Innovations in variable-rate financing for local governments in Florida.

• Author: Inzer, Robert B.
• Position: Award for Excellence

A local government financing pool in Florida has recruited the state pension funds for liquidity guarantees and developed innovative bond insurance agreements to support its variable-rate borrowing programs.

Editor's note: Each year the Government Finance Officers Association bestows its prestigious Award for Excellence to recognize outstanding contributions in the field of government finance. The awards stress practical documented work that offers leadership to the profession and promotes improved public finance. This article describes the 1994 winning entry in the policies and procedures subcategory of the capital financing and debt administration category.

The Sunshine State Governmental Financing Commission (the "commission") created in November 1985, through interlocal agreements between the Cities of Orlando and Tallahassee, was established to enable a limited number of Florida's governmental units with similar credit worthiness and high investment grade credit ratings to benefit from the economies of scale associated with large financings and to assist them in the development and structuring of financial programs and activities.

The commission consists of a representative of each participating local government. Commission members elect a board of directors from among the appointed representatives to administer the approved programs. There are no employees of the commission. The organization's staffing is provided by member representatives or by contracting for certain professional activities. Commission costs are borne by the borrowers, based upon the size of their outstanding loan.

In structuring the issuance of its bonds and local government loan program, the commission established the following goals and objectives.

* To provide local governments with the opportunity to finance capital projects at the most favorable short-term variable rates available in the tax-exempt market.

* To reduce overhead costs by sharing fixed issuance expenses, such as those for bond counsel, financial advisor, remarketing agents and administration.

* To make available an additional financing alternative which local governments may consider when entering the credit markets.

* To provide a secure, credit-enhanced program without cross indemnification by one participant for the principal and interest obligations of other participants.

* To simplify the process of raising capital by allowing participants to secure funds without the cost and time associated with arranging individual tax-exempt financing.

* To provide local governments access to the variable rate markets when individually the borrowings might not be of sufficient size to access these markets.

The Variable-rate Program

In July 1986, the commission sold $300 million of variable-rate put revenue bonds. In November 1986, the proceeds were made available for loans to qualified units of local government to finance or refinance capital projects. Within 18 months of issuance of the bonds, nearly all of the proceeds were fully committed. The participants in the original program were the Cities of Tallahassee, Orlando, Miami, Coral Gables and Vero Beach, as well as Dade County, Palm Beach County and Polk County. All of this 1986 issue is still outstanding.

In 1992, as the commission began development of a second variable-rate program, it examined the various financing instruments available to fund its programs. It determined that commercial paper was the lowest cost alternative and provided the most flexibility in increasing or decreasing the amount of debt outstanding. There were several problems, however, that would need to be addressed before the commission could meet all of its goals.

The most significant problem was finding a low-cost credit enhancer and liquidity provider. Historically, both of these functions had been met through a letter of credit (LOC) issued by a major money center bank with a AA or AAA credit rating. Due to the decline in the number of providers, the cost for an LOC on a pooled program had escalated to between .5 percent and 1 percent annually. In late 1993's low interest rate environment for tax-exempt commercial paper (2 percent to 3 percent), the additional cost of an LOC made the rate to the borrower generally noncompetitive with other short-term fixed rate alternatives.

The commission sought to separate the liquidity provider from the credit enhancer and, in so doing, expand the universe of potential liquidity and credit providers. Through a...