Meeting Minutes
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State Finance Committee Meeting Minutes |
           
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October 31, 1997The State Finance Committee met in special meeting after notice duly given to the press and radio of Thurston County.
Chairman Murphy moved the minutes for the July 23, 1997, meeting be approved. Lieutenant Governor Owen seconded the motion. The motion passed and the minutes were adopted. Mr. Kerr introduced proposed Resolution No. 867 authorizing the issuance and sale of $100,000,000 State of Washington General Obligation Bonds, Series 1998A, and $65,000,000 State of Washington Motor Vehicle Fuel Tax General Obligation Bonds, Series 1998B. Mr. Kerr stated that proceeds of the bonds will be used to finance numerous capital projects currently underway or to reimburse construction accounts for work already completed. He referred to the project exhibits contained under Tab 2 of the member’s briefing book. Issue size has been developed through an agency cash flow survey and at the request of the Department of Transportation. The bonds are to be sold competitively in early December, subject to Committee member availability. As is customary, proposed Resolution No. 867 provides for a ten-year optional call. This call protection continues to afford the state the ability to respond to falling interest rates by refunding the 1998A and 1998B bonds. At the same time, the market does not extract a penalty for retaining the call. The proposed resolution also provides for making the bonds non-callable based on an economic finding by the Deputy State Treasurer prior to sale. Mr. Kerr stated that, in the current market, he does not expect to have a basis for exercising this feature. In the current market environment, a 25-year level debt bond issue would have an estimated interest cost of 5.25 percent. At this level, the annual debt service for the $100 million Series 1998A would be approximately $7.2 million and $4.5 million for Series 1998B. Mr. Kerr presented proposed Resolution No. 867 to the committee.
Resolution No. 867 authorizing the issuance and sale of (a) $100,000,000 State of Washington General Obligation Bonds, Series 1998A, authorized by Chapter 14, Laws of 1989, 1st ex. sess., amended, and Chapter 17, Laws of 1995, 2nd Special Session, and Chapter 39.42 RCW, and (b) $65,000,000 State of Washington Motor Vehicle Fuel Tax General Obligation Bonds, Series 1998B, authorized by Chapters 39.42, 47.10.812, 47.10.819, 47.10.834, 47.10.761, and 47.60.800 RCW. Lieutenant Governor Owen moved adoption of Resolution No. 867. Chairman Murphy seconded the motion and the resolution was adopted. Mr. Kerr introduced proposed Resolution No. 868 authorizing the issuance and sale of $51,175,000 State of Washington General Obligation Bonds, Series 1998T (Housing Trust Fund – Taxable). Mr. Kerr stated that the 1997-99 capital budget contains a $50 million appropriation to the Department of Community, Trade and Economic Development for housing assistance, weatherization, and affordable housing (Sec. 108, Chapter 235, Laws of 1997). These programs, known collectively as the Housing Trust Fund (HTF), are operated through low-interest loans from bond proceeds to private non-profit charities and other 501(c)(3) organizations. HTF loans flunk the “private loan test” contained in Section 148 of the Internal Revenue Code. This provision limits the amount of any tax exempt bond issue that can be loaned to private entities to 5 percent or $5 million, whichever is less. Since the state has no control over the precise timing or amount of HTF loans vis-à-vis any particular tax exempt bond issue, the sale of taxable bonds is proposed to meet HTF loan cash flow and to comply with federal tax laws. Taxable municipal bonds are sold based on a spread off of similar “AAA-rated” U.S. Treasury maturities. The state’s last taxable issue, sold in November 1996, was sold at 6.52 percent, a spread of about 40 basis points (almost 1/2 percent) higher than Treasuries. A similar result is anticipated this year. The Series 1998T taxable HTF bonds are proposed to be sold competitively as a 10-year loan. Mr. Kerr stated that he knows of no controversy or issue relating to this proposed financing. Mr. Kerr presented proposed Resolution No. 868 to the committee.
