BOARD MEETING DATE: September 8, 2006
AGENDA NO. 9

Recommendation on Long-Term Debt Reduction Utilizing One-Time Penalty/Settlement Revenues; Approval of Resolution Authorizing the AQMD to Enter into a Guaranteed Investment Contract; and Approval to Hire Specialized Legal and Financial Advisory Services

SYNOPSIS:

The Board, at its June 9, 2006 meeting, directed staff to develop for Board consideration a long-term debt reduction proposal utilizing one-time penalty/settlement revenue.  This item requests Board approval of the attached Resolution authorizing AQMD to enter into a Guaranteed Investment Contract with a Triple A rated provider to defease a portion of AQMD's debt service payments through 2014 and to enter into contracts with legal and financial advisory services to complete the defeasance transactions.  A report on the debt defeasance options available to AQMD and staff's proposal was presented to the Finance Committee on May 19, 2006.

COMMITTEE:

Finance, May 19, 2006; Administrative, July 14, 2006, Recommended for Approval

RECOMMENDED ACTIONS:

1. Adopt the attached Resolution authorizing AQMD to enter into a Guaranteed Investment Contract with a Triple A rated provider for the purpose of defeasing a portion of AQMD’s current debt service through 2014 utilizing one-time penalty money available from the General Fund, Undesignated Fund Balance.
2. Authorize the Executive Officer to enter into agreements with Stradling, Yocca, Carlson & Rauth for legal services in an amount not to exceed $8,000 and Sperry Capital for financial advisory services in an amount not to exceed $10,000.

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 June 9, 2006 Special Board meeting, the Board directed staff to return to its July meeting with a proposal regarding long-term debt reduction utilizing one-time penalty/settlement revenue.  At the Administrative Committee meeting for the July Board meeting, staff was directed to return to the September Board meeting with its recommendations.

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 balanced budget and to bridge the remaining structural deficit until the Headquarters bonds are paid off in 2015, staff is proposing to use $19.1 million from the General Fund, Undesignated Fund Balance to reduce its annual debt service payments.

A report on the debt defeasance[1] options available to AQMD and staff's proposal was presented to the Finance Committee on May 19, 2006.  The report discussed the benefits and constraints associated with both a Legal or Economic defeasance and analyzed which of the Bond issues, Installment Sale Revenue Bonds or Pension Obligation Bonds, would be the least costly to defease.  The report also compared the yield differences between the various defeasance securities: U.S. Treasuries, Triple A rated Fannie Mae’s or a Triple A rated Guaranteed Investment Contract (GIC).

Staffs proposal is to enter into a competitively bid Triple A rated GIC which is allowed under the California Government Code if approved by Board resolution, to defease the 2007 through 2014 Pension Obligation Bonds (POBs) debt service payments.  At current market rates the estimated annual savings would be approximately $3 million ($24 million over 8 years).

The attached Resolution authorizes AQMD to enter into a Guaranteed Investment Contract with a Triple A rated provider to defease a portion of AQMD annual debt service payments through 2014.  The California Government Code requires a 90 day waiting period following the adoption of the attached Resolution before the authorized investment can be executed.  Staff will bring to the Board for approval, at the earliest possible date, a second Resolution approving the final structure of the investment agreement.

Sole Source Justification

Section VIII.B.2 of the Procurement Policy and Procedure identifies four major provisions under which a sole source award may be justified.  This request is to approve two sole source awards, for financial and legal services, authorized under provision B.2.d.(4) level-of-effort expert consultation services.

Staff proposes to retain the services of Sperry Capital, Inc. as Financial Advisor and Stradling Yocca Carlson & Rauth as Legal Counsel to AQMD for this defeasance.  Both Sperry Capital and Stradling Yocca Carlson & Rauth have considerable experience in the bond market and a strong understanding of AQMD financial operations and legal structure.

Sperry Capital has served as financial advisor to AQMD for the 2004 Pension Obligation Bond financing, the early redemption of $6.4 million of Refunding Series 1992 SCAQMD Building Corporation bonds and the issuance of $26.8 million of Refunding Series 2002 SCAQMD Building Corporation Bonds.  In addition to work with AQMD, Sperry Capital has served as financial advisor for the issuance of $10.28 billion of bonds and notes for California issuers since January 2002.  Some of Sperry Capital’s clients were the County of Orange (general fund debt and Pension Obligation Bonds), the Los Angeles Unified School District, the Orange County Transportation Authority, Contra Costa County (COPs and Pension Obligation Bonds), the State of California (CalTrans and the State Controller) and the City and County of San Francisco.

Stradling Yocca Carlson & Rauth has represented AQMD in connection with most of its significant borrowings including its 1995 and 2004 Pension Obligation Bonds.  During each of the past five years, the firm has ranked among the top public finance firms in terms of the number of bond issues closed or their dollar volume.  In 2003, for example, the firm was the second largest bond counsel firm in the state in terms of dollar volume, having acted as bond counsel on more than 246 financings totaling approximately $6.8 billion.

Resource Impacts

These recommended actions will result in estimated annual budget savings of $3 million for a $24 million savings over the eight year period.

Attachment (DOC 42kb)

A.        Resolution

[1] “Defeasance”:  A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient to service the borrower’s debt.  Also referred to as “defease.”