April 1, 1998

The State Finance Committee met in special meeting after notice duly given to the press and radio of Thurston County.

Present:

Michael J. Murphy, State Treasurer Gary Locke, Governor Brad Owen, Lieutenant Governor

Also Present:

Kay L. King, Office of the State Treasurer Svein Braseth, Office of the State Treasurer Mike Clarey, Office of the State Treasurer John Fricke, Office of Financial Management Dean Torkelson, Seattle Northwest Securities Cynthia Weed, Preston Gates & Ellis Jay Kirkevold, Office of the State Treasurer Rusty Fallis, Office of the Attorney General Tim Kerr, Office of the State Treasurer Sean Keatts, Lehman Brothers Dean Crabs, Merrill Lynch Faith Pettis, Preston Gates & Ellis Lynn Rodeheaver, Office of the State Treasurer Donna Lawrence, Office of the State Treasurer Dick Thompson, Office of Financial Management Martin Reynoso, Office of the State Treasurer Dan Gottlieb, Gottlieb Fisher & Andrews Nancy Adams, Office of the State Treasurer

Chairman Murphy called the meeting to order.

Governor Locke moved the minutes for the March 12, 1998, meeting be approved.  Lieutenant Governor Owen seconded the motion.  The motion passed and the minutes were adopted.

Mr. Kerr introduced proposed Resolution No. 874 which provides for the acceptance of a bid for the purchase of General Obligation Bonds, Series 1998C of the State in the aggregate principal amount of $220,000,000; fixing the interest rates and designating serial and term bond maturities for the bonds; all in accordance with Resolution No. 873, and amending Section 5 of Resolution No. 873.  Information soliciting competitive bids for this financing was circulated through publication of a preliminary official statement and advertising in the local and national financial press.  Notice was given to the market electronically through the Bloomberg Financial Information network and the State Treasurer’s Web Page on the Internet.

Pursuant to Resolution No. 873, approved by the Committee at its March 12 meeting, staff and the financial advisor evaluated potential savings (resulting from a lower interest cost) available to the state from allowing the 1998C bonds to be bid as non-callable bonds.  The practice has been to advise prospective bidders and the market whether the bonds will be callable in ten years or non-callable at least 24 hours prior to bids being received.  Staff conferred with the State Treasurer in advance and this determination was finalized.

In addition, Resolution No. 873 (Sec. 5) authorizes the designation of the current offering of bonds as non-callable if it is determined that non-callable bonds would result in interest savings to the state and would be in the best interests of the state.  The Treasurer has made this designation, and it was communicated to prospective bidders in advance of the bond sale on Wednesday, April 1.

This designation is being made for the following reasons:

For past sales, the interest rate spread between non-callable and callable bonds has been evaluated and has normally been about 5 basis points (.05 percent) in lower interest cost.  This spread has not been judged sufficient to benefit the state for giving up the flexibility of refunding bonds, maturing after the normal call date, between years 10 and 25.

The current market is characterized by large volumes of bonds, predominantly callable bonds, which puts upward pressure on interest rates.  The non-callable designation has the effect of differentiating the state’s bonds in the market leading to a higher price (lower interest rates).  Before this sale, non-callable bonds were estimated to demand a spread of 13 basis points (.13 percent) over callables, for a present value benefit of $2.1 million.

The non-callable designation precludes future refunding.  However, the estimated true interest cost of Series 1998C is approximately 5 percent.  The state is making the trade-off in favor of lower interest cost now over the potential of refunding bonds in an uncertain interest rate environment ten years hence.

Mr. Kerr then asked Mr. Torkelson, the state’s financial advisor, for his comments.  Mr. Torkelson outlined the procedure for deciding whether to sell a new issue of bonds as callable or non-callable.  The decision is reserved until three or four days before sale to assess the value the market will allow for declaring the bonds not subject to optional call.  A few days prior to the sale, that value appeared to be 12 to 15 basis points on the longer maturities.  The normal value in recent years has been 5 to 10 basis points.  This was particularly unusual because interest rates were so low.  The value of a call is influenced by the refunding potential of the bonds.  With rates so low, refunding potential is low, and so the call value should be low.  This is an anomaly within the municipal bond market, currently owing to a shortage of longer term, non-callable bonds, but an abundance of callable bonds.  Based on our analysis, the Treasurer determined that the 1998C bonds not be subject to call.  Based on the market for comparable, callable issues sold today, the non-call reduced interest rates on the 1998C Bonds’ longest maturities by about 17 basis points, thereby saving about $215,000 in annual debt service, for a present value cost reduction of approximately $3 million.

