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04/12/1993 CITY COMMISSION SPECIAL MEETING April 12, 1993 The City Commission of the City of Clearwater met in special session at City Hall, Monday, April 12, 1993 at 1:10 p.m., with the following members present: Rita Garvey Mayor/Commissioner Richard Fitzgerald Vice-Mayor/Commissioner Sue A. Berfield Commissioner Arthur X. Deegan, II Commissioner Fred A. Thomas Commissioner Also present: Michael J. Wright City Manager M.A. Galbraith, Jr. City Attorney Cynthia E. Goudeau City Clerk Daniel J. Deignan Finance Director The Mayor called the meeting to order for the purpose of discussing direct sale of water/sewer revenue bonds. The purpose of this meeting was to discuss the feasibility of the direct sale of bonds by the City. At the April 1, 1993, Commission Meeting the City Commission directed staff to contact mutual funds to see if they would be interested in purchasing bonds directly from the City. Dan Deignan, Finance Director, reported they spent two days contacting mutual funds. They contacted eight and none, except one, was interested. He stated all were concerned regarding secondary liquidity of the bonds should they find a need to resell them. The concern was that a New York House would not have been involved in the initial issuance. The market expects to see underwriters involved in the sale of bonds. He stated Fidelity indicated they would be happy to talk to the City, however many strings were attached which would require the restructuring of the bonds so the maturities met their schedule. He stated there would also be a 50-point spread and therefore it was not worth pursuing. He reported one unsolicited offer was received from a big firm to fully underwrite the bond issue for $5.00/$1,000 bond. This is half the first estimate provided by Smith-Barney, the City's current underwriter. There was also an offer to provide the private placement of the bonds which is different from underwriting as no risk is assumed by the placement agency. They offered to do this at $3.00/$1,000 bond. However, in their letter they stated the City would be best served by a negotiated private sale which would provide the lowest true interest cost. Therefore, staff's recommendation is to proceed as originally planned to have the negotiated sale through Smith-Barney. He reported that due to this exercise the City has been able to gain significant concessions in the underwriter's fees. Kevin Skyler, representing Smith-Barney handed out two proposed structures for underwriter's costs. He stated underwriter's costs are made up of take-down, which is a cost to provide incentive to brokers to sell the bonds; the management fee, which covers the cost to the underwriters to develop the documents, etc.; the underwriters risk, which would cover the underwriter's risk of not selling bonds; and expenses, which covers such things as underwriter's counsel, mailing, advertising, etc. The proposal recommended by Smith-Barney has an average take-down fee of $5.31/$1,000 bond (the fee varies over the life of the bond with lower fees upon initial issuance), a 75 cent/$1,000 bond management fee, zero underwriting risk, and $1.23/$1,000 bond for a total of underwriter's discount of $7.29/$1,000 bond or a total cost for the entire bond issue of $384,183. The alternate proposal is based on the unsolicited offer to sell the bonds at $5.00 a bond. He stated that the take-down fee would be $3.75/$1,000, no management fee, no underwriting risk, and $1.25/$1,000 bond in expenses for a total underwriter's discount of $5.00/$1,000 or total cost of $263,500. Mr. Skyler indicated on the reduced proposal, the take-down having been reduced will not be as attractive to brokers to sell the bonds. He stated there is a difference in cost of approximately $120,000. He felt that for that $120,000 Smith-Barney could double the savings to the City in that they would be able to sell the bonds on the market with a lower interest rate. Commissioner Thomas requested Mr. Deignan explain the $5.00 per bond offer. Mr. Deignan indicated Merrill-Lynch had offered to underwrite the bonds at $5.00/$1,000 bond. The City Manager questioned if there were any caveats in that proposal. Mr. Deignan indicated he did not get into a great deal of detail with Merrill-Lynch. He stated there would be a delay in issuing the bonds as Merrill-Lynch would have to redo the work already done by Smith-Barney. He indicated the City does have a contract with Smith-Barney for them to act as the City's underwriter through May 17, 1993. Commissioner Thomas commented that Smith-Barney's presentation indicated the City would get a better interest rate with the larger take-down fee. He questioned if there was anything in writing regarding what the difference in the interest rate would be between the proposal submitted by Smith-Barney and the $5.00/$1,000 bond proposal. Mr. Skyler indicated there will be a minimum of five basis points difference between the proposals. For every five basis points the City will save another $160,000 from the interest rate. Commissioner Thomas expressed concerns that there was no way to judge Smith-Barney's performance. The City Manager indicated that is why the City has Raymond