Bad Timing on Refinancing Proposal
Posted 05-07-1997
Last month I discussed the decision of the Westmoreland County government to not create a
General Authority. Ironically, the same day that we were supposed to vote on the General
Authority, our Director of Financial Administration was proposing to me that we do a
refinancing effort of our debt service payments. This proposal would allow the same
investment banking firm, RRZ Public Markets, that had been denied the bond underwriting
work on the General Authority, to do the bond underwriting on this refinancing effort.
My first question to our Director of
Financial Administration was, "Do you not have any sensitivity to the timing of this
proposal? And do you not think the public's perception of this effort, whether it has
merit or not, will be that we are somehow handing a consolation prize to RRZ since they
did not get to do the General Authority?" Apparently, neither he or my colleagues
appreciate the issue of timing.
My problems with the current proposal are
related to whether this truly is the best time for this effort in relation to current
market conditions and interest rates. I also have a major problem with only soliciting
advice from one source, and then that source of advice being the beneficiary of work
related to their recommendation. To me, the appearance of a conflict is there when one
firm advises us to refinance our debt and then they get the bond work. If indeed this is
the best time for such an effort, it should be clearly recognized by a number of
investment banking firms. RRZ's recommendation should be able to withstand the challenge
of competing recommendations if it truly is the best path to follow.
One aspect of debt restructuring efforts is
that the present value benefit of the transaction must be clearly identified. In this
instance the present value benefit is proposed to be $343,000.
Without even entertaining other proposals,
how do we know this is the best proposal for the taxpayers of Westmoreland County? It
disappoints me greatly that my colleagues refuse to entertain other proposals for this
effort. They claimed timing of going to market was the most critical issue, yet the only
party making that statement was the firm benefiting from the work. The issuance cost, that
is RRZ's fee, bond counsel fees, printing costs, and bank fees is $195,308.96. To this
point, I have not even been provided a more detailed breakdown of costs.
This debt restructuring along with
reinvestment of $18 million of asset sale proceeds will allow us to receive roughly $18
million in debt service relief over the next four years. This action will allow us to
realize larger fund balances over the next few years, but we still must have a lot of
discipline when it comes to spending. I am concerned that these surpluses in the next few
years will cause complacency rather than dedication to spending cuts. Also, despite this
restructuring, we are still projecting a $4.7 million deficit in the year 2000.
I believe if we are going to instill public
confidence in our actions we must clearly separate the functions of financial advisor and
bond underwriter, and refuse any firm from serving in both capacities. We must also
entertain competing proposals for these efforts rather than simply handing the work to a
firm because of some long standing relationship. Competition forces firms to sharpen their
pencils and offer the taxpayers a better deal. Isn't that the reason you elect us to
represent your interests? |
