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Springsted Incorporated 380 Jackson Street, Suite 300 Saint Paul, MN 55101-2887 Tel: [PHONE REDACTED] Fax: [PHONE REDACTED] www.springsted.com May 7, 2010 Mr. Brentt Ramharter Finance Director/Treasurer City of Missoula 435 Ryman Street Missoula, MT 59802-4297 Re: Recommendations for the Issuance of: $885,000 Pooled Special Sidewalk, Curb, Gutter, and Alley Approach Bonds, Series 2010 Dear Mr. Ramharter: We have enclosed an electronic copy of our recommendations for the above-captioned issue for distribution to Council members and City staff prior to your meeting on Monday, May 17, 2010. If you should have any questions pertaining to the enclosed documents, or if you require additional copies, please do not hesitate to contact us. Sincerely, David R. Jaye David R. Jaye, Vice President Project Manager akb Enclosures ---PAGE BREAK--- *Preliminary; subject to change Presented to: Honorable John Engen, Mayor Members, City Council Mr. Bruce Bender, Chief Administrative Officer Mr. Brentt Ramharter, Finance Director/Treasurer City of Missoula City Hall 435 Ryman Missoula, Montana 59802 Study No.: 001286114 SPRINGSTED Incorporated May 7, 2010 Recommendations For City of Missoula, Montana $885,000* Pooled Special Sidewalk, Curb, Gutter, and Alley Approach Bonds, Series 2010 ---PAGE BREAK--- RECOMMENDATIONS Re: Recommendations for the Issuance of: $885,000* Pooled Special Sidewalk, Curb, Gutter, and Alley Approach Bonds, Series 2010 (the “Bonds” or “Issue”) We respectfully request your consideration of our recommendations for the above-named Issue. Bond proceeds will be used to finance the cost of installing curbs, gutters, sidewalks and alley approach projects in certain areas of the City. We recommend the following for the Bonds: 1. Action Requested To establish the date and time of receiving bids and establish the terms and conditions of the offering. 2. Sale Date and Time Monday, June 14, 2010 at 12:00 Noon Central - 11:00 A.M. Mountain, with consideration for award by the City Council at 7:00 P.M. that same day. 3. Method of Sale The Bonds will be sold using a competitive bidding process. In the interest of obtaining as many bids as possible, we have included a provision in the Notice of Bond Sale for underwriters to submit their bid electronically through the electronic bidding platform of PARITY®. In addition, physical bids (by phone or fax) will be accepted at the offices of Springsted. A good faith deposit will be required of bidders and may be submitted by certified/cashier’s check, (ii) a financial surety bond or (iii) a wire transfer to Springsted as your agent. 4. Authority for the Bond Issue The Bonds are being issued pursuant to Montana Code Title 7, Chapter 12, Parts 41 and 42 and Chapter 14, Part 41. 5. Principal Amount of Offering $885,000* * Included in the Notice of Bond Sale for the Bonds is a provision that permits the City to increase or reduce the principal amount of the Bonds in any of the maturities. This allows for any necessary adjustments required based on final interest rates and issuance costs. * Preliminary; subject to change ---PAGE BREAK--- City of Missoula, Montana May 7, 2010 6. Repayment Term The Bonds will mature annually July 1, 2011 through July 1, 2030. Interest will be payable semi-annually each January 1 and July 1, commencing January 1, 2011. 