Mr. Kerr then described the current market climate.  After experiencing an unusually high volume of bond issuance—the 30-day visible supply of bonds was $10 billion on the March 12 meeting date—the market has become more orderly.  Currently the 30-day supply was approximately $6.5 billion and the tone of the market described as good.  Apart from a $250 million San Francisco Airport revenue bond issue offered after the state’s bid deadline of April 1, there are no other large issuers scheduled in the market next week.  A Florida Board of Education issue was on 24-hour notice for entering the market.

Municipal bonds continue to be “cheap” relative to taxable U.S. Treasury notes and bonds.  This situation makes state bonds attractive to cross-over buyers from the taxable side and their presence is significant.  Retail investors (the so-called “moms and pops”) are largely absent from the municipal market in favor of the stock market.  Market observers believe retail will reappear after the April 15th income tax filing date.

Mr. Kerr stated the apparent low bidder was Lehman Brothers with a true interest cost of 4.939414 percent.  Merrill Lynch submitted a true interest cost bid of 4.9466543 percent, Solomon Smith Barney submitted a true interest cost bid of 4.9512068 percent, and Bear Stearns submitted a true interest cost bid of 4.9596198 percent.  Mr. Kerr stated that all bids conformed to the official notice of sale.

Mr. Kerr presented proposed Resolution No. 874 to the committee.

Resolution No. 874 providing for the award of sale of $220,000,000 State of Washington General Obligation Bonds, Series 1998C, authorized by Chapter 39.42 RCW, Chapter 17, Laws of 1995, 2nd Spec. Sess., Chapter 456, Laws of 1997, Reg. Sess., and State Finance Committee Resolution No. 873.

Governor Locke moved to accept the bid from Lehman Brothers and adoption of Resolution No. 874.  Lieutenant Governor Owen seconded the motion and the resolution was adopted.

Mr. Kerr introduced proposed Resolution No. 875 authorizing the issuance and sale of $2,293,310,000, more or less, State of Washington General Obligation and Motor Vehicle Fuel Tax General Obligation Refunding Bonds.

Mr. Kerr told the Committee that in March 1995 the State Finance Committee approved Resolution No. 818.  The purpose of this resolution was to authorize the refunding, from time to time, of identified bond issues subject to market conditions and authorized debt service savings targets.  Proposed Resolution No. 875 supersedes the earlier resolution and updates refunding candidates, reflecting new money bond issues sold over the past three years.

The following conditions and concepts are embedded in proposed Resolution No. 875:

Refunding bond sales are subject to State Finance Committee approval by resolution.  Approximately $1.9 billion in advance refunding candidates are identified within ranges of current interest rates less 25 basis points (1/4 of 1 percent), 50 basis points, 75 basis points, and 100 basis points (1 percent).

In compliance with federal tax laws, bonds sold after 1986 may be advance refunded only once, hence the use of a conservative savings target.  Advance refunding candidates (those that have not yet reached their call dates) will be proposed for sale only if they meet the State Finance Committee savings target of a ratio of present value debt service savings to new (refunding) issues size of at least 5 percent.  There are approximately $200 million current refunding candidates (bond issues near or past their call date); $100 million to be sold in summer 1998 and $100 million in summer 1999 which meet a 5 percent equivalency target for much shorter bond issues.

As market conditions permit, refunding packages will be proposed to the Committee for consideration.  No bonds will be sold without State Finance Committee approval.

A Bond Buyer Index interest rate trend chart is enclosed to reflect levels the market would have to reach for the first group of refunding candidates, amounting to approximately $436 million, to meet Committee savings targets.  The goal of the state’s refunding operations is to reduce debt service cost.  Mr. Kerr stated that he knows of no controversy relating to this omnibus refunding authorization.

Mr. Kerr presented proposed Resolution No. 875 to the committee.

Resolution No. 875 authorizing the issuance and sale of $2,293,310,000, more or less, State of Washington General Obligation and Motor Vehicle Tax General Obligation Refunding Bonds authorized by Chapters 39.42 and 39.53 RCW.

Governor Locke moved adoption of Resolution No. 875.  Lieutenant Governor Owen seconded the motion and the resolution was adopted.

Chairman Murphy mentioned the state is still maintaining its high ratings of AA+ from three rating agencies.  He also noted that he has been working with the stadium authority to resolve technical issues concerning the Internal Revenue Service, and that he may need help with the next Legislature to optimize the amount of tax exempt bonds the state could issue for the Seahawk stadium.  Reducing the amount of taxable bonds potentially translates into increased revenue to the Youth Athletic Program authorized by the Legislature.

There being nothing further to come before the committee, the meeting was adjourned at 9:20 AM.

	STATE FINANCE COMMITTEE STATE OF WASHINGTON   _______________________________________ Michael J. Murphy, State Treasurer & Chairman   ________________________________________ Gary Locke, Governor   ________________________________________ Brad Owen, Lieutenant Governor
________________________________________ Tim Kerr Deputy State Treasurer & Secretary