February 10, 1999

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

Present:

Michael J. Murphy, State Treasurer Brad Owen, Lieutenant Governor

Also Present:

John Fricke, Office of Financial Management Allan J. Martin, Office of the State Treasurer Rusty Fallis, Office of the Attorney General Tim Kerr, Office of the State Treasurer Elise Greef, Department of Transportation Mike Clarey, Office of the State Treasurer Amy Arnis, Department of Transportation Nancy Adams, Office of the State Treasurer Harvey Childs, Office of Financial Management Martin Reynoso, Office of the State Treasurer Mike Cheney, Office of Financial Management Svein Braseth, Office of the State Treasurer Donna Lawrence, Office of the State Treasurer Jay Kirkevold, Office of the State Treasurer

Chairman Murphy called the meeting to order.

Lieutenant Governor Owen moved the minutes for the December 18, 1998, meeting be approved.  Chairman Murphy seconded the motion.  The motion passed and the minutes were adopted.

Mr. Kerr noted that bond counsel had been delayed by inclement weather, but that we would press on using the final draft of Resolution No. 883.  Mr. Kerr introduced proposed Resolution No. 883 which authorizes the issuance and sale of $300,000,000 State of Washington General Obligation Bonds, Series 1999B, and $38,555,000 State of Washington Motor Vehicle Fuel Tax General Obligation Bonds, Series 1999C.  The proposed sale of these bonds is a part of the state’s routine seasonal capital construction financing.

Mr. Kerr stated that proceeds from the Series 1999B Bonds will be used to finance projects authorized in the capital budget which are currently underway or to reimburse construction accounts for work already completed.  The 1999B financing plan was developed by Treasury staff in conjunction with state agency customers and OFM.  Bond proceeds from this proposed issue are to be deposited in the state building construction account, higher education construction account, outdoor recreation account, public safety reimbursable bond account, and waste water and water supply facilities construction accounts.  Mr. Kerr noted the Series 1999B Bonds are proposed to be sold competitively on March 23, 1999.

Mr. Kerr stated the Department of Transportation has requested the sale of the proposed Series 1999C Motor Vehicle Fuel Tax Bonds.  Proceeds of the bonds will be applied to a variety of highway and other transportation improvements, including funding for ferry construction.  Mr. Kerr noted the Series 1999C Motor Vehicle Fuel Tax Bonds are proposed to be sold competitively on March 30, 1999.

Mr. Kerr explained that, as is customary, proposed Resolution No. 883 provides for a ten-year optional call.  This call protection has served the state well in its ability to respond to falling interest rates through refunding.  At the same time, the market does not extract a penalty for retaining the call.  The proposed resolution provides for making the bonds non-callable based on an economic finding by the Deputy State Treasurer prior to sale.  Any such finding will be reviewed by the State Treasurer before a non-callable designation is made.

In addition, most public issuers have routinely required a hand delivered bid, together with a good faith check, be submitted on the date of a bond sale.  Over the past several years, a third-party insurance policy or surety has taken the place of the good faith check.  Now similar electronic commerce has emerged to take the place of the hand delivered bid—electronic bidding.

Mr. Kerr stated that proposed Resolution No. 883 provides for use of electronic bidding as well as hand delivered bids.  There are currently three electronic bidding firms vying for recognition in the market:  Bloomberg Financial Systems, Dalnet (Parity), a division of Thomson Financial Services, and MuniAuction.  The intent of the proposed Resolution is to let the bidders select the method and route by which they submit bids to the state on these two bond issues.  This will permit the state to evaluate the results of electronic bidding without favoring one approach over another.

Mr. Kerr presented proposed Resolution No. 883 to the committee.

Resolution No. 883 authorizing the issuance and sale of (a) $300,000,000 State of Washington General Obligation Bonds, Series 1999B, authorized by Chapter 14, Laws of 1989, 1st Ex. Sess., as amended, Chapter 17, Laws of 1995, 2nd Special Session, Chapter 456, Laws of 1997, and Chapter 39.42 RCW, and (b) $38,555,000 State of Washington Motor Vehicle Fuel Tax General Obligation Bonds, Series 1999C, authorized by Chapters 47.10, 47.60, and 39.42 RCW.

