Title
Amendment of Escrow Agreement in Order to Preserve Tax-Exempt Status of Utilities System Revenue Bonds, 2007 Series A (B)
Explanation
In March of 2007, the City issued its Utilities System Revenue Bonds, 2007 Series A (the "2007 Series A Bonds") to refund portions of the 2003 Series A and 2005 Series A bonds (the "Refunded Bonds"). This was an "advance" refunding, whereby the proceeds of the 2007 Series A Bonds were used to refund the Refunded Bonds in advance of the first call date of the Refunded Bonds. As a result, two issues of tax-exempt bonds - the original Refunded Bonds and the 2007 Series A Bonds - are held by investors until the Refunded Bonds are redeemed in 2015.
Pursuant to the Internal Revenue Code and applicable Treasury Regulations, in order for interest on the 2007 Series A Bonds to be and remain tax-exempt, GRU is required to restrict the earnings on the proceeds of the 2007 Series A Bonds (i.e., GRU cannot earn arbitrage above the yield on the 2007 Series A Bonds).
In order to comply with these yield restriction requirements, the escrow for the Refunded Bonds was structured to ensure that no excess arbitrage is earned, in part through the use of 0% reinvestments in United States Treasury Securities - State and Local Government Securities ("SLGS") to blend down the earnings rate on the escrow to stay within the mandated limitation. As a result, the escrow agreement provides for the reinvestment of the cash balance on deposit in the escrow account in 0% SLGS on October 1, 2013. However, because the federal government has reached its debt ceiling, the United States Department of the Treasury has been forced to stop borrowing funds, so it currently is not issuing/selling SLGS. Under the escrow agreement, no alternative reinvestment procedures were provided because at the time of the issuance of the 2007 Series A Bonds, it was not contemplated that the federal government would stop borrowing (and, therefore, stop selling SLGS).
In 2007, the Treasury Department issued regulations to address the situation where issuers of tax-exempt bonds are required to make reinvestments in 0% SLGS in order to keep their advance refunding escrows in yield compliance, but cannot as a result of the federal government having suspended the issuance of SLGS. Under these regulations, issuers of tax-exempt bonds are permitted to purchase higher-yielding U.S. Treasury securities on the open market, provided that they pay any excess arbitrage earnings over to the federal government.
Recommendation:
The City Commission authorize the General Manager for Utilities (1) to enter into an amendment to the escrow agreement for the Refunded Bonds in substantially the form submitted to this meeting, with such changes thereto as the General Manager for Utilities may determine to be necessary or desirable and subject to approval of the City Attorney as to form and legality, in order to permit necessary reinvestments in open-market U.S. Treasury securities in addition to 0% SLGS; (2) to execute such other documents and take such other actions (including, without limitation, hiring certain professionals to assist GRU with the purchase of such open-market securities and to verify compliance with federal income tax requirements) as may be necessary or desirable to proceed with this transaction and preserve the tax-exempt status of the 2007 Series A Bonds; (3) to cause any excess arbitrage earnings on the escrow to be paid over to the federal government, and to enter into any commitments with respect thereto as may be necessary or desirable; and (4) to enter into amendments to escrow agreements for such other Utilities System Revenue Bonds issuances that may be similarly impacted in substantially similar form subject to approval of the City Attorney as to form and legality.