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HomeMy WebLinkAboutUntitled Pu FinancNTheSpringsted Advisorsblice Published by SPRINGSTED Incorporated tu•Recycled Paper Financial Advisory Activities First Quarter, 1998 Top 10 Resolutions for 1998 by Alan J. Erickson, Vice President At year's end, many people reflect upon NI Resolve to finally clean out your files. the past 12 months and make resolutions I can recall starting a new job many concerning the upcoming year. Although years ago. On my first day, I was given a this tradition may be deemed old-fashioned, I three-ring binder that contained hundreds of think it's only human nature to strive for pages of handwritten notes from my improvement. For those of you who might predecessors and was assured that I would be be interested in making resolutions for 1998, unable to function in my new position without I offer some suggestions. With my apologies it. Five years later, as I was attempting to to David Letterman, I submit for your clean my office, I discovered the binder and consideration the top 10 list of finance realized that I had never referred to it. If you resolutions for the new year. have an active records management program, ( Resolve to close the books earlier use it and don't be afraid to jettison items that [. this year. Too many of us are you will rarely or never use. still struggling with this six months after ifiK Resolve to check on the overall year-end as we try desperately to remember financial health of your organization. where we put the phone number for "Bob" Most entities are comprised of many different from Accountemps. The best way to keep business units. Cities, for instance, often this resolution is to organize prior to year operate a wide range of enterprises, such as end. Also, keep in mind the concept of golf courses, water and sewer utilities, ice materiality; this should allow you to make arenas, and recreation centers. While these some reasonable estimates of expenditures units are diverse in how they operate, each can and let you close without waiting an have a positive or negative impact on your additional two months for stray invoices to general operations. Review how each of them wander in. is doing individually and also assess the impact Resolve to get those year-end they have on your operations as a whole. Make performance reviews finished. sure they are paying their way and not draining Performance reviews with good employees valuable resources from your general fund. Resolve to check on are typically an enjoyable experience. If you (See Top 10 on Page 2) the overall financial have a troublesome employee, try to face the health of your situation as early as possible. Letting a bad Inside The Springsted Letter organization. situation go on too long can be unfair to all employees who work for you. Cash Flow Borrowing: Resolve to review your outstanding The Opportunity to Pool 2 debt. Debt can be like writing a last Market Update 3 will and testament. Many people write a will Focus On Laurie Ukofia................... 3 and never look at it again, even though their S-I Capital Financing Review............. 4 children grow up and their net worth and lifestyle change. It's easy to automatically Non-profit Organizations: make debt service payments each year and Lease or Build?........................... 4 forget about the issue itself. However, Executive View .............................. 5 markets and your jurisdiction can go through City and County Cooperation substantial changes over the years. A Pays Off...... ............................ 5 refunding or restructuring may be possible that could free assets to be utilized more North Central Public efficiently. Finance Symposium...................... 6 St. Paul, MN • Minneapolis, MN • Washington, DC • Brookfield,WI • Iowa City, IA • Overland Park, KS Charter Member National Association of Independent Public Finance Advisors Cash Flow Borrowing: The Opportunity to Pool by John M. Maas, Senior Vice President Cash flow borrowing through a pool holds and, if necessary, time to compare feasible opportunities for school districts. Cash flow alternatives. borrowing is needed when a cash flow deficit is expected because aid or tax receipts are received after invoices are due. Cash flow Pooled Borrowing Programs borrowing, whether undertaken by an Investment individual district or through a pool State Issue Size Rate (combining two or more districts to sell one Iowa issuance of debt), allows districts to meet short-term cash needs. Series 1996-97B $80,025,000 5.911% Series 1997-98A $209,370,000 6.180 Borrowing through a pool provides Minnesota significant benefits for districts compared to issuing individually. It reduces Tax Series 1997A $13,610,000 5.500% administrative costs, typically achieves more Tax Series 1997B $18,470,000 5.420 favorable rates, and creates opportunities for Aid Series 1997A $9,655,000 5.510 pooled reinvestment of funds with a Aid Series 1997B $17,760,000 5.770 significant spread between borrowing and Wisconsin reinvestment rates. Series 1997A $7,015,000 5.820% However, this option requires analysis Series 1997B $4,750,000 5.750 before pursuing it. For example, there are Series 1997C $8,685,000 5.775 borrowing limits under state and federal regulations that must be taken into Several states, including Iowa, Minnesota, consideration, as well as consequences of and Wisconsin have realized these benefits arbitrage-rebate if the issue exceeds and