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Minutes - 02/08/1999 - Committee of the Whole,1-) VILLAGE OF OAK BROOK COMMITTEE -OF- THE -WHOLE Minutes February 8, 1999 UNOFFICIAL UNTIL APPROVED AS WRITTEN OR AS ENDED BY VILLAGE BOARD ON 1. MEETING CALL: The Committee -of -the -Whole meeting of Monday, February 8, 1999 was called to order by President Bushy in the Samuel E. Dean Board Room of the Village Commons at 7:33 p.m. Pledge of Allegiance was given. The Clerk called the roll with the following persons PRESENT: President Bushy, Trustees Bartecki, Caleel, McInerney, Savino and Shumate. ABSENT: Trustee Kenny. IN ATTENDANCE: Stephen B. Veitch, Village Manager; Michael A. Crotty, Assistant Village Manager; Ruth A. Martin, Library Director; and Alice Filinovich, Accounting Manager. 2. CAPITAL PROJECT FINANCING: Trustee McInerney remarked that the Village Board requested staff, at the Budget Workshop in December, to investigate the opportunity for the Village to take advantage of the current favorable interest rate environment and finance a part of the capital program and thereby retain larger cash reserves to grid against fluctuations or erosion in sales tax revenues. The following documents were discussed by the Village Board: A Financing Opportunities report prepared by R.V.Norene & Associates, Inc., one of the leading municipal financial advisors in this region, confirming staff's assumption that the market would likely view Oak Brook as an excellent credit. It addressed a number of issues related to structuring and selling a bond issue. A second memorandum and analysis prepared by Finance Director Langlois illustrating, with the framework of the current Five -Year Financial Plan, the effect on the General Corporate Fund of a $5,000,000 alternate revenue source bond issue. The question of whether or not the policy on minimum uncommitted cash balance in the General Corporate Fund should be revisited is also raised in the memorandum and is worthy of consideration. An article from last Wednesday's Bond Buyer on the eight North Shore suburbs that currently enjoy Triple -A credit ratings. R.V.Norene & Associates, financial advisor to five of the eight, believes that Oak Brook's bonds would be very seriously considered for that distinction and, regardless of rating, would likely receive interest rates comparable to a "Aaa" issuer if sold at a public competitive sale. The Village's 1999 -2003 Five -Year Financial Plan was adopted by the Village Board on October 13, 1998. The cover letter to the Plan notes that the Plan is consistent with the Village Board's objective of providing for major capital improvements without incurring general obligation debt. In the Plan's narrative regarding "General Corporate Fund - Capital Improvements" it is noted that ..... "in the current interest rate environment it might be advantageous for the Village to COMMITTEE -OF- THE -WHOLE Page 1 of 5 g February 8, 1999 Minutes 1 0 consider financing one or both of these projects." The projects referred to are the Library and the Municipal Building. Trustee Bartecki remarked that he did not see a down side to this concept. He asked that Mr. Norene address whether the Village may take a certain amount without a final agreement to spend it. Mr. Ron Norene, Bond Counsel, R.V.Norene & Associates, Inc., addressed the Village Board and explained the following concept of borrowed funds: The Village is a non -home rule unit in a county subject to the Property Tax Extension Limitation Act. The Act as originally passed in 1991 effectively limited municipal borrowing powers to voter approved G.O. Bonds (secured by property taxes) or Revenue Bonds (secured by a statutory enterprise fund source of revenue but not property taxes). In early 1995, legislation was adopted adding Cook County to the collar counties then subject to the Act. Late in 1995, the Illinois Legislature enlarged the borrowing powers of all taxing bodies subject to the Act by excepting (1) Limited Tax Bonds and (2) Alternate Revenue Source Bonds from the restrictions of the Act. Alternate Revenue Source Bonds were created in the Municipal Bond Reform Act adopted in 1988. They are known as "double barreled" bonds in that they have two pledged revenue sources: (1) property taxes and (2) an alternate revenue source. The statute requires that the "alternate" revenue source be sufficient to provide $1.25 of annual revenue for every $1.00 of annual debt service (if a "look back" at the last audit does not evidence such coverage there is a provision for projections of revenue by qualified experts). The procedure for the authorization of "alternate bonds" is through what is known as a "back- door" referendum. The issuer adopts an ordinance proposing the issuance of alternate bonds and identifying the alternate revenue source, publishes the ordinance locally and if within 30 days of the publication petitions containing the names of at least 10% of the registered voters are not received, the issuer can proceed to sell the bonds (the issuer must also comply with the Bond Issue Notification Act but the steps thereunder can run simultaneously with the alternate bond creation proceedings). If the requisite petitions are filed, the bond issue must either be placed on the ballot at the next consolidated election date or the project is dropped. The procedure for authorizing alternate bonds is virtually identical to that for authorizing revenue bonds. The Village could pledge sales taxes as the alternate revenue source for bonds issued for water and/or sports core purposes, but in fact it could transfer funds from the water and /or sports core enterprise funds to the General Fund and effectively use them to pay debt service. The Village could simultaneously use sales tax revenues as the pledge revenue source for infrastructure bonds but could make the actual payment from, for example, utility taxes. For projects like the Library and the Municipal Building, the logical alternate revenue source would be sales taxes. COMMITTEE -OF- THE -WHOLE Page 2 of 5 February 8, 1999 Minutes r4 R.V.Norene anticipates the Village of Oak Brook's General Obligation Bonds would be very seriously considered for a "Aaa" rating by Moody's Investors Service. Regardless of the assigned rating, it is R.V.Norene's opinion that the Village's bonds, if sold at a public competitive sale, will receive interest rates applicable to a "Aaa" issuer. Pending the expenditure of municipal bond proceeds, it is usually the case that the investment rate on the unexpended bond proceeds is greater that the bond rate. The difference between the borrower