Resolution No. 868 authorizing the issuance and sale of $51,175,000 State of Washington General Obligation Bonds, Series 1998T (Housing Trust Fund – Taxable), authorized by Chapter 456, Laws of 1997, and Chapter 39.42 RCW. Lieutenant Governor Owen moved adoption of Resolution No. 868. Chairman Murphy seconded the motion and the resolution was adopted. Mr. Kerr introduced a proposed motion authorizing the Chairman to undertake preparations necessary for development of a $200,000,000 variable rate bond transaction for consideration by the State Finance Committee. Mr. Kerr gave some background on the proposed motion stating that in July 1995 the State Finance Committee initiated an asset/liability management (A/LM) program. The objectives of the program were to increase dollars available to state general fund programs, reduce uncertainty of interest-sensitive portions of the budget, and greater coordination between the investment and debt management functions of the Office of the State Treasurer. Improved coordination has been evident in timing of bond sales and debt service payments to smooth out or avoid “valleys” in Treasury cash flow. As a part of A/LM, the State Finance Committee also approved a plan to issue variable rate general obligation bonds (generically referred to as variable rate demand obligations or “VRDOs”). At the time, the Committee limited variable rate exposure to 10 percent of the debt portfolio—about $600 million. The Committee issued its first $200 million of VRDOs in February 1996. Mr. Kerr further stated the state’s outstanding VRDOs or Adjustable Rate General Obligation Bonds, Series VR-96A and VR-96B, have the following characteristics and have performed as follows: Interest rates on the Bonds are reset every seven days. These rates are in the shortest part of the municipal yield curve and are usually lower than longer term fixed rates which reflect a risk premium. The Bonds are “multi-modal” which means the state can change this interest interval from weekly to daily, monthly, quarterly, annually, or, fix out the rates on a long-term basis. This feature results in an extremely flexible debt instrument which can be actively managed. Underwriting is performed by remarketing agents—broker/dealers. Remarketing agents are selected competitively through an RFP process. The state can replace its remarketing agents if it is not satisfied with their performance. Variable rate bond issues require a letter of credit bank or a bank providing a standby bond purchase agreement. These arrangements protect the state in the event of market conditions in which a significant number of holders “put” their bonds and replacement investors cannot be found (known as a “failed remarketing”). Credit facilities are selected through an RFP and can be replaced. Approximately 75 percent of VRDOs are purchased by tax exempt money market funds. This is a $200 billion market and a major opportunity to diversify the state’s investor base. The average all-in rate between the date of issue (February 1996) and September 1997 is 3.65 percent. This is 160 basis points lower than the 5.25 percent fixed rate that would have been experienced for a long-term bond issue in February 1996. The state has saved approximately $5 million in debt service costs over the period. Some risk to the state is involved if interest rates rise. However, as pointed out above, the multi-modal structure of VRDOs would enable the state to lock in rates for an intermediate term. At the time the VRDOs are issued the state establishes what the long-term borrowing interest rate would have been on that date. This “threshold rate” becomes a benchmark against which the VRDOs are tracked. If interest rate levels in the broader markets begin to show a rising trend, the multi-modal structure allows the state to respond. In addition, using the asset/liability concept, the VRDO liability is matched with the liquid portion of Treasury investment assets. If interest rates are rising generally, VRDO rates and short-term investment rates are rising in tandem as well. VRDO interest costs are rising, but they are being offset and covered (“matched”) by rising investment rates. Although these A/LM relationships are not currently formally recognized within the state budget process, achieving this recognition is the long-term objective of A/LM strategy. Mr. Kerr stated that over the past two years the state has experienced many benefits from the issuance of its first variable rate bonds: it has saved money in interest cost, provided the opportunity for the selective redemption of high cost fixed rate bonds, diversified its investor base, and taken the first steps in public sector adaptation of asset/liability management principles well established in the private sector. Mr. Kerr recommended this approach be continued with the issuance of another $200 million of VRDOs. This would bring the state’s variable rate exposure to approximately 6 percent of outstanding debt—within the Finance Committee A/LM target and well within those of the rating agencies. Because of the lead time required to select the remarketing agents and credit facility banks required to issue variable rate bonds, Mr. Kerr recommended the adoption of the following proposed motion: “That the Chairman proceed with the necessary steps to develop a $200 million variable rate financing transaction including, but not limited to, the competitive selection of remarketing agent(s), the competitive selection of a financial institution(s) to provide bank liquidity and/or credit support, and a financing plan which would be subject to State Finance Committee approval.” Lieutenant Governor Owen moved to adopt the motion. Chairman Murphy seconded the motion, and the motion was adopted. Ms. Rodeheaver introduced Resolution No. 869 authorizing the execution of a financing contract in the estimated amount of $7,350,000 for State Department of Licensing customer service centers in Vancouver and Union Gap. Ms. Rodeheaver stated that Part III, Sec. 301 of Chapter 457, Laws of 1997 (the 1997-1999 Transportation Budget) directs the Department of Transportation, the Department of Licensing and the Washington State Patrol to coordinate their activities when siting facilities. Section 301(2) authorizes the lease/purchase of three customer service centers by the Department of Licensing. The COPs authorized by this resolution will be used to construct two customer service centers in Vancouver and Union Gap. The Union Gap customer service center will include a vehicle inspection office for the Washington State Patrol. The project will be constructed on property adjacent to Department of Transportation facilities. The Washington State Patrol will provide project oversight during construction. The Vancouver customer service center will also include a vehicle inspection office for the Washington State Patrol. It is being constructed on land purchased by the Department of Licensing which is providing project oversight during construction. Ms. Rodeheaver presented proposed Resolution No. 869 to the committee.
Resolution No. 869 authorizing the execution of a financing contract in the estimated amount of $7,350,000 for State Department of Licensing customer service centers in Vancouver and Union Gap pursuant to Section 301(2)(a) and (c), Chapter 457, Laws of 1997 and Chapter 39.94 RCW. Lieutenant Governor Owen moved adoption of Resolution No. 869. Chairman Murphy seconded the motion and the resolution was adopted. There being nothing further to come before the committee, the meeting was adjourned at 10:27 AM.
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© 1997 [Updated: December 19, 1997] |