have initiated programs for pooled $5 million. What are the costs of choosing borrowing. this method of borrowing? There will be costs associated with added district staff For additional information regarding cash time and effort, estimated rate of interest, flow borrowing and pooled issues, please time and effort of local elected officials, contact Springsted. VII (Top 10... continued from Page 1) #3 Resolve to continue your education. Resolve to review your entity's#9.1 Our competitive work environments investments. Now is a good time to require that we constantly enhance our skills. review how your portfolio performed and to Fortunately, the ability to apply new determine if you need to reposition your techniques on the job is the number one assets. Think about the types of investments benefit of continuing education classes. you purchase, and review your investment Promise yourself that you will sign up for a policies and procedures to confirm that they class or conference this year. are realistic given current market conditions. Resolve to make technology work for Investment portfolios, like older debt issues, #2you. By doing this, hopefully we all can easily be forgotten and pushed to the will move beyond the point of cynically bottom of the in-basket. Dust off those viewing our laptops as nothing more than a investment reports and look at them with a high tech Etch-A-Sketch. critical eye. Resolve to spend more time with itA Resolve to keep in touch with old7T .,. your family. There is an old saying friends and colleagues. It's that no one on their deathbed ever said "I important that we keep in contact with our wish I had spent more time at the office." friends and colleagues because it lifts our While our jobs are very important, it's also spirits, and it can also give us new insights extremely important to remember that our into what is happening in our industry. Each loved ones need and deserve as much of our time I'm lucky enough to have lunch with, or time devoted to them as do the ledgers, just talk to, a friend working in this field, I resolutions, and board meetings. learn something new and helpful. On behalf of the entire staff at Springsted, have a happy and prosperous 1998! le Page 2 Market Update by David R. Jaye, Financial Analyst The current status of low interest rates for bottomed out, the index has remained municipal bonds isn't new. After analyzing relatively constant. The lows in 1993, 1996, interest rates over a long period, it can be and 1997 have been 5.20% (10/21/93), shown that history may be repeating itself. For 5.33% (2/15/96) and 5.23% (7/31/97). The example, a Bond Buyer's Index(BBI) graph previous low was 5.16% in 1974 before the over the past five years demonstrates that not long slow climb up to 1982's 13.44%. You only were interest rates similar in early 1996, need to go back to 1973 to find the BBI but also in the fall of 1993. Yet, prior to 1993, below 5% and all the way back to 1968 to the last time rates were this low was February find it below 4.75%. Therefore, the vicinity 1974. Today's market, in a long-term of 5% appears to be the floor, from a historical context, has taken on new meaning. historical perspective. We are in an extremely low interest rate environment relative to anything in the past Second, the rate of decline of interest quarter century. rates in general has been declining significantly in the past five years. Because A graph in The Bond Buyer on December 5, the blips up have been consistently less high 1997 shows how the BBI has moved since than previous ones, the slope (rate of change) 1980. The BBI hit 13.44% in January 1982 of the BBI graph has been flattening out. The and has been coming down, albeit with slope of the graph from the trough in May periodic upward blips, ever since. There are 1983 to the trough in January 1987, where two important things worth noting relative to rates dropped 224 basis points over 44.57 our current location on the BBI graph. months, was -5.03. From May 1987 to First, during the period when the last October 1993, where rates dropped 297 basis three recent troughs in the graph have points over 77 months, the slope was -3.86. Most recently, from April 1994 to July 1997, Bond Bye.S rates dropped 111 basis points in just under 20-Bond Index 40 months, producing a slope of-2.79. Given the way the market behaves, the 14 ;,. �,,�, periodic blips and dips are expected to 12 a t continue in the coming months. It will be 10 �.:, , °^` ^'; ` "mona interesting to see if the apparent 5% floor in X'" a municipal rates can give way to rates we WIESWAVVW MUM 8 ,, jet �,,a< haven't seen since the early 1960s. 6 r However, with an ever-flattening slope in �... ,,,, .. .' .. ..� .. ..�3 Asa; .::. '...:' the BBI graph, it may be a painfully slow 1/2/89 1/2/73 1/2/77 1/2/81 1/2/85 1/2/89 1/2/93 1/2/97 process to get the answer. EA Focus On Laurie A. Ukofia, Financial Analyst rr: g , 1 0 A Laurie Ukofia joined "The most enjoyable part of my job is :-I'f Springsted as a working with our clients, answering their "The most enjoyable partfinancial analyst in questions and finding solutions to their of my job is working with - w October 1996. She has problems," says Laurie. our clients, answeringtheir :4 .