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Home My WebLink AboutCOM 0076.005 1998-2000 RPR 26 ' 99 21 ~ 12 FR W I NTHROF' SI t ralJly NT G1G aJO i.+w i u .~•+o ~«oc~ . . . _ ~h WINTHROP, STIMSON, PUTNAM & ROB$RTS II]] CONN[OTMYT AKNYE, N. W. $ TNtOGwONrON Av[NYC I W.WIIM[TON.OC 20038 LOYYON EC2N 20. EweuNO I ~ TCI2•N9wc 202->76.9t00 ON[ BATTERY PAIN PLAZA TOJ:•NONC OII-WT-620••9]1 i[[t•u: zex•9aa•s.91 Ncw YOIa K, NY 10004-1390 T[~[••:. oll-.=71-e]e-wen e9s E.eT Maw 5*N[R NYC W TeC~TYNK[ w2 $T-wrON0. CT 0690.-6780 T[1.[NYONCI 212• BSB• 1000 8-1000 ewYSS[[[. Blwww T[[c.NOwcl [or][e-x]oo Tne•.x: zlz•ese-ISOO TuvXON[: grx2x-2ao•nsz T[1[1µ:20]-966.9226 T[L[K: e2B5t W INSTIM ~Y' OII.2f2.2]e•0288 125 WgITN AM[MY[ t•7, Ai.60 ~•ewOw[ Pqr OCwOy ?Z ]3.00 ,rMIwN}YY, TOKro 106. JYAN TLLpXON[: eel•t6t-729> 1-~[MqN[: OII't1x•3sa>•9JO0 T[1[l1K: 591-933-6>26 T[lLil1R: 0[-01x•]137.9261 Apri126, 1999 y006 An6 henw IIIYIMe Tenn CRIYMx R.z• ] 6.NO[N NC[O~ CcwTlul MOM[ KOMO TO[•w011l:OY•6R'x[x0- 7.00 The Honorable Steven K. Yarnashiro, ' ~ RECEIVED " Mayor T6^B--------- - - , gy- ~s-:.. Date-.----~unty CouncU Hartry A. Takahashi, - - Director of Finance County of Hawaii 25 Aupuni Street Hilo, HI 96720 Deaz Mr. Mayor: We are writing at the suggestion of Frank Manalili, in order to clarify the circumstances under which the County could issue its refunding bonds (the "Mew Bonds' in an amount sufficient to refund the County's Series 1978 Refunding Bonds, without regard to amounts (approximately $8.7 million) currently bald in a sinking fiord for the 1978 Refunding Bonds. To give the County maximum flexibility, we have investigated a variety of financing structures. Tn that effort we have uncovered an approach that minimizes Federal tax restrictions, under the new arbitrage regulations, also wnsidering the effect on state law provisions regarding the use of certain sinking funds. I. Arbitrage Restrictions Under Federai tax law it is possible to issue an amount sufficient to refund the 1978 Rcfilnding Bonds. The sinking fiord could then be transferred to a special (sub) account of the County's Gencrsl Fund,. However, three kinds of Federal tax restrictions would be imposed. A, Vietd and FXtxnditt±Tc RoStriations Until expended, moneys in this special account would have to be invested intax-exempt investrents or in investments not having a higher yield than the yield on the New Bonds. These moneys can be expended for any governmental purpose of the County. Records of expenditures would have to be maintained, and the County's method of accounting for these amounts would have to be consistent with the handling of its other funds. Even so, these funds could be Comm. No. ' ~ ~ •S File No. F N ~ ~~>'N 63(38863.01 Presented C-OJ1J4~ ' Ref. To: - Iief• Date MAY 5 19~ RPR 26 '99 2113 FR WINTHROP STiM50N NY 212 rs5u i~ea iu ~~IYJJH,JGJIJmL,Wl April 26, 1999 expended before other available funds. The County would be permitted, in effect, trace its expenditures to the particular source of funds. B. Mandatory Early Redemption of the New Bonds More significant, the arbitrage regulations impose a new restriction on the maximum term of the New Bonds. Subject to confirmation the 1978 Refunding Bonds may already have been outstanding for more than ] 20 percent of the average of the useful economic lives of the capital assets funded by the bonds which, in rum, were refunded by the 1978 Refueling Bonds. (The County may wish to investigate whather the capital projects refinanced by the 1978 Refunding Bonds actually have longer economic lives;;~n which case the following restriction could, is part, be relaxed.) This new restriction is not.directly applicable to the 1978 Refunding Bonds but would become applicable to any bonds issued at this time. The IRS can now assert under the new azbitrage regulations, that since the New Bonds will be outstanding longer than necessary for their ostensible purposes. As a result, "excess" amounts that the County, from time to time, had on hand would give rise to "other replacement proceeds." These amounts, in rum, would be subject to costly restrictions. That outcome can be avoided only in limited circumstances. First, the County would have to be prepared to acknowledge that the New Bonds are necessary to restructure debt ~ service, in order to mitigate conditions of impending financial distress. The County must support this assertion by convincingly eataneratit?g the causes of its financial distress. 1 1 ~ ~ ~ ' Y Furthermore, the New Bonds must provide for an early redemption provision allowing ~ bonds to be retired whenever the County has on hand excess "available amounts". Far this purpose; the County could still keep on baud the lr~sssr of (1) the amount it maintained as a working capital reserve in its fiscal year ("FY") 1498 or (2) five percent of its operating expenditures in the previous fiscal year. 'T'hus, for example, use of the sinlting fund in FY 1999 cannot result in an increase in the ~ , County's working capital reserve for FY 1999, over that of FY 1998; nor may it result in a reserve exceeding five percent of its FY 1998 operating expenditures. This test triust be applied at least on an annual basis and, whenever excess amounts are determ3ued to be on hand, the excess must be used prol[tgtly tq retit'e bonds. The Counry's assistance will be accessary in identifying funds which must be treated as "available" in the above calculation. This is particularly true with regard to special fiords, such as the enterprise funds, which may or may not be considered available, depending on the circumstances in which such funds could be used to pay operating expenses. For purposes of that effort, we set forth here the general rule. As a general rule, whether amounts must be treated as "available" depends Qnl the county's legal rehttionship.tp.those fiords. Nomlally, amounts are available if they may be used by the County for operating expenses, without legislative or judicial action and without a legislative, judicial or contractual requirement that those amounts be reimbursed. Thus, for example, grants for non-working capital purposes would not be available; neither would the proceeds of bonds issued to fiord capital projects. z 63138867.01 HI'K Lb "77 G1~13 hK Wlfv 114cur 71 uuuly rv~ cic April 26, 1999 C. No Advance Refundine 1 If the sinking fund moneys are not to be used to discharge the 1978 Refunding Bonds, the New Bonds must be delivered not more than 90 days before the 1978 Refunding Bonds aze to be retired. In this way, the New Bonds are not considered to be advance refundulg bonds, so they would not become subject to special "excess gross proceeds" rules which could be difficult to satisfy given the sinking fund moneys. - IL lusion Please consider whether the above restrictions and requirements ate acceptable to the County- in that effort you may want to consult investment bankers, in order to estimate the cost m of an early redemption provision of this type contemplated in I B, above. VJe look forward to discussing these matters with you further. Sincerely, ''~'c.~l Craig scull Jo ce: Frank Manalili Treasury, Couaty of Hawaii 3 63138863.01 TOTHL PRGE.04