Lieutenant Governor Owen moved adoption of Resolution No. 883.  Chairman Murphy seconded the motion and the resolution was adopted.

Mr. Kerr introduced proposed Resolution No. 884 which authorizes the issuance and sale of $50,000,000 plus financing costs and reserves, more or less, State of Washington Refunding Certificates of Participation (State Office Building Project, Series 1999), authorizing the execution of a financing contract and trust agreement.

Mr. Kerr stated that in May 1991, the state issued $78.8 million certificates of participation (COPs) to finance construction of the Department of Ecology (DOE) building on the St. Martin’s campus in Lacey.  This was the first state real estate lease/purchase or COP project to be brought to market.  The true interest cost of this transaction was approximately 7 percent.

The concept behind the DOE building was to enable the department to move out of 20+ private lease sites in Thurston County and centralize operations in a long-lived facility with a known debt repayment schedule.  DOE committed to the Legislature that debt service payments on the new building would be at or below the department’s projected private rental payments.

Mr. Kerr explained that in order to fulfill this commitment, compromises had to be made to reduce annual costs.  Among these were a ten-year call with a 2 percent prepayment premium and $27.8 million discount bonds maturing between 2013 and 2016.  For the past eight years, these provisions have made refinancing uneconomic.  During 1998, however, interest rates fell to the point that the 2 percent prepayment premium barrier could be overcome.  The long maturities (2013-2016), with interest rates of 5 percent, continue to be “out of the money.”

Mr. Kerr stated that proposed Resolution No. 884 provides for refunding of approximately two-thirds of the 1991 issue (2002 to 2012).  Subject to market conditions, the savings of such a refunding will reduce DOE’s annual debt service outlays by $300,000.  This scenario generates a present value savings ratio of 6 percent, well in excess of the 5 percent savings threshold used by the Finance Committee to evaluate other state refunding business.  Since this is a lease/purchase transaction, the proposed Resolution authorizes the State Treasurer to take the refunding into the market without the necessity of returning to the Finance Committee for approval of bids.  The proposal authorizes the Treasurer to proceed subject to meeting the 5 percent present value savings threshold and an interest rate limitation on the transaction of 6.5 percent.

Mr. Kerr noted that this proposal has been discussed with DOE representatives, and they endorse this opportunity to reduce agency spending.  The results of the transaction will be reported to the State Finance Committee upon completion.  The 2013-2016 maturities will continue to be monitored after the expiration of the premium call for an advantageous refunding opportunity in the future.

Mr. Kerr presented proposed Resolution No. 884 to the committee.

Resolution No. 884 authorizing the issuance and sale of $50,000,000 plus financing costs and reserves, more or less, State of Washington Refunding Certificates of Participation (State Office Building Project, Series 1999), authorizing the execution of a financing contract and trust agreement, authorized by Chapters 39.53 and 39.94 RCW.

Lieutenant Governor Owen moved adoption of Resolution No. 884.  Chairman Murphy seconded the motion and the resolution was adopted.

Chairman Murphy thanked John Fricke, Office of Financial Management, for all of his fine work with the State Finance Committee and congratulated him on his new position with the Higher Education Coordinating Board.  Chairman Murphy also thanked Rusty Fallis, Office of the Attorney General, for all of his fine work and legal advice for the State Finance Committee and congratulated him on his new position with Gottlieb Fisher & Andrews PLLC.

There being nothing further to come before the committee, the meeting was adjourned at 8:52 AM.

	STATE FINANCE COMMITTEE STATE OF WASHINGTON   _______________________________________ Michael J. Murphy, State Treasurer & Chairman   ________________________________________ Gary Locke, Governor   ________________________________________ Brad Owen, Lieutenant Governor
________________________________________ Tim Kerr Deputy State Treasurer & Secretary