STATEMENT OF ISSUE

The City of Tallahassee’s outstanding indebtedness includes approximately $67 million of variable rate loans issued through the Sunshine State Governmental Financing Commission (SSGFC). Because of the significant changes in the financial markets, including difficulties associated with selling variable debt such as that issued by SSGFC, we recommend that the City reduce its current exposure to the variable rate market. To reduce this exposure, we will utilize proceeds from a $30 million fixed-rate bank loan to reduce our variable-rate debt balance. The City’s financial advisor, PFM, issued a request for proposals, and four responses were received. The successful responding bank was Bank of America. The interest rate on the new financing will be set by the bank two days before closing and will be calculated using an index—current calculations indicate a fixed rate of 3.78%. The next-best rate offered was 4.79%.

As part of the process, we are requesting that the City Commission adopt Resolution No. 09-R-09 authorizing the issuance of not to exceed $30,000,000 City of Tallahassee, Florida Capital Improvement Refunding Revenue Bonds, Series 2009, and delegating certain responsibilities to the Mayor and City Treasurer-Clerk.

FISCAL IMPACT

The payments will reduce the City’s exposure to volatile variable-rates; however, the exact benefit cannot be calculated. Fixing the interest rate on another $10 million will ensure that the interest rate remains below the 6% estimate used for FY 2009 budgeting purposes.

RECOMMENDED ACTION

Option 1. Authorize, through a negotiated sale, the issuance of fixed-rate bonds to refund certain Sunshine State debt by adopting Resolution No. 09-R-09 authorizing the issuance of not to exceed $30,000,000 City of Tallahassee, Florida Bonds, Series 2009, delegating certain responsibilities to the Mayor and City Treasurer-Clerk, appointing a registrar and paying agent, providing certain other covenants and agreements in connection therewith, and providing an effective date.

Option 2. Provide staff with additional guidance.

James O. Cooke, IV, Deputy Treasurer-Clerk

Gary Herndon, City Treasurer-Clerk

For information, please contact: Jim Cooke, 891–8146

SUPPLEMENTAL MATERIAL/ISSUE ANALYSIS
HISTORY/FACTS & ISSUES

The City of Tallahassee’s outstanding indebtedness includes approximately $67 million of variable-rate loans issued through the SSGFC. This total includes debt incurred for general government, electric, gas and water and sewer needs. The first borrowing under SSGFC took place in 1986, and the most recent was in 2006. Until about six months ago, the variable interest rate associated with Sunshine State debt has been consistently below 5% per year and has generally been in the range of 2.0%–3.5%. Due to the low interest costs associated with this debt, the City has saved thousands of dollars over fixed-rate debt that would have almost certainly been at a higher rate. While this variable-rate debt has served the City well for many years, tightening in credit markets in recent months has caused the related interest rate to increase significantly. Perhaps more importantly, the interest rate has become much more volatile and, therefore, less predictable. For example, the overall rate for FY 2008 was 3.59%; however, the rates for specific months were as high as 12.75% when presented on an annualized basis.

Because of the significant changes in the financial markets, including difficulties associated with selling variable debt such as that issued by SSGFC, we believe that it is wise for the City to reduce its current exposure to the variable-rate market. To reduce this exposure, we will pay up to $30 million with proceeds from a fixed-rate bank loan. The effect of this payment will be to reduce the City’s variable-rate exposure from $67 million to $37 million. We have already notified SSGFC that we will make a $30 million cash payment on principal on or about April 24, 2009. This payment is made solely from proceeds of the new loan and does not affect the City’s reserves or other funding levels.

The bank-qualified loan takes advantage of a financing opportunity that is not always available to the City. An issuer can be bank-qualified if it issues less than $30 million in tax-exempt bonds in a given calendar year (including any general government or conduit debt). This limit was raised to $30 million from $10 million by recent federal legislation. Generally, lower rates are available if an issuer is eligible for bank-qualified status. In addition, the financing process requires no public offering document, ratings, debt service reserve fund or continuing disclosure filings associated with a bond issue.

The loan will be a 22-year, fixed-rate bond with amortization beginning in FY 2010. Debt service has previously been budgeted; therefore, there is no appreciable budgetary impact.

Item Title: Approval of Resolution No. 09-R-09 Authorizing Issuance of Not to Exceed $30,000,000 City of Tallahassee, Florida Capital Improvement Refunding Revenue Bonds, Series 2009.

Established budgets for variable-rate debt assumed 6% interest, and new loan will carry a rate less than 6% annually. The proposed loan repays three existing loans through Sunshine State. Amortization of the new loan will be structured to mirror the terms of the existing loans. The proposed loan will be secured by a covenant to budget and appropriate from non-ad valorem revenues.

The $37 million of variable-rate debt will represent 5% of the City’s total outstanding debt. During the process of issuing debt in recent years, we were advised that variable-rate debt representing 15% - 25% of borrowings is an acceptable level. During the current market situation, we believe that a more conservative approach is warranted.

CHARITABLE CONTRIBUTIONS

N/A

OPTIONS

1. Authorize, through a negotiated sale, the issuance of fixed-rate bonds to refund certain Sunshine State debt by adopting Resolution No. 09-R-09 authorizing the issuance of not to exceed $30,000,000 City of Tallahassee, Florida Capital Improvement Refunding Revenue Bonds, Series 2009, delegating certain responsibilities to the Mayor and City Treasurer-Clerk, appointing a registrar and paying agent, providing certain other covenants and agreements in connection therewith, and providing an effective date

2. Provide staff with additional guidance.

ATTACHMENTS/REFERENCES

Resolution No. 09-R-09 (To be provided.)