|
ADMINISTRATIVE
COMMITTEE |
||||
|
|
||||
|
6. |
CONSIDER APPROVAL TO SECURE A $2 MILLION LINE OF CREDIT TO FUND
DEVELOPMENT OF WATER SUPPLY PROJECTS |
|||
|
|
||||
|
Meeting
Date: |
August 12, 2008 |
Budgeted: |
No |
|
|
|
||||
|
From: |
|
Program/ |
N/A |
|
|
|
General
Manager |
Line Item No.: |
||
|
|
||||
|
Prepared
By: |
|
Cost Estimate: |
$5,000 |
|
General Counsel Approval: Yes |
||||
Committee Recommendation: On May 13, 2008, Committee recommended staff proceed and submit to the Board for consideration when more information was available. |
||||
|
CEQA Compliance: N/A |
||||
SUMMARY: In
response to a request from Director Brower and concurrence by the Administrative
Committee and the Board of Directors that the District secure a $2 million line
of credit, District staff has been working with several area banks to secure
proposals for the line of credit. Bank
of America (BofA) and First National Bank of Central California (FNB) have
reviewed the last three years of the District’s audited financial statements
and have submitted proposed terms and conditions to furnish a line of credit to
the District. In discussions with staff,
Rabobank had originally expressed interest in furnishing a line of credit and
was expected to submit a proposal.
However, on August 6, 2008, a bank representative informed staff that
they would not be able to submit a proposal at this time. No specific reason was given.
The proposed terms and conditions submitted by BofA and FNB are
summarized on the attached Comparison of Proposals to Provide Letter of Credit
(Exhibit 6-A). While the terms and conditions are quite
similar, the major difference is that BofA proposes a variable interest rate
based on the Wall Street Prime Rate (Prime Rate) minus 0.75%, while FNB
proposes that the variable rate be based on the Prime Rate with no margin. Using the current Prime Rate for comparison
purposes, the interest rates proposed would be 4.75% for BofA and 5.00% for
FNB. Based on these rates, the interest
for one year on an outstanding balance of $2 million would be about $15,000
less at BofA. FNB has also proposed a
fixed rate option based on the London Interbank Offered Rate (LIBOR), a common benchmark interest rate index used to make
adjustments to adjustable rate mortgages, plus a 2.5% margin. However,
advances would have to be in increments of $250,000 or more and would have
maturities of only one, three or six months.
For comparison purposes, the one, three and six month LIBOR rates
plus the 2.5% margin are currently 4.96%, 5.30% and 5.61%, respectfully. BofA
has proposed a $2.5 million line of credit, but has indicated the terms would
be the same if the District wished to keep the limit at $2 million. While no actual fees are proposed by either
bank, each has indicated that they charge out-of-pocket expenses, such as
attorney’s fees to review documents, at actual cost. While the costs are unknown, it is estimated
that they would not exceed $5,000 and will probably be less. Each bank has stated that their final
commitment to provide the line of credit will be contingent on the District
meeting certain conditions and providing additional information, such as its
authority to enter into this type of transaction. Both banks have also indicated that the line
of credit would require the District to maintain its primary operating accounts
at that bank. The District’s primary
accounts are currently at BofA.
RECOMMENDATION: District staff recommends that the Board authorize staff to proceed to establish a $2 million line of credit with Bank of America at a variable rate based on the Wall Street Prime Rate less 0.75%, and with out-of-pocket costs not to exceed $5,000. Alternatively, the Board could direct staff to establish the line of credit for $2.5 million.
BACKGROUND: Director
Brower has requested that the Board direct staff to secure a $2 million line of
credit to fund potential startup costs of a water supply project. The amount borrowed via the line of credit
would be repaid from either an increased user fee, a portion of debt issuance
proceeds for the project, other revenue increases or a combination of these
sources. The Administrative
Committee reviewed this item at its May 13, 2008 meeting and recommended
approval for staff to proceed. The
Committee further recommended that when more information is available, staff
should bring this matter back to the Board for final approval at a future
meeting. At its May 19, 2008 meeting,
the Board of Directors concurred with
the Committee’s recommendation. At the
July 21, 2008 Board meeting, staff presented an update and reported that a
final recommendation would be given to the Board at its August 18, 2008 meeting.
6-A Comparison of Proposals to Provide Letter of Credit
U:\staff\word\committees\Admin\2008\20080812\06\item6.doc