 2011, 2015, 2016, 2018, 2021).  Annual debt service on the refunding bonds is expected to be about $9 million in 2009 and then rapidly decline to $1.6 million in 2021.

· 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)

No

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

None