7. Security, Source of Payment and Payment Cycle Security The Bonds will not be general obligations of the City but will be special limited obligations of the City. Source of Payment The Bonds will be repaid with special assessments spread against benefited properties. Payment Cycle Interest on the assessments will commence accruing July 1, 2010. The City will collect sufficient assessment income to pay the January 1, 2011 and July 1, 2011 debt service payments. Thereafter, each year’s first-half collection of assessments will be used to pay the interest payment due January 1 in the year following collection. Second-half collections of assessments plus surplus first- half collections will be used to pay the subsequent July 1 principal and interest payment. To the extent assessment income is insufficient, the Bonds are payable from a special revolving fund reserved for all such bonds of the City. 8. Prepayment Provisions The City may elect on July 1, 2020, and on any date thereafter, to prepay the Bonds due on or after July 1, 2021, at a price of par plus accrued interest. In addition, the Bonds will be subject to extraordinary redemption, at any time, from prepayments of assessments. 9. Credit Rating Comments An application will be made to Standard & Poor’s Ratings Services for a rating on the Bonds. The City’s pooled curb and gutter debt is currently rated “BBB+” by S&P. 10. Term Bonds We have included a provision that permits the underwriters to combine multiple maturity years into a term bond, subject to mandatory redemption on the same maturity schedule provided in the Notice of Bond Sale. The advantage to the underwriter is that it provides large blocks of bonds, which are more attractive to bond funds, and certain pension funds. This in turn is Page 2 ---PAGE BREAK--- City of Missoula, Montana May 7, 2010 a benefit to the City since selling larger blocks of bonds reduces the risk to the underwriter, allowing them to lower their costs and the interest coupons. Since the Bonds are being offered on a competitive bid basis and awarded on the lowest true interest cost, the City will award the Bonds to the best bid regardless of whether term bonds are chosen or not. 11. Federal Treasury Regulations Concerning Tax- Exempt Obligations Bank Qualification Under Federal Tax Law, financial institutions cannot deduct from income for federal income tax purposes, expense that is allocable to carrying and acquiring tax- exempt bonds. There is an exemption to this for “bank qualified” bonds, which can be so designated if the issuer does not issue more than $30 million of tax exempt bonds in a calendar year. Issues that are bank qualified generally receive lower interest rates than issues that are not bank qualified. Since the City expects to issue less than $30 million of tax exempt obligations in 2010, these Issues are designated as bank qualified. The American Recovery and Reinvestment Tax Act of 2009 increased the previous bank qualification limit of $10 million to $30 million for tax-exempt bonds issued in 2009 and 2010. Arbitrage Compliance All tax-exempt issues are subject to the federal arbitrage and rebate requirements, which require all excess earnings created by the financing to be rebated to the U.S. Treasury. The requirements generally cover two categories: bond proceeds and debt service funds. There are exemptions from rebate that may apply in both of these categories in regards to the Bonds. Rebate Bond proceeds, defined generally as both the original principal of the issue and the investment earnings on the principal, have 6, 18 and 24 month spend down exemption periods. If all of the proceeds are expended during one of those exemption periods, the issuer is exempt from rebate and may retain the excess earnings. Since the City is reimbursing itself from Bond proceeds for expenditure previously made, there should be no Page 3 ---PAGE BREAK--- City of Missoula, Montana May 7, 2010 rebatable investment income earned on the Bond proceeds deposited into the construction fund. However, the deposit to the Revolving Fund will be subject to rebate. (ii) Yield Restriction The City must