Staff: R. Erb, K. West, D. Squires, A. Cole, W. Skinner, M. Pottorff
Board Members: N. Schuler, D. Kiefer
Guests: Frank Oh, Vice President of Paine Webber Municipal Securities
Mr. Joseph called the meeting to order at 9 a.m. and introduced Frank Oh of Paine Webber Incorporated.
Presentation on the Securitization of Tobacco Settlement Payments
Mr. Oh said Paine Webber is going around to different counties who are now examining cash flows and risks associated with proceeds from the tobacco settlement. Paine Webber is recommending that counties eliminate the risk involved by laying that off onto bond holders and securitizing the future cash flows by getting the money up front. Paine Webber is the number one ranked firm in New York State and the number two ranked investment firm nationally. They are one of only a few firms that have put together a securitization structure.
Mr. Oh distributed a copy of the materials that outlined his presentation. He said securitization is similar to lottery payments in that a choice can be made to get one lump sum rather than payments spread over of a period of time. In deciding to securitize or not a county needs to think about where the money is going to be spent. It is expected that these funds would be allocated to municipal projects so that the bonds are tax exempt when they are issued. Other counties have set up a local development corporation (which only takes a vote of the majority of the legislature to enact), and then sells their receivables to that corporation. This structure is important because it decreases the risk for future decreases in the settlement. He said if Tompkins County decides to securitize its payments it will be a negotiation process between the marketplace and the County. He explained the local development corporation is only set up for the County to transfer its rights to the peak of cash flows. The county sells the bonds and the local development corporation gets the money and transfers it back to the county.
Transactions that have been completed to date all have a flexible amortizing bond structure. Paine Webber does not agree with this and is recommending a different structure that they feel will allow all investors to participate. Flexible amoritization means rated maturity versus planned principal and the reason this was done was to make sure there was enough in cash flows to pay off the bonds. Because payments are likely to vary from year to year, if revenues were insufficient to make the first debt service payment, they would have a claim on future years of revenue.
Mr. Oh described a U.S. map displaying states and the status of various securitization efforts. In New York State the counties of Weschester, Nassau, and New York City have already completed securitization, while there are proposals to securitize in Erie and Monroe counties.
Mr. Joseph referred to planned vs. maturity and said the way he understood that is that if the county plans for the bonds to mature in 2000 and if the payments are lower than they were expected to be and there is not enough money, the County would keep paying until 2006 until it is paid off. He said by doing this it provides more security to the investor. He asked if Paine Webber is not doing this, are they doing something else to provide that level of security. Mr. Oh said they recommend a slightly different approach to maximize the amount to investors in securitization. Mr. Joseph said while there is discussion about selling the rights to place the risk on someone else, this kind of arrangement limits the risk to the investor and puts the risk back on a county.
Mr. Joseph explained coverage rate means that we have a stream of projected revenues and we are not securitizing the entire thing, but a portion of it and whatever the county first receives must go towards paying off the bonds. The bonds would get paid off unless the revenues fall short of the projection. He said if the revenues fall short, the county assumes that loss and therefore, have not sold any risk. Mr. Oh said that is why they recommend that a county sell its residuals as well.
Mr. Oh said Paine Webber recommends that counties create a local development corporation and that corporation would sell bonds to a master trust (multi-county) where all of the bonds would get pulled together. He said this way if bondholders don't get paid they cannot come back through the local development corporation to the County.
Mr. Oh explained Paine Webber's proposed tobacco securitization bond structure, including payments that would be used for debt services and payments used for debt service coverage (residuals). He said Tompkins County would be receiving approximately $17,000,000 up front that can be invested at 6.5 percent (cost of the bonds) and would equate to $39,000,000. Mr. Joseph noted that 6.5 percent is Paine Webber's estimate of what the bonds would sell at. Mr. Squires said the County now pays approximately 5.5 percent for 20-year bonds.
