The city of Springfield is switching the bank that backs the variable rate revenue bonds issued through its Land Clearance Redevelopment Authority.
The Bank of Kansas City will back the bonds starting in fiscal 2012, which begins July 1. Bank of America previously served as the liquidity provider on the original $7.95 million in bonds issued in 2003. Financial institutions serve as liquidity providers to bondholders so that in the event holders cannot find a buyer, the institutions will purchase the bonds in accordance with a pre-determined agreement.
The move, approved by City Council April 18, will cost JQH Hotels Inc., which funded improvements to its University Plaza Hotel and Convention Center through the LCRA-issued bonds, approximately $85,000 per year, according to Mary Mannix Decker, director of the city’s finance department.
Decker said Bank of America notified city officials that it would not be in the running to purchase the bonds should bondholders want to sell. Bank of America’s Standby Purchase Agreement ends July 1.
Decker compared the arrangement between the LCRA and JQH Hotels to a co-signing of a mortgage.
“We’re essentially lending our credit to back the bonds,” Decker said, adding that Hammons Hotels is responsible for all bond payments, which the company makes twice a year.
Decker said the Bank of Kansas City was the only financial institution to step forward with an offer after proposal requests were issued March 28.
“Bank of America said it would not be rebidding. There just aren’t as many banks willing to back these types of bonds as there were three or four years ago,” Decker said.
Council unanimously approved the resolution that cemented the terms of the agreement, which includes an upfront fee of .125 percent of the principal and a jump in its annual interest rate to 1.7 percent from .025 percent. The Bank of Kansas City, a subsidiary of the Bank of Oklahoma, has agreed to back the current $5.6 million worth of bonds for three years.
“We feel that is a competitive rate considering the market we’re in now,” Decker said of the interest rate. Decker and the city’s financial adviser, Oppenheimer & Co. Inc., reviewed the terms of the deal.
Before the vote, Councilman Doug Burlison asked Decker under what scenario the variable-rate revenue bonds could be moved to flat-rate bonds.
Decker said flat-rate revenue bonds are currently selling for about 7 percent to 7.5 percent, and if the gap between the two continues to narrow, the city might consider making a switch in future arrangements.
Decker said the bonds are available for sale once a week and that it would be unusual to be unable to find a buyer. However, without the backing of institutions such as Bank of Kansas City, the city would have to have the money upfront to purchase the bonds outright should bondholders decide to sell.
She said interest rates on such bonds vary by the London Interbank Offered Rate, and there is no ceiling or floor for the variable rate in the new agreement.
“Over the past year (LIBOR) has been very stable, but we did experience some sharp increases in 2008,” Decker noted.
The daily LIBOR is based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market. According to information provided to council by Bank of Kansas City, the interest rate, which includes the variable rate and the backing-agreement rate, was at 3 percent as of April 7.
A call to JQH Hotel’s financing department for comment referred questions to its attorney, Justin Harris, who did not return calls for comment by deadline.
Pension on the mend At the April 19 council luncheon, Ken Homan, chairman of the Police and Fire Pension Fund Board of Trustees, told council members the once-ailing pension plan is on the mend, due to a revenue infusion from a dedicated sales tax, higher than expected investment returns and other changes to the plan.
The plan’s funded ratio is now about 54 percent, up from a low point of 29 percent in 2009. Net assets of the plan totaled more than $177 million as of Feb. 28, up from a low of $90 million in February 2009.
“Part of it is more than $24 million in telecom settlements that the city has earmarked into the fund,” Homan said after the meeting. “The city increased its contributions as a percent of public safety employee salary to a high point of 53 percent of salary in this past year and continue to be committed to 35 percent of salaries – and that’s high compared to other pension plans.”
As the city continues to steer general-fund revenue into the pension fund, Police and Fire employees hired before July 2006 have increased the amount they pay into the now-closed plan.
Homan said the three-quarter-cent pension sales tax brings in roughly $2.2 million each month.
Investment returns continue to be stronger than expected – above the pension board’s target of 7.5 percent. Returns in 2010 topped 11 percent and were above 20 percent June 30–March 31. Homan attributed the fund’s international equity investments, which are up roughly 30 percent in the last year, as part of the reason for the funds’ performance.[[In-content Ad]]
