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The original item was published from 1/5/2018 1:53:25 PM to 2/1/2018 12:10:01 AM.

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Posted on: January 5, 2018

[ARCHIVED] Commercial Paper Issued to Finance Underground Utility Project

The Town of Palm Beach, Florida (the “Town”) issued $9 million in Commercial Paper this week. The Commercial Paper will be used to finance the initial phases of the Town’s Underground Utility Project at low favorable interest rates.

In late July, a lawsuit had been filed to halt the $22,650,000 interim commercial paper financing of the underground utility project and the imposition and collection of special assessments for the project, by Carol Kosberg, trustee, and Michael Scharf. After the initial proceedings, the plaintiffs dropped the count as to the interim commercial paper financing, and the commercial paper financing may now proceed. The lawsuit continues as to the imposition and collection of special assessments, which do not secure the interim commercial paper financing. The commercial paper is payable from the Town’s non-ad valorem revenues. The Town’s defenses as to the plaintiffs’ remaining claims on special assessments are actively being pursued.

An earlier lawsuit brought by Arthur Goldmacher to challenge the issuance of up to $90 million general obligation bonds for the project, backed by the Town’s taxing power and special assessments, was dismissed on all counts by the Circuit Court for Palm Beach County, and is now pending appeal in the 4th District Court of Appeal. While awaiting the final outcome of the appeal, the Town determined it will proceed with cost effective interim commercial paper financing to commence the project construction.  

The Town issued $9 million in Commercial Paper on December 20, 2017 at an interest rate of 1.40%. Commercial Paper (“CP”) is issued by local governments for a number of reasons, including interim construction financing.  CP is secured for liquidity purposes by a dedicated source of immediately available funds; the Town's CP structure, utilizes a Direct-Pay Letter of Credit from Citibank.

A Commercial Paper program constitutes a "continuous offering", or reissuance, of debt, whereby a local government issues new CP Notes as construction funds are needed. CP is usually structured with a maximum maturity of 270 days, and maturing CP is “rolled-over” or replaced by a new issue of CP at prevailing interest rates. The process is repeated until the CP program is either refunded with permanent long-term financing or paid off from other sources.  All excess funds from the CP will be invested in the Town’s short-term fixed income investments, with expected earning rates in the range of the issuance rate.  Arbitrage rules apply, so the Town cannot earn more income than it pays on the debt, but the Town is in a position to recoup much of the interest on this debt.  

Since the implementation of the Town-wide assessment, the Town has received over $13.7 million in prepaid assessments representing 15.3% of the total assessments.  These prepaid assessments will reduce the amount the Town will ultimately borrow for the underground utility project.

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