DATE: December 7, 2016
TO: Board of Mayor and Aldermen
FROM: Eric Stuckey, City Administrator
Russ Truell, Assistant City Administrator
SUBJECT:
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*Consideration of Resolution 2016-93, an Amended and Restated Resolution Authorizing the Issuance, Sale and Payment of up to $12,000,000 in Aggregate Principal Amount of Water and Sewer System Revenue Bonds of the City of Franklin, Tennessee and Making Provision for the Operation of the Municipality and the Collection and Disposition of its Revenues
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Purpose
The purpose of this memo is to provide information to the Franklin Board of Mayor and Aldermen (BOMA) concerning certain changes to the previously adopted Resolution 2016-85.
Background
As a result of the action of the Tennessee Local Development Authority (TLDA) regarding policies on subordination and parity with State Revolving Loans, and after discussion with our financial advisory firm, Public Financial Management (PFM), we have reviewed the adopted resolution and the rating criteria for the pending revenue bond issue. Two changes are proposed:
1) Adjust the Additional Bonds Test to match the rate covenant at 1.25X.
2) After further review of the Section on Reserve Requirements, we would like to remove the springing reserve concept within the definition and in any other reference within the Resolution. Our suggestion is based on a concern that the springing reserve could be onerous in the future and may negatively impact the w/s fund and the credit. In the event net revenues are not producing 1.25, then the issuer will be forced to raise rates due to a rate covenant default. If this credit also has to fund a reserve, it will require additional funds be raised or diverted from Operations &Maintenance at a time when resources are already limited. We do believe it is in the best interest of the City to evaluate a reserve requirement or a springing reserve for each bond issue; however, based on what we know today, the springing reserve would not be advisable for the 2016 Bonds.
“Reserve Fund Requirement” means an amount determined from time to time by the Municipality as a reasonable reserve, if any, for the payment of principal of and interest on a series of Bonds pursuant to the resolution authorizing such Bonds. With respect to the Series 2016 Bonds authorized herein, there shall be no Reserve Fund Requirement until such time as the Municipality shall have failed, for two consecutive Fiscal Years, to produce Net Revenues sufficient to satisfy the rate covenant test set forth in Section 13(e), but assuming solely for this purpose that the 125% coverage requirement of Section 13(e)(2)(a) is instead read as a 150% coverage requirement. At such time and from time to time thereafter, the Reserve Fund Requirement with respect to the Series 2016 Bonds shall be the least of (a) 10% of the original stated principal amount of the Series 2016 Bonds; (b) the remaining Maximum Annual Debt Service Requirement on the Series 2016 Bonds, on a Fiscal Year basis; or (c) 125% of the remaining average Debt Service Requirement on the Series 2016 Bonds, on a Fiscal Year basis; and shall be funded as set forth in Section 12(b)(4) hereof.
Bond counsel and Finance Department staff have reviewed these changes and are in agreement that they are in the best interest of the City’s Water Management department.
In addition to the above changes, all of the dates have been changed to 2017 in order to recognize that the process of completing the tasks necessary to obtain a separate rating for the Water Management System will result in the bonds being sold in January, 2017 instead of December, 2016.
Financial Impact
There is no direct and measureable financial impact. Reducing the additional bond test policy could have a slightly negative effect on future ratings, but that result is offset in large part by lessening the financial pressure on water and sewer rates which is beneficial to the system.
Recommendation
Staff recommends adopted the amended Resolution.