maintain a bona fide debt service fund for the Bonds or be subject to yield restriction. Yield restriction requires restricting the investment return in the debt service fund to the yield on the Bonds. A bona fide debt service fund is a fund for which there is an equal matching of revenue to debt service expense, with the fund spent down each year to a carry over permitted equal to the greater of the investment earnings in the fund during the prior year or 1/12 the debt service of the prior year. Additionally, all original proceeds of bonds and interest earnings on those proceeds must be expended within three years, or the remaining proceeds will be subject to yield restriction. Although the Issue may be exempt from rebate, the City must still comply with the arbitrage regulations which require yield restriction of proceeds remaining in a project fund after the three-year temporary period. With issues having special assessments pledged as a source of repayment, such as the Bonds, additional diligence should be exercised in monitoring the debt service fund due to the potential accumulation of assessment prepayments which could cause the fund to become non-bona fide. The extraordinary redemption provision will allow the City to prepay Bonds and avoid a problem in this regard. The City should monitor both the project fund and the debt service fund of the Bonds to ensure yield restriction provisions of the federal arbitrage rules are met. Economic Life The average life of the Bonds cannot exceed 120% of the economic life of the projects to be financed. The economic life of the improvements exceeds 20 years. The average life of the Bonds is 7.181 years; therefore the Issue is within the economic life requirements. Federal Reimbursement Regulations Federal reimbursement regulations require the City to make a declaration, within 60 days of the actual Page 4 ---PAGE BREAK--- City of Missoula, Montana May 7, 2010 payment, of its intent to reimburse itself from expenses paid prior to the receipt of Bond proceeds. It is our understanding the City has taken whatever actions are necessary to comply with the federal reimbursement regulations in regards to the Bonds. 12. Continuing Disclosure The Bonds are subject to continuing disclosure requirements set forth by the Securities and Exchange Commission. The SEC rules require the underwriter of the Bonds to provide an annual update of certain Official Statement information and report any material events to bond holders. The purchaser therefore requires the City to commit to providing such information under a continuing disclosure agreement or “undertaking.” If the City does not enter into such an agreement prior to the offering of the debt, underwriters will not offer a bid to purchase the Issue. We understand that the City manages its own continuing disclosure matters and will continue that practice with this Issue. 13. Attachments • Sources and Uses of Funds • Assessment Income Schedules • Debt Service Schedule • Notice of Bond Sale Parameters DISCUSSION Proceeds of the Bonds will be used to finance several projects in various areas of the City. In all cases the proceeds will be used to reimburse the City for internally funded expenditures. Page 7 shows the sources and uses of funds for the Bonds, including the various project costs, a five percent deposit to the City’s Revolving Fund, costs of issuance and allowance for underwriter’s compensation through discount bidding. Capitalized interest was calculated by the ity and represents the added cost to the City of internally funding the expenditures. C The Bonds are not general obligations of the City. Debt service on the Bonds will be paid with special assessments. All assessments, totaling $885,000, will be filed