Paine Webber's proposed tobacco securitization bond structure utilizes both the ABS (Amoritized Bond Structure) and the tradional "tax-exempt" bond technology to maximize investor participation in the offering. Mr. Joseph said he feels Tompkins County would still be keeping the risk because on page 15 of the handout it shows that if Tompkins County were to securitize, it would get receive $17 million up front; and what we have sold is column two ($39,040,242). He said if revenues come in as expected, the County will get its $17 million up front and will also get annual payments of column three (residual amounts). Mr. Joseph said if payments go down, the County would assume the loss first. He said the bondholder will get paid regardless of whether it is the year they should get paid in or not. Mr. Joseph said he is concerned that if the money does not come in as planned, our regular annual payments will begin moving farther into the future; this is a risk to the County and not the bondholder.
Mr. Proto said Paine Webber is the first investment group that has approached the County and asked why the County should accept their offer as opposed to anyone else who may come forward with an offer. Mr. Oh spoke of Paine Webber’s national distribution capabilities and said they are ranked as the number two firm nationally for the first quarter of 2000 and the number one firm ranked in New York State. He said they are one of the few firms that have put together a pool structure and have been working with various bond counsels and attorneys.
Mr. Erb said the two firms that have indicated interest in working with small to mid-size counties are Paine Webber and First Albany. He said it is still unclear what NYSAC’s role in this is but they are suppose to be coming forward with a proposal for counties. When asked what kind of time frame counties are faced with, Mr. Oh said his company would like counties to make a decision by September.
Following Mr. Oh’s presentation, committee members were given the opportunity to ask questions and discuss the information presented. Discussion topics included the County’s bond rating and the interest rate being offered, what risk would be assumed and by who, and spending these revenues on capital projects versus ongoing operating expenses.
The following resolution was MOVED by Ms. Davis and seconded by Mr. Penniman:
Mr. Joseph said this resolution approves a temporary target increase for the Contingent Fund for 2001. It would be set aside so that departments and agencies can ask for it and they don’t have to have their request in by budget-time this year and can submit their request at some point during 2001.
Mr. Proto said by doing this the Board would be making a commitment before the budget process begins to set aside money for a specific purpose. His concern is that although in writing it would say it is for a specific period of time, the Board does not have a history of discontinuing programs. Mr. Joseph agreed and said he does not feel the intention would be for one-time. He sees the intention of this resolution is to say that twenty percent of the money is going to spent on health-related items, and that money is being put into the Contingent Fund to give departments and agencies some extra time to ask for it. He said there is certainly the possibility and probability that a program would come in and apply for money that is expected to continue the following year.
Ms. Davis spoke in support of the resolution and said programs that have been created on a temporary basis have ended in a timely manner. She said this resolution only minimally goes toward what she wanted it to.
Mr. Todd said he cannot support this resolution because it is a deviation from the normal budget process when everything is looked at at the same time. He thinks tobacco revenues should be applyied towards debt service.
Mr. Penniman thinks it makes sense to do this on a one-time basis, provided there is an opportunity to review a program after one year.
Mr. Joseph said he does not support having separate pots of money and that he will only support a program based on its individual merits. He feels this should be part of the full budget process
Mr. Proto said he will support legitimate health-related proposals. He noted that although some members cannot support this resolution, it does not mean they are opposed to health care. He said the Board has fought very hard to keep and maintain various health-related programs. He feels the Board should be using the Health Planning Council and the County Administrator to develop criteria to evaluate proposals.
A voice vote on the resolution resulted as follows: Ayes – 2 (Davis and Penniman); Noes – 3 (Joseph, Proto, and Todd). MOTION FAILED.
County Administrator’s Report
Mr. Erb said attached to the agenda packet are capital budget scenarios that he and Ms. West prepared. The Committee briefly reviewed the scenarios with various ways of applying tobacco revenues.
Approval of Minutes of March 16, 2000
It was MOVED by Ms. Davis, seconded by Mr. Todd, and unanimously adopted by voice vote to approve the minutes of March 16, 2000.
The meeting adjourned at 11:20 a.m.
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