Authorize
the Chief Executive Officer to select one or more investment providers and
enter into forward delivery contracts for terms of up to 10 years and
authorize the payment of related legal fees, advisory fees and other ancillary
expenses necessary to implement the agreements.
Under
forward delivery investment contracts Metro will be able to achieve higher
investment yields on monies that are held by bond trustees in debt service
fund (DSF) accounts to pay semi-annual debt service. Because deposits to DSF accounts are made monthly and debt
service payments to bondholders are made semi-annually, monies are invested
for an average of 90-days.
Under
an investment contract, the provider is able to invest its funds for longer
terms, thereby allowing the Metro to earn a higher interest rate.
As of March 2002, funds invested by bond trustees in money market funds
and low risk fixed income securities are yielding less than 2%.
Currently, 3‑year and 5-year forward delivery contracts are
estimated to yield 4.25% and 4.95%, respectively.
Based on average DSF balances of approximately $80 million, Metro could
earn more than $2 million of additional interest annually.
Because
this is a specialized financial product, the Metro’s financial advisor, Public
Financial Management, will conduct the competitive processes to solicit,
evaluate and recommend providers, including ancillary services, for award.
County Counsel, including outside counsel, as necessary, will provide
the necessary legal review and approval.
In
a forward delivery contract the provider agrees to sell specified types of
fixed income securities to the bond trustee at a price that will provide the
agreed yield. The securities
delivered to the trustee will be U.S. treasury and agency securities or other
low risk securities permitted by the bond trust agreement. The provider delivers the
investment
securities to the trustee monthly and is paid on delivery.
There
is no risk of principal loss for the Metro because the trustee only releases
payment for the securities after each delivery. The primary concern is that short-term interest rates rise
dramatically and quickly. Under
these circumstances the Metro’s risk is the loss of the opportunity to earn
interest above the contracted rate for the balance of the contract period.
Funding of $100,000 to pay expenses of entering into
these agreements is available in the FY02 budget in cost center #0521, Treasury
Non-Departmental under project # 610306, Prop A Debt Service and project #
610307, Prop C Debt Service. Increased
interest earnings from funds on deposit with the trustee make more Prop A
and Prop C revenues available.
The
Metro could actively direct the investment of the funds through the trustee.
This alternative may provide a small amount of improvement in the
investment return by directing investments in specific securities on a
day-to-day basis. However, the
current average return would still be around 2% since the funds could only be
invested for the same, short-term periods.
This alternative is not recommended because active investment management
is not Metro’s core business.
Terry
Matsumoto
Executive
Officer, Finance and Treasurer
Roger
Snoble
Chief
Executive Officer