as of July 1, 2010 and spread over periods of eight, twelve, and twenty years, depending on the project, with even annual payments of principal. Interest will be charged on the unpaid principal balance of the assessments at a rate 0.5% above the average coupon rate on the Bonds, or approximately 4.29%. Interest on the assessments will start to accrue on July 1, 2010. Pages 8 through 11 show the projection of assessment income. Each year’s first-half collection of assessments will be used to pay the interest Page 5 ---PAGE BREAK--- City of Missoula, Montana May 7, 2010 payment due January 1 in the year following collection. Second-half collections of assessments, plus surplus first-half collections, will be used to pay the subsequent July 1 principal and interest payment. The Revolving Fund consists of a 5% deposit with respect to all special improvement district bonds of the City. The Revolving Fund is to be used to make loans, on an equal and ratable basis, to secure payments of principal and interest on special improvement bonds in the event assessment receipts are insufficient for that purpose. A loan from the Revolving Fund to pay bond debt service creates a lien on future revenue receipts in the amount of the loan plus interest at the bond rate. Proceeds of the Bonds equal to five percent of the face amount of the Issue, or $44,250, will be deposited into the Revolving Fund. Our recommended principal structure for the Bonds is shown in the projected net debt service schedule on page 12. Principal repayment has been structured as directed by the City to provide debt service requirements matching assessment receipts. • Columns 1 through 4 show the annual principal, estimated interest rates and projected total principal and interest payments, given the current market environment. • Column 5 shows the total projected assessment income developed on pages 9 through 11. • Column 6 shows the difference between columns 4 and 5. It is assumed that annual surplus income will be accumulated in the debt service fund and will be available to either cover anticipated subsequent shortfalls or call Bonds, to the extent available. • Column 7 shows the cumulative debt service fund balance, beginning with the Issue’s rounding amount deposited when the Bonds are issued. Springsted is pleased to again be of service to the City of Missoula. Respectfully submitted, SPRINGSTED Incorporated DRJ akb Page 6 ---PAGE BREAK--- Page 7 $885,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - Issue Summary Total Issue Sources And Uses Dated 07/01/2010 I Delivered 07/01/2010 8 Years 12 Years 20 Years Issue Summary Sources Of Funds Par Amount of $420,000.00 $50,000.00 $415,000.00 $885,000.00 Total $420,000.00 $50,000.00 $415,000.00 $885,000.00 Uses Of Funds Primary Purpose 361,478.22 41,511.59 358,806.79 761,796.60 Reserve Fund 21,000.00 2,500.00 20,750.00 44,250.00 Costs of 18,983.05 2,259.89 18,757.06 40,000.00 Capitalized 12,311.79 1,453.61 12,210.93 25,976.33 Total Underwriter's Discount 5,880.00 700.00 5,810.00 12,390.00 Rounding 346.94 1,574.91 (1,334.78) 587.07 Total $420,000.00 $50,000.00 $415,000.00 $885,000.00 Series 2010A Curb & Gutte I Issue Summary I 3/16/2010 I 3:28 PM ---PAGE BREAK--- Page 8 $885,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - Issue Summary Assessments Aggregate Assessment Income DATE Series 2010A Curb & Gutter Assessments 8 Years Series 2010A Curb & Gutter Assessments 12 Years Series 2010A Curb & Gutter Assessments 20 Years TOTAL 07/01/2011 70,518.00 6,311.67 38,553.50 115,383.17 07/01/2012 68,265.76 6,132.93 37,663.32 112,062.01 07/01/2013 66,013.50 5,954.17 36,773.16 108,740.83 07/01/2014 63,761.26 5,775.43 35,882.98 105,419.67 07/01/2015 61,509.00 5,596.67 34,992.80 102,098.47 07/01/2016 