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).
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