James as the City's financial advisors. They are there to protect the City's interests. The City Manager stated Smith-Barney could not provide pricing until the day of sale. Commissioner Thomas questioned what the difference would be using the figure the bonds could be sold for today. Mr. Skyler indicated there would be five to seven and a half basis points between the two proposals. Commissioner Thomas questioned if Mr. Skyler was indicating the lower up-front cost to the City would result in a higher interest rate on the bonds and therefore cost the City more in the long run. Mr. Skyler indicated this was true. Commissioner Thomas indicated he had been told the City would get a better deal if they bid the underwriting in the open market. Mr. Deignan indicated this would be difficult for this bond issue as it is a refunding issue. Commissioner Thomas expressed concerns regarding the $34,000 fee for underwriter's counsel whereas the City is already paying over $70,000 for underwriter's counsel. He questioned why. Mr. Skyler indicated one is the City's bond counsel and the other is Smith-Barney's legal advisor. Bonnie Wise and David Thornton of Raymond James & Associates, the City's financial advisor, spoke regarding the proposals. Ms. Wise indicated she felt the Merrill-Lynch proposal may have been referring to a RFP process rather than a competitive sale. She indicated Smith-Barney was chosen by the City through a competitive bidding process to be the City's underwriters. She stated in this negotiated sale for refunding the bonds, not only will the City be selling bonds, they will also be buying securities to place in escrow to defease the prior bonds. She stated everything must be done quickly. This is difficult as the yield on the escrow cannot exceed the yield on the bonds. Commissioner Thomas stated the question was whether it would be better to competitively bid the entire package rather than have a standing contract with Smith-Barney. Mr. Thornton indicated it was his personal opinion if everything were rebid each time, the City would generally come out ahead. Ms. Wise pointed out the issue would also depend on whether or not the time to go through the RFP process was available. Mayor Garvey pointed out in this issue time is of the essence. Mr. Wright indicated he felt the market would become less favorable. Mr. Thornton reported the day after they were here previously, interest rates went up 20 basis points. He indicated they have now come back down and there is a good market for the time being. Mr. Thornton indicated Raymond James felt there may be some middle ground to be reached regarding the underwriter's fee. He stated they agree the $5.00/$1,000 bond proposal would suffer in interest rates but he felt there may be some fee between the $5.00 proposal and the Smith-Barney proposal which could be negotiated. The City Manager pointed out if the Commission decides to go with Merrill-Lynch they would have to go back out for bid and should wait until the Smith-Barney contract expires. Commissioner Thomas agreed the City had a responsibility to Smith-Barney but he felt that Smith-Barney also had the responsibility to provide the City with the best deal. Ms. Wise indicated a way of adjusting the cost may be to adjust the take-down rate over the number of years of the bond, therefore reducing the average take-down rate for the entire term. The City Manager questioned when the deal was actually set. Ms. Wise indicated Thursday morning. Mr. Wright questioned if they needed the Commission to ratify everything Thursday night. Ms. Wise indicated a special meeting Friday afternoon would provide them with enough time to provide pricing. Mr. Skyler indicated there was room for negotiation regarding the underwriter fee. Commissioner Thomas stated he felt the Commission should determine from this experiment just how good Smith-Barney and Raymond James are. Mr. Skyler indicated that what would happen is, early Thursday morning an interest rate scale and a take-down component would be used to set the savings as of that day. At that point, Ms. Wise will say "yes" or "no" to the deal. Ms. Wise indicated they need authority to proceed and to mail the preliminary official statement. She indicated the bond ordinance will be adopted on second reading Thursday night and an award resolution would be adopted at the special meeting. Questions were raised regarding why the resolution could not be adopted Thursday night. Mr. Skyler indicated if Raymond James was comfortable with this, they could present something Thursday night. Ms. Wise indicated her concern was that the preliminary official statement still needed to be printed and she questioned the timeliness of getting it to the appropriate people. She recommended placing the item on Thursday night's agenda but scheduling the special meeting in case it was needed. Consensus of the Commission was to schedule the special meeting for noon on Friday, April 16, 1993. This meeting would be canceled if all the documents come together and the deal can be concluded Thursday night. Commissioner Thomas moved for Raymond James and Smith-Barney to proceed. The motion was duly seconded and carried unanimously. The meeting adjourned at 2:02 p.m.