Agenda - Council - 10/22/1979 - Laserfiche WebLink

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MARKET MUSINGS October 1979 The economy continues to gasp for air while choking from the smoke of the great Inflation fire. Until the second week of this month, the Federal Reserve~ simultaneous with its efforts to dampen the fire by fostering higher interest rates, fanned the flames by expanding the money supply. The Fed changed its course though on Monday, October 8th, with its announcement that it will henceforth pay more attention to the money supply and will let interest rates seek their own level. It's a drastic measure they are using but if we are to have any hope of controlling consumption in our economy, and perhaps the world's, forceful, if unpleasant, techniques are sorely needed. The tax-exempt market is reacting predictably. Although the market remained fairly stable from June through mid-August, it rose b,8 basis points~ as measured by the Bond Buyer's Index, from August I~;th through October Z~th when the BBI was (,.6b,%. As of Monday, the 8th, the Daily Bond Buyer's Munifacts reported tax-exempt rates were up another 10- 15 basis points. We foresee a very early return to the crunch of being able to market bonds within rate limitations. In fact we may already be at that point. Shortening an issue won't help much because short-term rates are experiencing severe pressures. NEW ARBITRAGE REGULATIONS The new arbitrage regulations have at last been published in final form. Since 1969 municipalities have all been affected by proposed regulations issued by the Treasury to curb "abuses", caused by some municipalities trying to profit from the interest spread between tax- exempt and taxable securities. The following is only a partial and very general summary of rules which affect most issuers of typical bond issues. Advance refundings~ sinking fund debt and other unique offerings are treated separately in the regulations. Generally speaking~ the rules have little adverse effect on a standard~ new money, construction issue. While the regulations do not specifically prescribe the purposes for which bonds may be issued, they are designed to restrict the use of tax-exempt bonds to what the IRS refers to as "governmental purposes." Enforcement could result in a non-complying issuer being unable to market tax-exempt bonds in the future. Generally, the regulations are intended to restrict the investment of bond proceeds and bond issue related funds, both as to rate and period of investment. The regulations do permit investment of both types of funds at unrestricted yields but only for what is described as a "temporary period." Proceeds of a bond issue may be invested for a temporary period of 36 months at an unrestricted yield if: Within six months of the date of issuance a substantial binding obligation is made to expend the lesser of: 2Y2% of the project costs to be financed by the bonds, or $100~000 (usually the retention of an engineer or architect is considered a sufficient commitment)i and, 85% of the proceeds for project costs are expended within the 36 months. This period may be extended under certain circumstances. If a debt service reserve is created~ either from bond proceeds or other funds, a sum up to I 5% of the original amount of the bond issue in such a reserve may be invested at an unrestricted yield for as long as the reserve is maintained. It is necessary though to demonstrate the reasonableness and amount of the reserve. TED INCORPORATED o, ,.o ,~ ;~¢(~ ( ,~%H( ,~hi",l £',l)lf L¢ING ,-%AINT PAUL, i,.4iNNESO'I'/ .32 r'612;