December 19, 1996

The State Finance Committee met in special meeting after notice duly given to the press and radio of Thurston County.

Present:

Daniel K Grimm, State Treasurer Mike Lowry, Governor

Also Present:

Robert J. Fallis, Attorney General’s Office Dean Torkelson, Seattle Northwest Securities Doug Breckel, University of Washington Ellen L. Evans, Seattle Northwest Securities Darlene DeRose, P.G. Corbin & Company Patricia Richards, Office of the State Treasurer Tim Kerr, Office of the State Treasurer Scott Sheeran, Office of the State Treasurer Martin Reynoso, Office of the State Treasurer Mike Clarey, Office of the State Treasurer Lynn Rodeheaver, Office of the State Treasurer Steve Beacon, Office of the State Treasurer Kay L. King, Office of the State Treasurer Jerry Bobo, Smith Barney Svein Braseth, Office of the State Treasurer John L. Bernhard, State Department of Transportation Ann Daley, Office of the State Treasurer Lynn Hallock, Office of Financial Management George Mack, Foster Pepper & Sheffelman Vicki Cox, Office of State Treasurer

The Chairman called the Public Deposit Protection Commission to order.  Following adjournment of the PDPC, the State Finance Committee was called to order.  The Chairman stated the first order of business for the State Finance Committee was adoption of the minutes of the December 5, 1996, meeting.

Governor Lowry moved that the minutes for the meeting of December 5, 1996, be approved.  Chairman Grimm seconded the motion.  The motion passed and the minutes were adopted.

Mr. Sheeran spoke to proposed Resolution No. 854.  He noted that Resolution No. 854 was an offering of $81,315,000 State of Washington General Obligation Refunding Bonds, Series R-97A (State Convention and Trade Center Zero Coupon Bonds).  He explained that the refunding is a restructuring undertaken to improve the Convention Center’s cash flow during the construction and coming on-line period of the expansion project.  The Series R-97A Refunding Bonds modify the debt service requirements of $33,900,000 State of Washington General Obligation Bonds, Convention and Trade Center, Series At-5.  The bonds were brought to market on December 18th with a true interest cost of 5.88%.  The underwriting team, led by Smith Barney, marketed the Series R-97A bonds consisting of five maturities between 2016 and 2020.

Mr. Torkelson described his written summary of the results of the restructuring.  He stated the restructured debt true interest cost was 6.87%.  Governor Lowry asked why the Convention Center needed debt restructuring.  Mr. Torkelson responded that the Convention Center cash flow projections indicated greater facility for repayment in future years than in the current period.  Mr. Torkelson also noted that COPs carry a higher interest cost than bonds, and that this difference is greater the longer the maturity.  Therefore, the resulting debt structure would have an overall economic benefit by having more COP debt short-term and the bond debt long-term.  Mr. Sheeran stated that Smith Barney had provided a good faith check securing that firm’s performance.

Mr. Sheeran presented proposed Resolution No. 854 to the committee.

Resolution No. 854  accepting an offer to purchase $81,315,000, State of Washington General Obligation Refunding Bonds, Series R-97A (State Convention and Trade Center Zero Coupon Bonds) authorized by Chapter 39.42 RCW and Resolution No. 844 of the State Finance Committee and authorizing the execution of a bond purchase contract.

Governor Lowry moved the adoption of Resolution No. 854.  Chairman Grimm seconded the motion and the resolution was adopted.  Chairman Grimm thanked Smith Barney, staff, financial advisers, bankers and the bond counsel for their efforts in this transaction.

Mr. Sheeran told the committee members there was a copy of a memo in their folders that was sent to the Chairman of the Convention Center, Mr. Jim Ellis, regarding the timing of the financial proposal for the expansion project.  He explained that due to the complexity of the transactions and the substantial amount of documentation, the best date to present a resolution to the committee is January 7, 1997.  Mr. Sheeran said he expected notification shortly from Seafirst Bank regarding their interest as lender under a master financing contract.  He stated the different options had been discussed at the previous committee meeting and those discussions were included in the minutes.  Mr. Sheeran further stated that at the request of the Chairman, Treasurer’s staff had met with the Governor’s, House and Senate staff, Attorney’s General representative, Cynthia Weed, and Susan Musselman to explain what action had preceded and what alternatives were available.  He stated there was tremendous support from these parties to pursue the financing alternatives.

Mr. Kerr introduced Doug Breckel, Associate Treasurer of the University of Washington, Ellen Evans, Seattle Northwest Securities, financial advisor to the University of Washington, and Darlene DeRose, P.G. Corbin, co-financial advisor to the committee.  He explained the proposed University of Washington interest rate swap transactions (or “payment agreements”) as being an exchange of interest payment obligations, one fixed and one variable, between two parties.  A swap has no impact on the underlying debt.  Under state law, interest rate swaps may only be used to reduce issuer exposure to interest rate changes, reduce the net cost of borrowing, or to increase the net return on investments.  Mr. Kerr emphasized that the swap payments reflect fixed or variable interest payments only.  No principal is exchanged in these transactions.  A notional amount is used to compute the fixed and variable payments.

Mr. Kerr continued by stating that the University of Washington is proposing to use the interest rate swap tool as part of a program to finance the Harborview Medical Center’s share of the acquisition of a network of primary health care clinics.  The network is being established through a cooperative arrangement involving the University of Washington, Harborview Medical Center, and the University Physician Practice Plan.  Network financing is proposed to be done through a taxable variable rate line of credit from Seafirst Bank to the University.  The University has requested the authorization to execute swaps from time to time to convert the variable rate financing into a fixed rate, if deemed appropriate and if such swaps meet certain stated conditions.

State law sets forth a series of conditions which must be met prior to the execution of a swap agreement.  Seattle-Northwest Securities Corporation, acting as financial advisor to the University, has developed a compliance checklist of these items for the current proposal which is included in member packets.  In summary, the checklist items are:

• A resolution finding that the swap reduces interest rate exposure, reduces net cost of borrowing, or increases net return on investments.
• A counterparty selection process that has been undertaken in compliance with the law.
• A certification of “commercial reasonableness” that will be made by the financial advisor at or prior to execution of a swap.
• A provision relating to the credit rating of the counterparty and collateralization requirements in the event of a lowered counterparty credit rating.
• A requirement that the notional amount and term of the swap does not exceed the principal amount and term of the underlying debt.

In addition to these checklist items, swap transactions will be subject to approval of the UW Board of Regents under the proposed resolution.  Under the swap legislation, the State Finance Committee is the body charged with approving transactions for any state institution of higher education.  The University has requested that the Committee adopt proposed Resolution No. 852 authorizing the University to enter into payment agreements in conjunction with its line of credit.

Mr. Kerr also noted that the University was still in the process of verifying that it had the authority to contract the underlying debt.  Mr. Breckel of the University noted that an Attorney General opinion to that effect was expected within the next couple of weeks.

Chairman Grimm questioned the need to authorize the extension of swap transactions prior to final determination of whether the University had borrowing authority.  After discussing the unresolved issues, Chairman Grimm deferred action on proposed Resolution No. 852 until the January 7th committee meeting.

There being nothing further to come before the committee, the meeting was adjourned at 9:07 AM.

	STATE FINANCE COMMITTEE STATE OF WASHINGTON   _______________________________________ Daniel K Grimm, State Treasurer & Chairman   ________________________________________ Mike Lowry, Governor   ________________________________________ Joel Pritchard, Lieutenant Governor
________________________________________ N. Scott Sheeran Deputy State Treasurer & Recording Officer