Audit Report-1995-1996 •
Gray
Company
a ny
October 2, 1996
Honorable Mayor,City Commission and City Manager
City of Atlantic Beach
Atlantic Beach,Florida
I have read the letter dated September 30, 1996,to Mr. Alan C. Jensen from Mr. Alan W. Potter, Sr.
expressing concern about what Mr. Potter calls "Off-the-Top" Costs totalling$1,113,021.35. We are
currently performing the City of Atlantic Beach, Florida's(the City) financial audit for the fiscal year
ended September 30, 1996,which includes a review of the transactions relating to the Series 1996 Bonds,
so Mr.Jim Jarboe has asked mc to comment independently on Mr.Potter's figures.
Original Issue Discount
Mr. Potter's characterization of the Original Issue Discount (OW) as an "Off-the-Top" Cost is
inappropriate. The OID of S635,380.70 is not a cost of issuance. This figure does not represent a cost to
the City,but rather a reduction in the purchase price to the bondholders. This figure is 2.78%of par and
means that on average,each 55,000 bond was purchased for$4,861(97.22%).
During the sale of bonds there will always be a trade-off between higher discounts and higher interest rates.
Then:is an optimal mix of OW and coupon rates at the point of sale which will yield the lowest true
interest cost to the City. Your financial advisors(First Union Capital Markets Corp.)determined that the
optimal mix was the average OlD of 97.22%with an average coupon rate of 5.4241%. The combination
of the two components yields a rare interest cost of 5.6957%. The financial advisors represent the City
and have sophisticated programs to assure the City receives the optimal mix.
Again,the OW is not considered a cost of issuance. If the bonds had not been issued with an 010,your
true interest cost would have exceeded 5.6957%,which would have meant a higher overall cost to the City.
Insurance
There arc two other items which Mr. Potter refers to as"Off-the-Top"Costs which were determined by
your financial advisors to be worthwhile, as they lowered the coupon rate on the bonds resulting in an
overall savings to the City. They included the following-
• Bond Insurance -S115.000(Insures against a payment default by the City and allows for a
higher bond rating. thus lower coupon rate: bond insurance normally requires a reserve
account equal to two semiannual payments)
i
• Surety Bond - 536,000 (Replaces the requirement for a reserve account, lowering the par
amount required, and eliminating the related debt service and additional issuance costs
thereon.)
Certified Public Accountants
•
•
Honorable Mayor,City Commission and City Manager
City of Atlantic Beach
Atlantic Beach,Florida
Page 2
Both the Bond Insurance and the Surety Bond were beneficial to the City because they lowered the coupon
rate on the bonds and the future debt service requirements.
Mr.Potter also refers to a$28,452 insurance premium to AMBAC Indemnity Corporation to insure against
nonpayment of invested monies in the event of default by the investment custodian. Although this policy •
appears in the City's bond documents(fab 33),the premium was not paid by the City,but by AMBAC
Indemnity Corporation.
Other Issuance Costs
Total Costs of Issuance,including insurance were 5443,664. Total Costs of Issuance,excluding insurance,
were$292,664. The latter amount represents all amounts paid by the City to the bond attorneys,financial
advisors,underwriters,consulting engineers,rating agencies,and other parties in connection with the bond
issuance,not Mr.Potter's S1,113,021.35 figure.
The issuance costs of 5292,664 represent 1.28%of the total amount of the 522,835,000 bond issue. Based
on our experience with other municipalities,these costs are very low. The largest single cost was the
Underwriter's Discount,at$118,514(55.19/51,000 par value),which is the lowest percentage rate I have
seen in ten years. These overall low issuance costs are a reflection on the excellent performance of your
financial advisors.
I hope these observations have been helpful. Please call me if you have any questions.
Sincerely,
PURVIS,GRAY AND COMPANY
l',31771t,Sh/flAtil
Joseph J.Welch,C.P.A
Audit Partner
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