59,256.76 5,417.91 34,102.62 98,777.29 07/01/2017 57,004.50 5,239.17 33,212.46 95,456.13 07/01/2018 54,752.26 5,060.41 32,322.28 92,134.95 07/01/2019 - 4,881.67 31,432.10 36,313.77 07/01/2020 - 4,702.90 30,541.92 35,244.82 07/01/2021 - 4,524.16 29,651.76 34,175.92 07/01/2022 - 4,345.40 28,761.58 33,106.98 07/01/2023 - - 27,871.40 27,871.40 07/01/2024 - - 26,981.22 26,981.22 07/01/2025 - - 26,091.06 26,091.06 07/01/2026 - - 25,200.88 25,200.88 07/01/2027 - - 24,310.70 24,310.70 07/01/2028 - - 23,420.52 23,420.52 07/01/2029 - - 22,530.36 22,530.36 07/01/2030 - - 21,640.18 21,640.18 Total $501,081.04 $63,942.49 $601,936.80 $1,166,960.33 Par Amounts Of Selected Issues Series 2010A Cu-8 420,000.00 Series 2010A Cu-12 50,000.01 Series 2010A Cu-20 415,000.00 885,000.01 Aggregate I 3/16/2010 I 3:29 PM ---PAGE BREAK--- Page 9 $420,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - 8 Years Assessments ASSESSMENT INCOME Date Principal Coupon Interest Total P+I 07/01/2010 - - - - 07/01/2011 52,500.00 4.290% 18,018.00 70,518.00 07/01/2012 52,500.00 4.290% 15,765.76 68,265.76 07/01/2013 52,500.00 4.290% 13,513.50 66,013.50 07/01/2014 52,500.00 4.290% 11,261.26 63,761.26 07/01/2015 52,500.00 4.290% 9,009.00 61,509.00 07/01/2016 52,500.00 4.290% 6,756.76 59,256.76 07/01/2017 52,500.00 4.290% 4,504.50 57,004.50 07/01/2018 52,500.00 4.290% 2,252.26 54,752.26 Total $420,000.00 - $81,081.04 $501,081.04 SIGNIFICANT DATES Filing 7/01/2010 First Payment 1/01/2011 Series 2010A Curb & Gutte I 8 Years I 3/16/2010 I 3:29 PM ---PAGE BREAK--- Page 10 $50,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - 12 Years Assessments ASSESSMENT INCOME Date Principal Coupon Interest Total P+I 07/01/2010 - - - - 07/01/2011 4,166.67 4.290% 2,145.00 6,311.67 07/01/2012 4,166.67 4.290% 1,966.26 6,132.93 07/01/2013 4,166.67 4.290% 1,787.50 5,954.17 07/01/2014 4,166.67 4.290% 1,608.76 5,775.43 07/01/2015 4,166.67 4.290% 1,430.00 5,596.67 07/01/2016 4,166.67 4.290% 1,251.24 5,417.91 07/01/2017 4,166.67 4.290% 1,072.50 5,239.17 07/01/2018 4,166.67 4.290% 893.74 5,060.41 07/01/2019 4,166.67 4.290% 715.00 4,881.67 07/01/2020 4,166.66 4.290% 536.24 4,702.90 07/01/2021 4,166.66 4.290% 357.50 4,524.16 07/01/2022 4,166.66 4.290% 178.74 4,345.40 Total $50,000.01 - $13,942.48 $63,942.49 SIGNIFICANT DATES Filing 7/01/2010 First Payment 1/01/2011 Series 2010A Curb & Gutte I 12 Years I 3/16/2010 I 3:29 PM ---PAGE BREAK--- Page 11 $415,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - 20 Years Assessments ASSESSMENT INCOME Date Principal Coupon Interest Total P+I 07/01/2010 - - - - 07/01/2011 20,750.00 4.290% 17,803.50 38,553.50 07/01/2012 20,750.00 4.290% 16,913.32 37,663.32 07/01/2013 20,750.00 4.290% 16,023.16 36,773.16 07/01/2014 20,750.00 4.290% 15,132.98 35,882.98 07/01/2015 20,750.00 4.290% 14,242.80 34,992.80 07/01/2016 20,750.00 4.290% 13,352.62 34,102.62 07/01/2017 20,750.00 4.290% 12,462.46 33,212.46 07/01/2018 20,750.00 4.290% 11,572.28 32,322.28 07/01/2019 20,750.00 4.290% 10,682.10 31,432.10 07/01/2020 20,750.00 4.290% 9,791.92 30,541.92 07/01/2021 20,750.00 4.290% 8,901.76 29,651.76 07/01/2022 20,750.00 4.290% 8,011.58 28,761.58 07/01/2023 20,750.00 4.290% 7,121.40 27,871.40 07/01/2024 20,750.00 4.290% 6,231.22 26,981.22 07/01/2025 20,750.00 4.290% 5,341.06 26,091.06 07/01/2026 20,750.00 4.290% 4,450.88 25,200.88 07/01/2027 20,750.00 4.290% 3,560.70 24,310.70 07/01/2028 20,750.00 4.290% 2,670.52 23,420.52 07/01/2029 20,750.00 4.290% 1,780.36 22,530.36 07/01/2030 20,750.00 4.290% 890.18 21,640.18 Total $415,000.00 - $186,936.80 $601,936.80 SIGNIFICANT DATES Filing 7/01/2010 First Payment 1/01/2011 Series 2010A Curb & Gutte I 20 Years I 3/16/2010 I 3:29 PM ---PAGE BREAK--- Page 12 $885,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 - Issue Summary NET DEBT SERVICE SCHEDULE Date Principal Coupon Interest Total P+I Assessment Surplus (Shortfall) Cumulative 07/01/2010 - - - - - 587.07 07/01/2011 85,000.00 1.150% 26,200.00 111,200.00 115,383.17 4,183.17 4,770.24 07/01/2012 85,000.00 1.550% 25,222.50 110,222.50 112,062.01 1,839.51 6,609.75 07/01/2013 85,000.00 1.850% 23,905.00 108,905.00 108,740.83 (164.17) 6,445.58 07/01/2014 80,000.00 2.150% 22,332.50 102,332.50 105,419.67 3,087.17 9,532.75 07/01/2015 75,000.00 2.550% 20,612.50 95,612.50 102,098.47 6,485.97 16,018.72 07/01/2016 75,000.00 3.050% 18,700.00 93,700.00 98,777.29 5,077.29 21,096.01 07/01/2017 75,000.00 3.350% 16,412.50 91,412.50 95,456.13 4,043.63 25,139.64 07/01/2018 75,000.00 3.600% 13,900.00 88,900.00 92,134.95 3,234.95 28,374.59 07/01/2019 25,000.00 3.800% 11,200.00 36,200.00 36,313.77 113.77 28,488.36 07/01/2020 25,000.00 4.000% 10,250.00 35,250.00 35,244.82 (5.18) 28,483.18 07/01/2021 20,000.00 4.200% 9,250.00 29,250.00 34,175.92 4,925.92 33,409.10 07/01/2022 20,000.00 4.350% 8,410.00 28,410.00 33,106.98 4,696.98 38,106.08 07/01/2023 20,000.00 4.400% 7,540.00 27,540.00 27,871.40 331.40 38,437.48 07/01/2024 20,000.00 4.500% 6,660.00 26,660.00 26,981.22 321.22 38,758.70 07/01/2025 20,000.00 4.600% 5,760.00 25,760.00 26,091.06 331.06 39,089.76 07/01/2026 20,000.00 4.700% 4,840.00 24,840.00 25,200.88 360.88 39,450.64 07/01/2027 20,000.00 4.800% 3,900.00 23,900.00 24,310.70 410.70 39,861.34 07/01/2028 20,000.00 4.850% 2,940.00 22,940.00 23,420.52 480.52 40,341.86 07/01/2029 20,000.00 4.900% 1,970.00 21,970.00 22,530.36 560.36 40,902.22 07/01/2030 20,000.00 4.950% 990.00 20,990.00 21,640.18 650.18 41,552.40 Total $885,000.00 - $240,995.00 $1,125,995.00 $1,166,960.33 $40,965.33 7/01/2010 Delivery 7/01/2010 First Coupon 1/01/2011 Yield Statistics Bond Year $6,355.00 Average 7.181 Years Average 3.7922109% Net Interest Cost 3.9871755% True Interest Cost 3.9326075% Bond Yield for Arbitrage 3.6978913% All Inclusive Cost 4.7298047% IRS Form 8038 Net Interest 3.7922109% Weighted Average 7.181 Years Series 2010A Curb & Gutte I Issue Summary I 3/16/2010 I 3:28 PM ---PAGE BREAK--- $885,000 City of Missoula, Montana Pooled Special Sidewalk, Curb, Gutter and Alley Approach Bonds Series 2010 FACTS FOR NOTICE OF SALE Scheduled Date of Sale: Monday, June, 14, 2010 at 12:00 Noon Central-11:00 A.M. Mountain Award: 7:00 PM that same day Permit Electonic Bidding Using PARITY Par Amount of $885,000.00 Permit size adjustment after receipt of bids. July 1, 2010 First Coupon January 1, 2011 Frequency of Interest 2 Per Year Jan. 1 and July 1 Frequency of Principal Amortization 1 Per Year July 1 First Serial Maturity July 1, 2011 Final Serial Maturity July 1, 2030 Term Bonds Term Bonds Permitted First optional call July 1, 2020 For Bonds Maturing on or July 1, 2021 Call 100% Minimum Bid $872,610.00 Good Faith Deposit $17,700.00 2% Couponing Level or ascending interest rates Continuing Disclosure Full Bank Qualification Election Issue is Bank Qualified Bond Insurance No Bond Insurance Maturity Schedule 07/01/11 85,000.00 07/01/18 75,000.00 07/01/25 20,000.00 07/01/12 85,000.00 07/01/19 25,000.00 07/01/26 20,000.00 07/01/13 85,000.00 07/01/20 25,000.00 07/01/27 20,000.00 07/01/14 80,000.00 07/01/21 20,000.00 07/01/28 20,000.00 07/01/15 75,000.00 07/01/22 20,000.00 07/01/29 20,000.00 07/01/16 75,000.00 07/01/23 20,000.00 07/01/30 20,000.00 07/01/17 75,000.00 07/01/24 20,000.00 Use of Proceeds Source of Payment Springsted Incorporated Advisors to the Public Sector Proceeds of the Bonds will be used to finance the cost of installing curbs, gutters, sidewalks and alley approach projects in certain areas of the City. In addtion, the City will pledge special assessments against benefited properties. Page 13