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HomeMy WebLinkAbout12/01/2020 04K Replacement of LIBOR Benchmark Rate; YMC 3.123.010 a\'4\lyy bxk ik 1 +� PPP d P PPPPPc s' lii it tYlltYlA.\ta. BUSINESS OF THE CITY COUNCIL YAKIMA, WASHINGTON AGENDA STATEMENT Item No. 4.K. For Meeting of: December 1, 2020 ITEM TITLE: Ordinance amending Municipal Code 3.123.010, replacement of LIBOR benchmark rate SUBMITTED BY: Steve Groom, Director of Finance and Budget SUMMARY EXPLANATION: LIBOR, the London Interbank Offered Rate, is a common benchmark for interest rates that is being phased out; it may cease to exist by 2022. SOFR, the Secured Overnight Financing Rate, published daily by the Federal Reserve Bank of New York, has been identified as an appropriate replacement benchmark rate. There is one instance of LIBOR in the Yakima Municipal Code to be updated for this change. ITEM BUDGETED: NA STRATEGIC PRIORITY: Public Trust and Accountability APPROVED FOR SUBMITTAL BY THE CITY MANAGER RECOMMENDATION: Pass Ordinance ATTACHMENTS: Description Upload Date Type r Maras 1 13102 r Memo L C7rdi mace endi rig .123. 10 line 1 12 1202 backup Material rdinance endin 3.123. 10 dean 10/20/2020 C)rdinance 2 \ S • FINANCE TO: City Councilmembers Bob Harrison, City Manager FROM: Steve Groom, Finance DATE: October 23, 2020 RE: Recommendation of LIBOR replacement in the YMC This memorandum provides the basis for a recommendation for replacement of LIBOR, the London Interbank Offered Rate, a benchmark for interest rates that is scheduled to cease to exist in 2021 , with SOFR, the Secured Overnight Financing Rate, published daily by the Federal Reserve Bank of New York, as a benchmark rate reference used in the Yakima Municipal Code. Recommendation: Approve the ordinance, replacing of "LIBOR" with "SOFR, (Secured Overnight Financing Rate)" in the following section of the Yakima Municipal Code Title 3 Funds and Accounts § 123.010 Interfund loan The director of finance and budget is hereby authorized to administer an interfund loan program. The director of finance and budget shall make interfund loans as needed to keep the funds of the city solvent. In conjunction with interfund loans, the director of finance and budget shall prepare a planned schedule of repayment of the loan principal plus applicable interest. The monthly rate of interest will be the thirty-day LIBOR Secured Overnight Financing Rate (SOFR) rate plus one percent and shall be charged by the lending fund, unless the borrowing fund has no other source of revenue other than the lending fund, or is normally funded by the lending fund. In addition, the borrowing fund must anticipate sufficient revenues to be in a position over the period of the loan to make the specified principal and interest payments. Interfund loans for brief periods up to a calendar quarter will not be subject to interest. (Ord. 2013-011 § 1 (part), 2013). Rationale: The Secured Overnight Financing Rate (SOFR) is generally accepted as the replacement benchmark rate for LIBOR. The Federal Reserve formed a committee to select a replacement benchmark rate and announced SOFR as its choice for the replacement in 2017. The Federal Reserve Bank of New York began publishing SOFR rates daily in April 2018. Reference: An informational article, published in the Government Finance Officers Association (GFOA) member publication Government Finance Review, in October, 2019, is attached for further background. � k . Background an LIBOR and SOFR B R nay asosnson Bro k '.1w L d nterbank Off d n2019,th l d I mane formed +•. Rate ( < s a global bench the Alternative Reference Rotes . . a that is c I . t ARRC), a group Ihat culated daily With 12s0 zilhon in US includes pnvateector _s _ et paxlici becar 17ss dollar ex e. linked to LJBOR pa to :ela A a rat . to c_IJSO u n. n .xis the .t widelyused bendrr ark LIBOR and gmd slion Alter nd'has been d the scold's . :ol} 1 e dial altna- er w se t s ntm L a. t. l vial products. live:, the s F tuned in June based on LIBOR Include loan corpo 2017 that had Irei a new rate, A stet . 0 rate bm.tda, inice4 to swars, the Secured eyeinght Financing Rate r ub.,a_ J s dar e )sits T y ( n?R), asp dedreptace- asso moun_ p anal. we met for U L LIBOR The Federal n-rr„v,inz Whale ubiquitous, LIBOR. became Reserve publistnng S F. I n•able as a benchmark bec Apra 21) 8 T e u'FR^ sele led it. a.. LLtnt �R_ecau_._ t meant F ettt e e ° rc Si=r w= al J - shornam u b crowing by AS=1s fully fully based on actual tans- - banks, and banks have substantiallyon.] so does. not 1st. on M70 ^(^^c^. . reduced their Use ofhs type of Iud enntlowI . nsl'heLIL d panel bags tP OFR iereience3 mulhpleseiRments tally must subm ra e,based onthau - 1 iu .era : a. . of theUS S repurchase actions, and niter agreancit market the I .ge;t :ota 3y reluctant t e .Thingmarketin he worm. Regulators and market paiumparcs una market isTal- erne 3 'oast imp lent andss un iant _ ..ris ix I robust The SOF:s a hue . erfreF rate.,.;L liars:non away LI Ol become able as a ieflecuon of interest rates urgent ir. July 2017 when Andrew cecia]I Bailey, head of the Tinted KingdomSOH( „or dn ,± by the public Financial Conduct Authority (I 4) L L I it .nalhod- an i ti LIBOR _. I r th NFy v d t - olo- t-ric to submit Undel5mc .SO FE con elatesl with oldie LIBORalte 01 hell! of the,estate- overnight money naiket rater and .. efuture easzense of LIBOR het: non r u. f calCecolporat s. 4 To guide the transition, the ARRC ■Use of derivatives linked to LIBOR: Because many of these contracts was reconstituted in April 2018 with .Use of synthetic fixed-rate t ue- referencing LIBOR do not adequately broad representation from official goy- ones to gain exposure to a fixed plan for the risk that LIBOR will be dis- ernment entities, banks, asset manag- ate when issuing variable rate continued, such an event could have rers, insurers, consumer groups, and bonds— for example, interest rate serious consequences for a wide range industry trade associations. It is now swaps in which an issuer agrees of market participants and investors. tasked with: o receive a LIBOR-based floating Strategies for how to handle LIBOR ■Developing options for implement- interest rate in exchange for pay- cessation in legacy contracts have not ing SOFR across loans, bonds, and ing a fixed interest rate. To the yet been worked out, and municipal securities that reference the USD extent that the two floating rates ssue s together with their counsel and LIBOR(cash products); ottset each other, the issuer's net advisors should work with ARRC to ®Transitioning derivatives transac- interest rate exposure is limited to seek ways of addressing these issues. tions to SOFR; the fixed swap rate. Developing mechanisms through ■Minimizing potential disruptions •Similarly, use of synthetic variable which market participants can tran- associated with either voluntary rate structures to gain exposure to srtion remaining legacy LIBOR-based transition to SUER or to an end a variable rate when issuing fixed products to SOFR, and launching new of LIBOR; and rate municipal bonds. Examples contracts referencing SOFR or other ■Communicating the rationale are interest rate swaps where the rates, should be two core programs for payments are reversed, compared municipal issuers in the coming years. behind the change to SOUR and the compared to the example above. To the Addressing potential problems like tax status of implementation. p extent that the fixed rate offset and accounting issues, as well as con- each other, the issuer's net inter- tinuing education about the available est rate exposure is limited to he resources and the transition timeline, floating swap rate. will also help. •Use of interest rate swaps in an effort to assume exposure The long duration of existing munici- to changes in tax rates, where pal bonds and loans implies that a the issuer pays the counter- considerable part of the outstanding party a floating rate based on the stock will not have matured or rolled Securities Industry and Financial over by any likely end date for LIBOR. Markets Association [ndex,which Securities and products with long Jura- trac. s tax-exempt seven-day mter- Taking inventories of existing prod- est rates and receives a percent- rids and processes that use LIBOR age of LIBOR for a set period of should be a first step for any municipal time. These transactions provide issuer. Some common uses of LIBOR an opportunity for positive carry, among state and local government gen- given differences between tax- erally include: exempt and taxable rates. ®Issuance of floating rate notes and 6 Holding of LIBOR-based floating rate loans where the interest rate is reset notes issued by corporations or sov- . ' " periodically based on LIBOR such as ereigns in the state and local govern- """ private placements and bank loans. ment's asset portfolios. October.20191 Government Fimnce Review 35 5 Lions need to be managed through ers and other market participants as "fallback" provisions set forth in con- they prepare for the transition away tracts describing what happens if from LIBOR.We are especially glad to LIBOR is no longer produced. Open see that the Internal Revenue Service questions include who can legally is providing clarity around the tax change contract language to include issues relating to converting outstand- fallback provisions (i.e., unanimous ing trades such as interest rate .swap consent versus calculation agent), contracts in order to alleviate any what the exact triggers to move to costly and unproductive disruption an alternative rate would be, and for issuers. whether a spread should be