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interest rate for the first three years, which would be about 4.4% including all ongoing costs. After the three years the bonds would convert to a floating rate automatically. Mr. Euphrat showed overhead slides to show the average floating rates from 1989 through 1997 which was about four and three eighths percent, and today it stands at approximately four percent. He said bonds during the variable rate period were like money market funds which maintain a constant dollar value where principal cannot be lost. He said the bonds would have a letter of credit which secures the demand for payment and interest, which makes them very attractive to buyers. Mr. Euphrat said the City could call the bonds on a thirty day notice with no premium. "If you want out, you have thirty days notice, and you can get out." Mr. Euphrat said the appeal of this process is to "allow the capital improvement fund to maintain its liquid assets." He said that after the three year fixed rate period, the City would then invest its money in the "Treasurer's Local Agency Investment Fund called LAIF" which is available to all local agencies and which averaged 6 percent during the 1991-1997 period. Mr. Euphrat said short term investments would also be available to the City. Mr. Euphrat said, "This program is not designed to earn arbitrage income or profit. That's not the purpose of this particular financing mechanism. It is to efficiently allocate your resources." Mr. Euphrat said the City is not legally required to deplete its resources before it can sell bonds. He said technically, the City "would sell this facility to a financing authority, and lease it back... not unlike mortgaging your home. The strategy in this program is to eliminate the financial risk, any kind of actual cost, until break even is achieved", which would include all fees. Mr. Euphrat explained the graphs in the Report that illustrated the break even point. Mr. Euphrat said the bonds are structured to ameliorate risks, but there were always some risks involved in bonds and other investments He explained how Letters of Credit were used to reduce risks, and the relationship between break even points and recovering costs. Mr. Euphrat said if that relationship could not be achieved then the City would not sell bonds. He described other bond instruments and why he would advise the City not to consider them, and why he would advise investing the bulk of the capital improvement fund money in LAIF. He said if there came a time when the cost of money exceeded the investment rate, the City would simply shut the program down and there would be no loss of principal. Mr. Euphrat said the program as described "at the end of the day, you are about... $750,000 in present value terms, ahead" based on historical rates, the average for LAIF and estimated high costs. He said the concept was a sound one and it is designed to make efficient use ofthe City's resources. In response to Vice Mayor Ruskin's questions regarding risks, Mr. Euphrat said the program could be shut down only after the first three year period. He added that "throughout this program you will always have your cash on hand." Mr. Euphrat also said if the City decided to shut the program down on the first day after the three year period (if ADJOURNED REGULAR COUNCIL MEETING MINUTE BOOK NO. 56 DECEMBER 18. 1997 MINUTES Page No. 126 PAGE 21