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COUNTY OF SAN MATEO
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County Manager/Clerk of the Board
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DATE:
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July 14, 2008
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BOARD MEETING DATE:
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July 22, 2008
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SPECIAL NOTICE/HEARING:
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None
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VOTE REQUIRED:
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Majority
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TO:
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Honorable Board of Supervisors
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FROM:
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Reyna Farrales, Deputy County Manager
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SUBJECT:
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Resolution Authorizing the Issuance and Sale of up to $160 Million of 2008 Refunding Lease Revenue Bonds to Refinance the Outstanding Auction Rate Securities of the San Mateo County Joint Powers Financing Authority’s 2003 Lease Revenue Bonds for the San Mateo County Youth Services Center
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RECOMMENDATION
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Adopt a Resolution:
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1. Approving the issuance and sale by the San Mateo County Joint Powers Financing Authority of Not to Exceed $160 million aggregate principal amount of refunding lease revenue bonds (Youth Services Campus), 2008 Series A, for the refinancing of the outstanding auction rate securities of the Authority’s Lease Revenue Bonds (Youth Services Campus), 2003 Series A, 2003 Series B and 2003 Series C, or a conversion of such bonds;
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3. Authorizing the forms of and directing the execution and delivery of a supplemental indenture, remarketing agreements, a bond purchase contract and related financing documents; and
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4. Authorizing the taking of all necessary actions relating to the refinancing of the Series 2003 Bonds.
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Vision Alignment
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Commitment: Responsive, effective and collaborative government
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Goal 20: Government decisions are based on careful consideration of future impact, rather than temporary relief or immediate gain.
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This Board action contributes to this goal by removing the existing Youth Services Center bonds from the auction rate securities market and refinancing them to variable rate demand obligations, which keeps overall annual borrowing costs below 4% as budgeted.
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Background
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In November 2003, the County issued $155 million in lease revenue bonds to build the Youth Services Center (YSC). As a means to lowering borrowing costs, the County chose to structure the financing as “synthetic” fixed rate bonds. To accomplish this, the County issued variable rate bonds known as Auction Rate Securities (ARS) and entered into interest rate swap agreements with Citibank and Lehman/AIG. This effectively changed the variable interest rates on the bonds to a fixed rate approximating 3.33%. To date, this swap structure has produced $6.2 million in present value savings to the County when compared to the 4.78% fixed rate the County would have paid if traditional fixed rate bonds were issued back in 2003.
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The ARS market began to show signs of weakening in late 2007 as the subprime mortgage crisis unfolded and a lack of confidence in the credit quality of bond insurers grew. Nearly 98% of the municipal ARS market is supported by bond insurance. These credit concerns soon sparked a “liquidity crisis” in the ARS market; investors began to fear that they would not be able to find new investors to purchase their ARS bonds in the weekly and monthly auctions, which are the vehicle for trading ARS bonds.
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The YSC bonds were insured by Ambac, which was first placed on negative credit watch by Fitch Ratings in late December. At that time, the County began to look for alternatives to the ARS market for its YSC bonds. Subsequently, both S&P and Moody’s have downgraded Ambac to their current ratings of AA/Aa3. At the request of Ambac, Fitch has withdrawn their ratings. The County started putting together a plan with California Financial Services, Citigroup and Lehman to restructure the YSC bonds. In mid-February, the municipal market experienced a significant number of “failed” auctions, including the auctions for the County’s YSC bonds. A failed auction occurs when new investors cannot be found to replace investors who wish to sell bonds and triggers an indexed rate on the County’s bonds. As a result, the County is currently paying a combined swap and bond rate of more than 6%. If allowed to continue, the County would pay an additional $3 million per year in YSC debt service, which is currently budgeted at $9 million.
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Discussion
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It is recommended that the YSC bonds be refinanced to more stable variable rate demand obligations (VRDOs. This will remove the bonds from the failed ARS market but retain the synthetic fixed financing structure, which is projected to keep the County’s total annual borrowing costs below 4%. The County has secured a commitment from Assured Guaranty to insure the bonds. In addition, liquidity support in the form of a standby bond purchase agreement will be provided by a bank in the unanticipated event that the County is unable to make payments. Dexia Credit Local has provided a verbal commitment to provide the liquidity facility with terms favorable to the County. In April, the County pursued and was able to obtain the highest credit rating for a California county from Moody’s (Aa1) and one of the highest ratings from Standard and Poor’s (AA+). These ratings will help reduce borrowing costs. Given continued uncertainty in the financial markets, additional flexibility has been provided in the resolution, which authorizes a fixed rate financing to refund the ARS, if the VRDO financing cannot be completed.
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The Joint Powers Financing Authority approved the refinancing parameters at its May 13 meeting. Updates were provided to the Finance and Operations Committee in March and June.
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Fiscal Impact
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Annual borrowing costs are projected to remain below 4%. Financing costs are estimated at $3.3 million for the bond insurance, rating agencies, financing team, and official statement printing. These costs will be included as part of the $160 million refunding package. Annual debt service of $8,871,500 has been included in the FY 2008-09 budget adopted by the Board in June. Debt service will be included in subsequent years based on adjusted debt service schedules. The Financing Team expects to sell the 2008 Refunding Bonds in late August or early September.
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cc: 2008 Lease Revenue Bonds Financing Team (Attached Distribution List)
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ATTACHMENT – Preliminary Official Statement 2008 Lease Revenue Bonds
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