Minutes 08/12/1980 - Laserfiche WebLink

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Many "cases" have been posed in the past for analysis, using different sets of future assumptions as to the variables. There follows a discussion of certain terms or concepts necessary to understand all these cases and the remarkable range of results. Interest Rates - When bonds are sold they bear a stated interest rate, payable along with principal within an amortization schedule. Past case studies assume a single sale of bonds and the same interest rate on the entire bond issue. Reserve Fund - A certain amount of the proceeds of a bond sale must be held in reserve, as a guarantee to the bond holders, for the life of the issue. The amount of the reserve is generally related to the average annual amount of debt service. Arbitrage - Municipal bonds are tax-free and ordinarily sell at interest rates lower than taxable corporate bonds. Proceeds from municipal bond sales that are not immediately expended (such as . the Reserve Fund or which are idle during the construction process) can, therefore, be invested short-term and produce a ~'profitH. Arbitrage is the difference between the interest we must pay on borrowed funds and the interest we may earn on those same funds. Arbitrage can be positive or negative, but historically it has been positive, by as much as 2%. It is currently negative; but, which- ever it is, arbitrage can be a critical factor in financing a large public works project. Net Construction Cost - With the profitable benefit of positive arbitrage, it is possible to actually borrow less money than is necessary to pay the cost of a construction project; and the amount to be borrowed is described in these terms. Cost of Purchased Power - This refers to the wholesale cost to the City of buying power (demand charges) from APCo. Feasibility of the Ridgeway Project can only be expressed as a reflection of projections about APCo's wholesale rates, begin- ning in 1985. It is basically necessary to assume that the Ridgeway Project will produce power at an appreciably lower cost. The first Beck projections of APCo's 1985 demand charge was $129/kw, countered by the Select Committee's more conser- vative estimate of $100/kw. Beck's current estimate is a compromise of $118/kw. Inflation Rate - All other economic factors involved in the project (and attempts to analyze its feasibility) are very sensitive to the country's overall future rate of inflation. Ramped Capitalized Interest - This is a financing approach that could eliminate the short-term deficits predicted by various case studies. It is simply a mattcr of selling additional bonds, using the proceeds to cover the deficits and thus deferring them until the latter years of the amortization schedule, when the project will be more profitable. This is not an unusual practice, according to the financial advisors, and is acceptable to bond undcrwriters. -9-