• worked in public � �. Having previously worked in both public questions and finding finance for 15 years. finance and underwriting/trading, Laurie 4 Her experience solutions to their mint brings a very useful perspective to our P includes underwriting, problems i:i,,i.,,7. ®,fir m business. Her expertise in the areas of lease trading, structuring, revenue financings, pooled transactions, 1R:ligileux, 1 and negotiating bond issues. As a member of Springsted's analysis and structuring makes her a valuable General Finance Group, Laurie works resource to Springsted and its clients. closely with our clients to develop debt Outside of work, Laurie enjoys walking, repayment schedules which fit clients' swimming, raising her 6-year-old Eandson, needs and parameters. and "hanging out with the kids." El Page 3 S-I Capital Financing Review Municipal Athletic Complex Expansion in the City of St. Cloud,MN The City of St. Cloud recently issued certain circumstances) to repurchase or $4,520,000 Certificates of Participation to repossess the golf course and stadium. finance the construction of a second ice arena and a second baseball stadium, and to make To counter these risks, which concerned improvements to the municipal golf course. the rating agency and purchasers of the The financing faced several difficulties. Certificates, the City pledged as security its existing ice arena and the new ice arena. The Since the three projects were considered existing arena, which is located on City land "non-essential" and the City's certificate and underwent substantial renovation in 1994, payments were subject to annual exceeded the value of the golf course appropriation, the financing carried a higher improvements and the new stadium. The degree of risk than standard general issue received a "BBB+" rating by Standard obligation debt. In addition, the stadium and & Poor's, reflecting the non-essential nature golf course sites are not located on City land, of the projects, and was successfully but land owned by the U.S. Department of marketed on November 3, 1997. The Veterans Affairs and leased to the City under projects, which enjoyed strong community a 35-year ground lease. This lease contains support, are now substantially completed. provisions that would allow the V.A. (under — Catherine R. Polta Non-Profit Organizations: Lease or Build? by Elizabeth A. Fowler, Vice President Increases in the operating costs of local non- One advantage for 501(c)3 organizations is profit organizations frequently find their way the ability to use tax-exempt borrowing which into our clients' annual operation budgets in is typically 2% less than the taxable the form of transfers from their General Fund ("conventional")cost of borrowing. Instead or Trust and Agency Accounts. In order to of annual lease payments, the organization will minimize this public sector subsidy, our clients make debt service payments that are typically are interested in the long-term space planning far less expensive, even including the needs of these non-profits. operating costs of the new facility. The annual savings to the organization can be used to Have your community's non-profit organizations outgrown their facilities due to defray other operating costs, to buy down the debt by accelerating principal payments, or to staffing changes? Are they (or you) educat uncomfortable with the unpredictability of rent effoundrts. new charitablerthat aor 501(c)3ional escalations? Perhaps it is time for your efforts. To the extent a e0 alati organization to is time consider the organization is a direct provider of services, it advantages or of zabutioinits own "home." also enables the organization to price those services on a break-even basis without further An analysis of the lease-or-build question subsidy. typically begins with an inventory of current The opportunity also exists for structuring and projected facility needs, based on the the financing using a combination of taxable internal strategic plan of the organization. and tax-exempt debt in order to accommodate Normally, if the analysis indicates that the other taxable tenants. facility's needs are either uncertain or transient, it will be more advantageous for the For further information on the use of tax- organization to retain the flexibility of the exempt financing by your community's non- leasing option. If, however, the facility's profit organization, contact your Springsted needs are fairly predictable, it may want to representative, or call Elizabeth Fowler, consider the more cost-effective option of Team Leader of vringsted's Non-Profit owning its own facility. Finance Group. Page 4 Executive View A Message from Ronald W. Langness, Managing Principal As 1998 begins, it is a bidding on each maturity. The outcome had good time to review mixed reviews because the interest rates on financial issues that average seemed to be higher than they would occurred in 1997 and have been in an all-or-nothing sale. 46 what they may mean for Electronic methods of conducting business, the future. Probably the and other types of experimentation, will most notable activity has continue in 1998 as firms try to reduce costs. been the increasing The impact of most changes will be number of mergers and departures of bond positive for the large issuers, with high volume and name recognition. These are the houses and banks from the municipal bond business. This trend began several years ago issues that can be sold in large blocks to and is resulting in fewer firms to market major purchasers with little markup your bonds. The most recent announcement required. Small issues may end up providing was the purchase of Piper Jaffray by US the profit margins