rate and the investment rate produces what is known as arbitrage. The U.S. Treasury requires the rebate of arbitrage profits which, at the very worst, means just the incremental difference attributable to the difference in interest rates —i.e., borrow at 4 %, reinvest at 4 1/2% and return the extra 1/2% to the U.S. Treasury. As the reinvestment of bond proceeds can only occur pending the expenditure of the funds for the purpose for which borrowed, the reinvestment rate would be that applicable for relatively short investments. Federal tax law provides several exceptions to the arbitrage regulations. If an issuer borrows $5,000,000 or less in a calendar year and expects to spend the proceeds within three years, there are absolutely no arbitrage rebate requirements. There would be no arbitrage rebate if the issuer has expended all of its bond proceeds, regardless of issue amount, within 18 months meeting the following spend -down requirements: 15% in 6 months; 60% in 12 months; and 100% in 18 months (except for reasonable retainages up to 5% which must be spent within 30 months). If the issuers bond proceeds will be spent at least 75% for construction purposes, the spend -down period for the exemption from all rebate is met with the following spend -down requirements: 10% in 6 months; 45% in 12 months; 75% in 18 months; and 100% in 24 months (same retainage provisions). Finally, if 100% of the proceeds (again, with retainage provisions) regardless of issue amount are spent in six months there is no rebate requirement. An issuer must obtain the necessary authorization to borrow and then enter the market. The Village and its advisors would first have to prepare the financing plan. The pledged alternate revenue source should be sales taxes which would require only one back -door authorization. Provisions of the Bond Issue Notification Act (publishing a notice of a hearing regarding the bond sale and holding the hearing at least seven days before the bond sale) can be folded into the alternate bond authorization period or, if the Village chose, could commence any time thereafter. There is nothing that can result from the hearing that could force the Village to abort the bond issue. For an underwriter to purchase municipal securities for resale, pursuant to S.E.C. Rule 15c2- 12(b)(5), an issuer must provide a "disclosure document" called an "Official Statement" and is similar to a prospectus in corporate finance. The Official Statement describes the issue (bond issue details include maturities, call features, etc.), lists various participants (bond registrar /paying agent, securities depository, bond counsel, etc.) and describes the socioeconomics and finances of the issuer. Specific detail regarding the securities depository is included as is language prepared by bond counsel discussing various tax treatment items. Under the Rule, issuers must agree to provide annual continuing disclosure updates and those terms are explained and discussed. Certain facts specific to the issue are included (such as whether the issuer will designate the bonds as "Qualified Tax Exempt Obligations "). The document will contain a five -year history of the Village's finances and changes in its tax base composition; the ultimate credit security on the bonds is the Village's ad valorem taxing powers and these strengths must be highlighted. COMMITTEE -OF- THE -WHOLE Page 3 of 5 February 8, 1999 Minutes 0 The preparation of the disclosure document (the Official Statement) is the responsibility of the financial advisor — i.e., R.V.Norene & Associates, Inc. The document's preparation would be concurrent with the authorization process and the sale of the bonds could occur as- soon -as shortly after the 30 -day back -door period has expired. R.V.Norene & Associates recommends that the Village of Oak Brook sell their bonds through a public competitive bid process. The Village would need to obtain a bond rating from Moody's Investors Service (the primary rating service for Illinois bonds). There are two areas of costs in a bond sale: (1) issuance costs and (2) underwriters costs. Issuance costs include, the services of bond counsel, the bond registrar /paying agent, reproduction of the disclosure document, local newspaper printing of the ordinance, the bond rating fee and the fee of the financial advisor (structuring assistance, Official Statement preparation, liaison with the rating agency and the underwriting industry, conducting the sale and providing a recommendation to the Village regarding the bids received and closing assistance). The underwriting costs are accommodated through what is known as bond discount (provision for the underwriter to pay something less than par and to cover his costs in that spread) — in today's market that spread would be between $5 and $8 per $1,000 (partially dependent upon the term of the bonds). Assuming the Village were to sell a $5,000,000 G.O. Alternate Bond issue, R.V.Norene & Associates estimate the costs of issuance would be: Bond Counsel (not local counsel) $12,000 R.V.Norene & Associates, Inc. - Financial Advisor 15,500 Moody's Investor's Service 8,275 Bond Registrar/Paying Agent 700 Official Statement Printing (1,000 copies) 1,300 Official Statement Mailing & Other Distribution 1,100 Wall Street Journal Summary Advertisement 280 Contingencies 845 Total $40,000 Trustee McInerney commented of his support of this concept, as it is a way of stabilizing the Village's revenue source, as compared to sales tax revenue. The Village has an opportunity now with a 20 -year low in interest rates and a significant advantage with arbitrage of reserve and cash balance. Trustee McInerney is in favor of the idea to review a $10,000,000 authorization with $5,000,000 being used for a short basis. Trustee Savino stated his agreement to move ahead on that basis. President Bushy asked that a recap of this discussion be given for the residents at the next Village Board meeting that it was a consensus of the Board to pursue this. Village Manager Veitch explained that the first real action of the Village Board is to appoint the financing team, bond counsel and authorize staff to negotiate these agreements. This subject will be placed as the last item on the Village Board meeting's agenda of February 9, 1999. COMMITTEE -OF- THE -WHOLE Page 4 of 5 February 8, 1999 Minutes 4�� 3. ADJOURNMENT: Motion by Trustee Caleel, seconded by Trustee Kenny, to adjourn the Committee -of -the -Whole meeting at 9:07 p.m. VOICE VOTE: Motion carried. ATTEST: Linda K. donnella, CMC /AAE Village Clerk cow02899 COMMITTEE -OF- THE -WHOLE Page 5 of 5 February 8, 1999 Minutes