BOARD MEETING DATE: December 1, 2006
AGENDA NO. 2
Adopt Resolution Authorizing Execution of a Guaranteed Investment Contract and Escrow Agreement; Approve Form of Contract and Selected Provider
SYNOPSIS:
The Board, at its September 8, 2006 meeting, authorized and directed the Executive Officer to prepare a solicitation of bids for the provision of a Guaranteed Investment Contract between the District and an AAA-rated provider and to return to the Board to approve the selected provider and the proposed form of the Guaranteed Investment Contract, the proceeds of which will be used to defease a portion of AQMD’s debt service. This action is to adopt a resolution authorizing execution of Guaranteed Investment Contract and Escrow Agreement and to approve selected bidder.
COMMITTEE:
Investment Oversight, November 17, 2006, Recommended for Approval
RECOMMENDED ACTIONS:
- Adopt the attached Resolution 1) authorizing the execution of a Guaranteed Investment Contract and Escrow Agreement to defease a portion of AQMD’s current debt service through 2014 in the amount of $19.1 million from the General Fund, Undesignated Fund Balance and; 2) approving the form of the Guaranteed Investment Contract and Escrow Agreement.
- Approve the selection of the winning bidder as presented at the Board meeting as the AAA-rated provider.
Barry R. Wallerstein, D.Env.
Executive Officer
Background
Over the past fifteen years, in response to Legislative limits placed on AQMD revenues, the agency has streamlined its operations, implemented staffing reductions (41%) associated with its fee supported stationary source programs and issued long-term debt to lower program costs in response to declining revenues from businesses. Currently, AQMD debt service ($12.8 million annually) represents 11% of the agency’s total budget, and 42% of its budget if labor is excluded.
At the September 8, 2006 Board meeting, the Board adopted Resolution No. 2006-25 authorizing AQMD to enter into a Guaranteed Investment Contract (GIC) with a AAA-rated provider for the purpose of economically defeasing a portion of AQMD’s current debt service through 2014 with one-time penalty/settlement moneys. An economic defeasance uses securities other than U.S. Treasury securities.
GIC Structure
Guaranteed Investment Contracts or GICs are the most common type of investment agreement for state and local agencies. In essence, a GIC is a promise to pay a state or local agency a specific interest rate over time for a specified investment amount. State and local agencies typically use GICs for investing in debt service reserve funds, construction funds, debt service funds and defeasance funds.
The GIC contract recites the basic information about the reason for the investment (e.g. the defeasance of AQMD’s annual July 1 deposits to the FSA GIC for AQMD’s Pension Obligation Bonds (POBs)), the maturity, the interest rate as well as the parties to the agreement. We intend to write the GIC documents so that the GIC is between the GIC provider and the POB Trustee. This is a common form of GIC agreement for state and local agencies.
The GIC will be from an AAA-rated provider. In addition to the AAA credit rating of the provider itself, we will require that the GIC be over-collateralized with U.S. Treasury or Agency securities at all times. The U.S. Treasury or Agency securities will be held by a third party and must be maintained at a minimum value of 104% of the GIC for Treasuries and 110% for Agencies. The collateral value will be verified at least monthly by the third party.
As additional protection, we will include a standard GIC downgrade provision that requires the provider to assign the collateralized GIC to another qualifying GIC provider if the provider’s credit ratings falls below A3 and A- as determined by Moody’s and Standard & Poor’s respectively.
Upon the occurrence of a default the Trustee may declare that all amounts due under the GIC are immediately due and payable. Due to the collateral requirement, the Trustee will have the legal right to exercise its right under the Uniform Commercial Code to sell the U.S. Treasury or Agency collateral for the benefit of AQMD.
Based on the Board’s GIC provider requirements we intent to solicit bids from MBIA Insurance Corporation, Financial Security Assurance (FSA), Ambac Assurance Corporation, Trinity Funding (a wholly-owned subsidiary of General Electric), and CDC IXIS Financial Guaranty North America Inc.
Proposal
AQMD’s scheduled debt service payments will be reduced by approximately one-half beginning in July 2015 with the retirement of all outstanding debt related to the construction of the Diamond Bar Headquarters. To implement the Board’s directive to establish a structurally balance budget and to bridge the remaining structural deficit until the Headquarters’ bonds are paid off in 2015, the Board authorized the use of a GIC in the amount of $19.1 million to defease a portion of the debt service payments through 2014.
The GIC and Escrow agreement with the winning bidder provide for the payment of $19.1 million on December 8, 2006 from the AQMD for the return of $3,000,000 on July 1st of each year for seven years and the final payment of $ on July 1, 2014. This represents an annual fixed rate of return of **%.
The resolution approved on September 8, 2006 requires that the Board approve the final structure of the investment agreement and the selected provider. The California Government Code requires a 90-day waiting period following the adoption of a resolution providing for the investment before the authorized investment can be executed.
Resource Impacts
These recommended actions will result in budget savings of $** million over the eight year period.
** Due to the requirements of GIC providers to hedge their bid amounts within minutes of their bid, the bidding for the GIC will take place at approximately 8:30 amDecember 1, 2006. The winning bidder and the results of the bid will be reported to the Board for their approval at their 9:00 a.m. December 1, 2006 meeting.
Attachments (EXE 60kb)
A. Resolution
B. Escrow Agreement
C. Form of a Guaranteed Investment Contract
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