Finance Claims Committee, CITY OF NORWALK, norwalk ct, norwalk city hall

JULY 17, 2002

ATTENDANCE: Bruce Kimmel, Betsy Bain, Chris Perone, Ken Baker, Doug Sutton,

Matthew Miklave

OTHERS: Jack Miller, Frederic Gilden, Christian McCarthy, Lehman Brothers Representative

Mr. Kimmel called the meeting to order at 7:05 p.m.

Mr. Kimmel said he received a call last week from the Finance Department and per Jack Miller there was a meeting with rating agencies to discuss diversified bonds in the city; they need to be approved by the council and this was the reason for the meeting tonight. He stated if it was felt there was not enough information to review tonight then it could be discussed at the meeting next week.

Mr. Miller said they solicited proposals from seven underwriters and chose Lehman Brothers to be the underwriter for the issuance. They have issued fixed debts and are looking to be aggressive with amortization over fifteen years. Over the last two years consideration was given to issuing a variable because it is widely used in other areas in the country and Norwalk would be the first in this state to do it; he noted it is used substantially throughout the country. He said the cost for the variable writ bonds is low and a marketing agent would be used to handle the marketing effort and they could process whatever amount is determined aggressively.

Mr. Miller said they are in the process of analyzing the banks and have a range of proposals and they are looking at three banks and leaning toward a 5-year agreement that would be locked in for a period of time to be determined. The cost would be $58k to service it based on the size of the issue. Mr. Miller continued to say variables offer a lot of options such as being able to switch to fixed bonds. He said the variable rate would be looked at on a weekly basis and if problems were seen then they would consider swapping but overall savings could be seen from a variable issue. Mr. Miller referred to the letter from the Mayor and he noted that enough cash is on hand to carry the debt currently. He stated that $20.7million is now averaging a 12% return rate so a gain of $78k should be seen and if it were not used within one year it would be at $42k.

Ms. Bain stated that the interest in cash on hand would be more than the rate it was borrowed.

Mr. Miller said two months ago there were marketing cash management programs and they came in hoping to find opportunities, they looked at Mr. Gilden’s program and determined it was the best cash management program ever seen. He noted that the 1.70 could go up and down.

Mr. Perone asked if there are highs and lows with the variable and if so what is the range. The Lehman Brothers representative said it could be 3.18 for a 10-year average. He said when discussing rates the municipal bonds move in the direction of interest rates and some of the analysis per the memo was that it was not assumed at today’s rate, it is staying where it is.

Mr. Miller said that was why they are looking to borrow because they have every expectation of gaining in interest. He said they looked at the AAA bond at a rate of 4.05% and if they look at a rate of 1.70% of past months and subtracts 38 basis points they would still see a spread of 1.97% thus a considerable gain. He said they took the average of 4.92% and 3.18% and subtracted 38 basis points and determined they would have a savings of 1.36 or less than $2.5million; so historically gains are seen with the variable and with safeguards, using variable makes sense. There is a lot of flexibility to track the rates on a weekly basis based on the market and he stated that with $20million in the capital fund now and if they wanted to restructure they could do this without affecting the rate. A variable is used as a positive as long as it is used prudently.

Mr. Miller said in collecting information from seven underwriters all were unanimous in recommending using a variable.

Ms. Bain said the use of variables would be one element and rating agencies feel it should be no more than 20%. Mr. Miller agreed this was so.

Mr. Miklave asked if they could switch to fixed rates at anytime. Mr. Miller said yes.

The Lehman Brothers representative said there are good options with a variable because a lot of fixed rates are not callable at the same time; variables are callable per monthly which allows a chance to eliminate the debt quickly; there is a lot of flexibility and if some catastrophic event should occur and rates plummeted to say 6% a variety of maneuvers could be looked at such as a swap where the debt would be outstanding but the firm would pay the floating rate. He explained that people opt for the variable to save money and it has more flexibility.

Mr. Baker asked if the average is expected to be better than 3.18. Mr. Miller said not necessarily, this has been seen over the past years but the future would determine this.

Mr. Miller said an interest in opting for the variable is due to anticipation of where they could go with this new idea and he noted he expects other towns would eventually follow.

Mr. Baker asked how long the variable rate has been available. The Lehman Brothers Representative said since 1981, 21 years. He said this would be the first time for Norwalk but he noted New Haven uses a similar variable rate program. He pointed out that Connecticut is different due to the small towns and where a lot of esoteric financial engineering is not needed.

Ms. Bain asked if the cost is regardless of the amount. Mr. Miller clarified the amount they were speaking of tonight only applied to the one issue.

MR. KIMMEL MOVED TO APRPOVE THE RESOLUTION WITH RESPECT TO THE ISSUANCE AND SALE OF NOT EXCEEDING $20,700,000 CITY OF NORWALK, CONNECTICUT VARIABLE RATE DEMAND GENERAL OBLIGATION BONDS, SERIES 2002

MOTION PASSED UNANIMOUSLY

ADJOURNMENT

Mr. Kimmel adjourned the meeting at 7:35 p.m.

Respectfully submitted,

Diane Graham

Telesco Secretarial Services