for underwriters. Bancorp (formerly First Bank). One reason In addition to these changes in the for the mergers is the very thin profit financial industry, Springsted is margin. In municipals, there are two strengthening the coordination of its pressures under way to correct the profit financial services to non-profit line. One is to increase the underwriter's organizations. Elizabeth Fowler is leading share, which is happening in negotiated this effort. Springsted and its Non-Profit transactions, and the other is to reduce the Finance Group have been assisting non- costs of each transaction. Reductions in cost profit entities nationwide for over 25 years. can be achieved by merging firms and Current non-profit clients include numerous eliminating duplication of administrative higher education institutions, social service - expenses, improving technological resources, agencies, private foundations, and private and marketing in larger blocks. K-12 schools. The City of Pittsburgh recently sold a$70 With these changes, 1998 should prove million general obligation issue via an to be an exciting and challenging year for electronic auction method, with underwriters all of us involved in municipal finance. 21 City and County Cooperation Pays Off by Paul R. Donna, Vice President Today, governments increasingly face the increase could jeopardize the facility's challenge of finding efficiencies without occupancy rate. The only option was to reduce sacrificing service levels. How can the financing costs. jurisdictions meet this challenge successfully? The cash flow pro forma assumed the City, By cooperating,jurisdictions can finance which is rated "Baal," would issue general projects with lower interest costs. obligation revenue bonds. However, a The City of Stewartville and Olmsted second scenario identified Olmsted County, County, Minnesota, provide an excellent Minnesota, which is rated "Aal"/ "AA+," example of cooperation. The City owns and as a potential issuer. The stronger credit operates a nursing home. The nursing home's rating of the County directly reduced the debt administration and the City Council wanted to service costs, which also lowered the initial complement the facilities with independent investment to an affordable level. The senior housing accommodations. The City Olmsted County Board and Olmsted County retained Springsted to develop a cash flow pro Housing and Redevelopment Authority forma to analyze the financial feasibility of the (HRA)were approached by the City with the project. Based on the cost and revenue idea of cooperating on the project. Both assumptions, a significant up-front investment Boards approved the County's involvement was required. Higher revenues and/or lower and both the City's and County's housing costs needed to be identified. A market study goals were met. Construction began in recommended a rent structure reflective of the October and occupancy is scheduled for June area's economic and demographic profile. 1998.October, ,,and the City concluded that a rent Page 5 North Central Public Finance Symposium by David N. MacGillivray, Principal, Director of Project Management On October 22, financing, moved beyond traditional 1997, approaches to explore pioneering ways to Springsted, accomplish infrastructure investment. along with the . Given the success of the First North Minnesota ,b ,tee Government Central Public Finance Symposium, Finance Officers Springsted Incorporated, the Minnesota GFOA and The Bond Buyer look forward to Association hosting the second North Central Public (GFOA) and The Finance Symposium in 1998. The Bond Buyer, Symposium will be held on November 5 hosted the first and 6 at the DoubleTree Grand Hotel near North Central Public Finance the Mall of America in Bloomington, Symposium. As the first offering of its Minnesota. Our objective will be to expand kind, the Symposium exceeded organizers' partnerships throughout the North Central expectations by bringing together over 200 region. Mark your calendars—we look la local government and bond industry forward to seeing you there! professionals. The Symposium's purpose was to further a greater understanding of SPRINGSTED Incorporated is an the environments within which each of us independent public finance advisory operates. firm. For more information on the The Symposium's attendees included articles published in this issue or to issuers, underwriters, credit rating receive additional copies,call the office agencies, bond insurers, bond counsel nearest you: firms, and trust companies. The interchange among these groups delved St. Paul (612);223-3000 deep into subject matter not offered at other Minneapolis (612) 333-9177 forums. The topics discussed included: Iowa (319) 351-4614 trade-offs of implementing major Wisconsin ( ) 782-8222414 privatization projects,joint facility financing by multiple jurisdictions, credit Kansas (913) 345-8062 rating issues, the underwriters' approach to Washington, D.C. (202) 466-3344 pricing bond issues, and investors' decision- making in purchasing bonds. These The Spnngsted Letter is edited by Patricia A.McDonald. discussions, while covering aspects of bond The 1998 North Central Public Finance Symposium will be held November 5-6 at the Doubletree Grand Hotel near the Mall of America in Bloomington, Minnesota. SPRINGSTED Public Finance Advisors 85 E.Seventh Place,Suite 100 Saint Paul,MN 55101-2887 © El vn r U t. i I'; JAN 3 01998 ,0 2113195 Gop,d, te ea-um els ilfy6L3