included (or adjusted). Issuers should also start thinking ., .. - about and planning for new language and terms that would reference SOFR or other rates rather than LIBOR. As soon as they are comfortable with the new language, they should start using it in new contracts. All market participants should prepare themselves for a world with A number of potential tax and SOFR, and potentially one with- accounting issues will need to be out LIBOR. The ARRC maintains a addressed, including whether a move website, which is accessible to all, from LIBOR would cause a bond to where it will release guidance and lose its tax-exempt status.The ARRC is steps on transitioning as well as working on these questions. updates on market progress during this transition. Importantly, in early October 2019, the U.S. Treasury Department moved As an appointee to the Alternative to smooth the transition away from Reference Rates Committee, GFOA LIBOR by proposing a rule allow- will continue providing content to ing market participants to change help educate the issuer community as the reference rate on any contract the transition approaches. 1 without tax consequences. GFOA looks forward to commenting on the proposed regulations. The Treasury EMILY SWENSON BROCK is direc[or Department's attention to this matter of A',; Fed ra ia.scn Cl. nter in has been much anticipated by issu- Washington, J.C. 36 Government Finance Review I October 2019 6 ORDINANCE NO. 2020- AN ORDINANCE amending Section 3.123.010 of the City of Yakima Municipal Code Chapter 3.123 to identify the Secured Overnight Financing Rate (SOFR) as the benchmark for interest calculations on interfund loans. BE IT ORDAINED BY THE CITY OF YAKIMA: Section 1. Section 3.123.010 of Chapter 3.123 of the City of Yakima Municipal Code is revised to read as follows: 3.123.010 Interfund loan authorized The director of finance and budget is hereby authorized to administer an interfund loan program. The director of finance and budget shall make interfund loans as needed to keep the funds of the city solvent. In conjunction with interfund loans, the director of finance and budget shall prepare a planned schedule of repayment of the loan principal plus applicable interest. The monthly rate of interest will be the thirty-day Secured Overnight Financing Rate (SOFA) . rate plus one percent and shall be charged by the lending fund, unless the borrowing fund has no other source of revenue other than the lending fund, or is normally funded by the lending fund. In addition, the borrowing fund must anticipate sufficient revenues to be in a position over the period of the loan to make the specified principal and interest payments. Interfund loans for brief periods up to a calendar quarter will not be subject to interest. (Ord. 2013-011 § 1 (part), 2013). Section 2. This ordinance shall be in full force and effect 30 days after its passage, approval, and publication as provided by law and by the City Charter. PASSED BY THE CITY COUNCIL, signed and approved this_ day of_, 2020. ATTEST: Patricia Byers, Mayor Sonya Clear Tee, City Clerk Publication Date: Effective Date: 7 ORDINANCE NO. 2020- AN ORDINANCE amending Section 3.123.010 of the City of Yakima Municipal Code Chapter 3.123 to identify the Secured Overnight Financing Rate (SOFR) as the benchmark for interest calculations on interfund loans. BE IT ORDAINED BY THE CITY OF YAKIMA: Section 1. Section 3.123.010 of Chapter 3.123 of the City of Yakima Municipal Code is revised to read as follows: 3.123.010 lnterfund loan authorized The director of finance and budget is hereby authorized to administer an interfund loan program The director of finance and budget shall make interfund loans as needed to keep the funds of the city solvent. In conjunction with interfund loans, the director of finance and budget shall prepare a planned schedule of repayment of the loan principal plus applicable interest. The monthly rate of interest will be the thirty-day Secured Overnight Financing Rate (SOFA) rate plus one percent and shall be charged by the lending fund, unless the borrowing fund has no other source of revenue other than the lending fund, or is normally funded by the lending fund. In addition, the borrowing fund must anticipate sufficient revenues to be in a position over the period of the loan to make the specified principal and interest payments. Interfund loans for brief periods up to a calendar quarter will not be subject to interest. (Ord. 2013-011 § 1 (part), 2013). Section 2. This ordinance shall be in full force and effect 30 days after its passage, approval, and publication as provided by law and by the City Charter. PASSED BY THE CITY COUNCIL, signed and approved this 1st day of December, 2020. ATTEST: Patricia Byers, Mayor Sonya Clear Tee, City Clerk Publication Date: Effective Date: