AgdaPkt 2009-10-26 - Laserfiche WebLink

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6.28 Page 2 COPs. In the event that the COP issuer is unable to make the required principal and interest payments, the Trustee will withdraw funds from the LOC to make such required payments. Without an LOC it would be very difficult or impossible to find investors willing to purchase the COPs. Factors Driving Redemption of COPs The City currently pays the KBC Bank of Belgium (KBC) 0.37% annually for the LOC. KBC has advised the City that it intends to exit the LOC business and will not renew the LOC when it expires in October 2010. Current indications are that the annual cost for an LOC in today's market is between 1.500/0 and 1.750/0. Additionally, the one-time transaction cost of substituting a new LOC for the KBC LOC is estimated at approximately $150,000. At these expense levels it no longer makes sense to keep the COPs outstanding as we expect the City would expend more than it would earn on the invested proceeds. This conclusion is informed by the fact that short-term interest rates are at historic lows with the differential between our cost of funds and our investment of those funds narrowing. As of September 28, 2009 the City was earning 0.680/0 on LAIF while paying 0.990/0 in interest on the COPs and fees for the LOC. At this differential the City is incurring a net cost of almost $25,000 per year to leave the COPS outstanding. Given the state of the national economy, we do not expect this situation to change prior to the expiration of our LOC in October 2010 and, even after the economy improves, we do not expect the spread between our cost of funds and our investment of the proceeds to widen sufficiently to warrant the expense of keeping the COPs outstanding. Accordingly, with the likelihood that the outstanding COPs will be redeemed around October of 2010 due to the probable increased cost of a replacement LOC and the prospects that taxable short-term interest rates on our invested proceeds will not markedly increase prior to the LOC expiration date, it makes sense to redeem all of the outstanding COPs as soon as practical. Council Finance Committee Review This recommendation was reviewed and approved by the Council Finance Committee at their October 19th meeting. Ai. TERNATIVES The Council could disagree with this recommendation and not redeem the COPs at this time in hopes that the rates for LOCs drop dramatically in the next 12 months and that short-term taxable interest rates increase during that time at a faster rate than short- term tax-exempt interest rates increase. FISCAL IMPACT Redeeming the bonds now will result in the City's general fund recognizing a one-time gain of approximately $400,000 which represents the accumulated earnings since the COPs were sold in 1998.