Agenda Packets - 1983/11/28 - Laserfiche WebLink

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-z- Under a cash deteasance the amount of the surplus which would be available to the city would vary direct-ly with the rake of interest paid on the. investments. The greater the inturost rate the greater the amount of the surplus available to the City. It should be noted that under each option (waiting until the bonds are paid ott or undertaking a cash dufeasance) the oppor- U nity exists to fully cancell all future bonded debt tax levies. Projections of the fund's financial position indicate that if a defeasance is not undertaken the City still has the opportunity to cancoll all future tax levies and has done so for - the L904 budget year. There is an additional consideration in choosing between con- tinuing to make scheduled bond payments or undertaking a cash defeasance, on a theoretical basis the benefit to the City is the same given a constant rate of interest. If a cash defeasance was undurtakun the surplus available now is approximately equal to the surplus available when the final bond payment is made discounted for interest earned during periods bond payments were made. For example. if $10,000 were needed in 1993, S3,855.43 invested in 1983 at 10% interest compounded annually would be worth $10,000 in 1993, The difference is the time value of money. The prime reason for undertaking a cash defeasance is a need for the surplus which would be available as a consequence of the defeasance. If there is not an immediate need for the money a defeasance should nUC be Un(leCtdkell. TheBfs having funde bCit i1 immediately available for use rather than waiting until the bonds finally mature and then having surplus funds available. should the decision to undertake a defeasance be made the next consideration is: how soon is the anticipated surplus needed? If it is needed immediately the defeasanu- should Ibe undortanCr, a soon as possible. If the anticipated surplus is not needed immediately rate of return on investments becomes a considera- tion. High interest rates on investments purchased for defeas- ance allow the anticipated surplus to become larger. If rate of return is a primary consideration the City should seek to undertake a defeasance when interest rates are very high so as to maximize the anticipated surplus resulting from the defeas- ance. The greater the interest rate the greater the surplus. Each half of 18 increase in interest rates has the effect of increasing the anticipated surplus resulting from defeasance by $50,000. is