Title
2005 Interest Rate Swap (B)
A Resolution of the City of Gainesville, Florida, approving the form and authorizing the execution and delivery of a confirmation with Citibank, N.A., New York pertaining to an interest rate swap transaction relating to taxable bonds issued by the City under Resolution No. 020918, as supplemented and amended; delegating to the City Manager, the Administrative Services Director or the Finance Director of the City the authority to execute and deliver such confirmation and related documents on behalf of the City under certain delegation parameters; providing certain other details in connection with such transaction; providing an effective date.
Explanation
In March of 2003 the City issued the Series 2003A & B Taxable Pension Obligation Bonds in the combined amount of approximately $89,895,000. The proceeds of the issue were deposited into the City's defined benefit pension plans to discharge the Unfunded Actuarial Accrued Liabilities (UAAL) in each plan. The 5.61% true interest cost on the bonds was significantly lower than the interest rate of 9.25% for the General Employees' Pension Plan and 8.5% for the Consolidated Police Officers' and Firefighters' Pension Plan previously carried on the plans' respective UAAL. The debt issuance is projected to generate gross savings of approximately $78 million dollars and present value savings of approximately $34 million dollars over the life of the issue.
Additionally, in July of 2005 the City issued $35,210,000 in Series 2005 Taxable Other Post Employment Benefit bonds. The proceeds of this issue were deposited into the Retiree Health Insurance Fund to take out the UAAL in the Retiree Health Insurance Plan; the 4.87% true interest cost on the bonds, when compared with the 9% interest rate carried on the Retiree Health Plan UAAL, is projected to produce a gross savings of approximately $7 million dollars over the next ten years and approximately $5.5 million in net present value savings.
The debt proceeds on these issues were invested in the same manner as all other pension plan and retiree health fund assets. The current asset allocation in each plan is approximately 70% equities and 30% fixed income instruments. One of the potential risks associated with taxable bond issues of this type is that the investment earnings on the bond proceeds will be generated at rates lower than the interest rate paid on the debt. While on an overall blended basis, staff is confident that the earnings rate on the proceeds will continue to exceed the interest rates on the debt going forward, this risk is highest on the 30% portion of the proceeds invested in fixed income instruments.
Market conditions currently provide the opportunity to hedge or mitigate this risk by implementing a fixed-to-floating interest rate swap agreement. Under the provisions of a swap agreement the City would enter into a contract with a counterparty to swap out a variable interest rate payment to the counterparty in exchange for receiving a fixed interest rate payment over the life of the proposed swap agreement. The City entered into such an agreement in July of 2004 on the Taxable Pension Obligation Bonds, and subsequently terminated the swap in September of 2004 in exchange for receipt of a termination payment of approximately $950,000. The City Commission granted staff the authority to negotiate to initiate another such swap in April of 2005. This authority expired on September 30, by which time rates had not moved to the point where it was beneficial for the City to exercise this authority. The proposed resolution would once again provide staff the option to negotiate this swap agreement.
Fiscal Note
Creation of this synthetic variable rate debt is designed to provide for 1) generation of interest savings over the current 100% fixed rate structure that currently exists on the pension obligation bonds and 2) a better matching of interest earnings on the bond proceeds deposited in the pension funds with interest expense associated with the Series 2003 bonds. In rising interest rate environments, the increased expense associated with the rising variable rate payment on the swap should be offset by increased interest earnings on the proceeds. In a declining interest rate environment, the reduced interest earnings on the proceeds should be mitigated by the net positive cash flow that results from the lower variable rate payment on the swap. The net result is more stable and predictable net cash flows.
Recommendation
The City Commission adopt the Resolution authorizing the execution and delivery of a master agreement, schedule, credit support annex, and confirmation with Citibank, N.A., New York, and delegating to the City Manager, Administrative Services Director or Finance Director the authority to execute and deliver such documents.