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ADMINISTRATIVE
COMMITTEE |
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9. |
DISCUSS RENEWAL OF THE DISTRICT’S $2.5
MILLION LINE OF CREDIT TO FUND DEVELOPMENT OF WATER SUPPLY PROJECTS |
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Meeting
Date: |
March 9, 2010 |
Budgeted: |
No |
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From: |
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Program/ |
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General
Manager |
Line Item No.: N/A |
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Prepared
By: |
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Cost Estimate: |
See Discussion |
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General Counsel Review: N/A |
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Committee Recommendation: N/A |
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CEQA Compliance: N/A |
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SUMMARY: Bank
of
RECOMMENDATION: Staff recommendation is pending receipt of additional information.
BACKGROUND: In October 2008, the District entered into a
Loan Agreement with BofA to establish a $2.5 million line of credit. The interest rate was equal to the bank’s
prime rate minus 0.75%. The line of
credit officially expired on January 31, 2010, but BofA has approved renewal
and extended the expiration date pending negotiation of new terms. The terms proposed by BofA for renewal of the
$2.5 million line of credit is an increase in the interest rate from the Bank’s prime
rate minus 0.75% to prime rate plus 0.25% and a renewal fee of 1% ($25,000) of
the amount of the line of credit. BofA
indicated that the proposed increases were due to changing economic conditions
and the fact that the District has utilized only a small portion of the line of
credit while the bank had to reserve the total amount for our use.
This matter was discussed at the
Chair/Vice-Chair meeting on February 26, 2010, and as directed by the Chair and
Vice-Chair the CFO began to gather information to get new proposals for the
District’s line of credit. Specifically,
as suggested by the Vice-Chair, the CFO had a discussion with Roland Pascua of
First National Bank (FNB). During that
discussion, the CFO indicated that the District might be looking to replace the
District’s current line of credit with BofA because of an increased interest
rate and renewal fee proposed by BofA.
After further discussion, he indicated that FNB would also charge a
similar fee in that situation and that he didn’t feel that the 1% was
unreasonable. While he indicated FNB
would likely be interested in providing a proposal for a line of credit, he
said that he would need to review the District’s latest audited financial
statements before doing so.
The CFO also contacted the BofA representative
and told him of the direction from the Chair and Vice-Chair. However, based on previous suggestions from
him on how to lower the costs, the CFO asked him how the bank could reduce the
renewal fee and/or interest rate if the amount of the credit line was reduced
and the District deposited additional funds with BofA. He has since offered to renew the line of
credit for $1.5 million with a fee of 0.5% ($7,500) or $1.0 million with a fee
of 0.5% ($5,000) at the Bank’s prime rate plus 0.25%. Additionally BofA has offered to open a new
money market account paying an initial rate of 0.65% and transfer funds from
the District’s current money market account (currently paying 0.33%) if the
District is willing to transfer an additional $500,000 from the Local Agency
Investment Fund (currently paying 0.60%) into the new account.
Based on the proposals received for the
current line of credit, if the District were to establish a new line of credit
with a different bank, we could expect to pay up to $5,000 in setup costs, and
the new bank would almost certainly require that we transfer all of our
operating and investment accounts from BofA, and possibly the State of California
Local Agency Investment Fund. That would
require a considerable effort from staff to set up new checking and money
market accounts, direct deposits of employee’s paychecks, etc., and the
District would incur additional costs for replacement check stock and other
bank related supplies. Also, as
indicated by Mr. Pascua of FNB, we would likely be back in the same situation
with the new bank if we did not substantially utilize the full amount of the
line of credit in the upcoming year.
U:\staff\word\committees\Admin\2010\20100309\09\item9.doc