HomeMy WebLinkAbout1986-12-01 City Council Summary MinutesCITY COUNCIL
MINUTES
PALOALTO CITYCOUNCit. MEETINGSARE BROADCAST LIVE VIA K2SU-FREOUENCY90.1 ON FM DIAL
Regular Meeting
December 1, 1996
ITEM
Consent Calendar
1. Amendment No. 1 to Contract No.4627 with Wells
Fargo Guard Services for Security at the
Municipal Service Center
2. Agreement Between the City of Palo Alto and
Roberta Enterprises, Inc. for Temporary
Employment Services
3. Agreement Between the City of PA10 AIto and
Timesavers Temporary Personnel
4. Agreement Between the City of Palo Al to and'
Certified g1exsta f f Temporary Personnel
Services
5. Agreement with West ,Valley Construction for
Replacement of Approximately 100 Galvanized
Water Services with C :pper Pipe.
6. Rejection. of Thermal Insulation Bids
7. Resolution 6575 Approving the Application . for
Federal and and Water Conservation Funds for
Greer Park Project
8. Resolution 6576 Approving the Application for
1986 Grant Funds Under the Regional Competitive
Program of the Community Parklands Act of 1986
for Greer Park Phase II
9. Resolution 6577Authorizing _the Issuance and
Sale of City of Palo Alto Insured Revenue Bond*
(Lytton Gardens Convalescent Hospital)
Adjournment at 9:01 p.m.
P AG E
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Approval
Regular Meeting
Monday, December 1, 1906
The City Council of the City of Palo Alto met on this
Council Chambers, 250 Hamilton Avenue, at 7:35 p.m.
PRESENT:
ABSENT:
Bechtel, Cobb, Patitucci (arrived at
7:44 p.m.), Renzel, Sutorius, Woolley
Fletcherf Klein, Levy
CONSENT CALENDAR
date in the
MOTION: Councilmember _ Sutorius moved, seconded by Woolley,
of the Consent Calendar.
1. AMENDMENT NO. 1 TO CONTRACT NO. 4627,WITH WELLS FARGO GUARD
SERVICES FOR SECURITY AT THE MUNICIPAL SERVICE CENTER
CMR:g58 :6) (130-03
2., AGREEMENT BETWEEN THE CITY OF PALO ALTO AND ROBERTA ENTER -
TEMPORARY EMPLOYMENT SERVICES (CMR:567:6)
PRISES INC.
(500)
FOR
3. AGREEMENT BETWEEN THE CITY OF PALO ALTO AND TIMESAVERS TEMPO-
RARY .PERSONNEL (CMR:567:6) (5001
4. AGREEMENT BETWEEN THE CITY OF PALO ALTO AND CERTIFIED FLEX -
SERVICES (CMR:567:6) (500)
STAFF TEMP,ORRAARYY
PE
RSONNEL
5. AGREEMENT WITH WEST VALLEY CONSTRUCTION FOR REPLACEMENT OF
APPROXIMATELY 1o0 GALVANIZED WATER SERVICES WITH COPPER PIPE
T iR:S 4: ) ( 120)
Staff recommends that Councils
o Authorize the Mayor to execute the agreement in the amount
of $89,600; and
o Authorize staff to execute change orders to the agreement
for up to $9,000 to .cover the cost of unanticipated work
that may be required.
6. REJECTION OF THERMAL INSULATION BIDS (CMR:571:6) (720-07)
Staff requests that Council reject all bids submitted for the
Thermal Insulation contract under the Utilities Department's
Weatherization Program.
1987
Home
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CONSENT CALENDAR (Cont'd)
7. RESOLUTION 6575 entitled "RESOLUTION OF THE COUNCIL OF THE
CITY OF PALO ALTO APPROVING THE APPLICATION FOR FEDERAL LAND
AND WATER CONSERVATION FUNDS FOR GREER PARK PROJECT"
(CMR:575:6) (412-01) -)01
8.8. RESOLUTION 6576 entitled "RESOLUTION OF THE COUNCIL OF THE
CITY OF PALO ALTO APPROVING THE APPLICATION. FOR 1986 GRANT
FUNDS UNDER THE REGIONAL COMPETITIVE PROGRAM OF THE COMMUNITY
PARKLANDS A T OF 1986 FOR GREER PARK PHASE II (CMR:5 5:6)L—
(412 -7O1 WO
AQTIO* PASSED unanimously, Fletcher, Klein, Levy, Patitucci
absent.
9. RESOLUTION 6577 entitled "RESOLUTION OF THE COUNCIL OF THE
CITY OF PALO ALTO AUTHORIZING THE ISSUANCE AND SALE OF CITY OF
PALO ALTO INSURED REVENUE BONDS (LYTTON GARDENS CONVALESCENT
HOSPITAL)L REFUNDING SERIES 1986 THE EXECUTION AND DE IVERY
OF AN INDENTURE LOAN AGREEMENT, CONTRACT OF INSURANCE
REGULATORY . AGREEMENT, ESCROW AGREEMENT, OFFICIAL STATEMENT AND
CO TRACT' OF PURCHASE AND CERTAIN OTHER ACTIONS IN CONNECTION
THEREWITH (CMR:569:6) ( 04)
Senior Assistant City Attorney Anthony Bennetti said the under-
writer's representative just advised him the State of California
Office of Statewide Health Planning ` and Development would not
allow a "call" on the bonds if the interest became taxable.
Language in the agreement required the City to perform certain
arbitrage calculations yearly as a result of the .new 1986 tax act.
It was basically a "hands off" transaction in terms of the City,
and staff tried to have the language deleted. Staff negotiated
what was believed to be an acceptable compromise, but with the
inability to "call" the bonds should they become taxable, there
was concern the bondholders might file suit for failure to keep
that part of the agreement if the City agreed to perform calcula-
tions and the corporation, trustee, or whomever had not performed.
the calculation correctly. The rest of tke transaction was not
structured in the same fashion. The City was supposed to be pro-
tected from such exposure and given the chance, something could be
worked out. He had not had an opportunity to discuss the 'matter
with the underwriter or bond counsel. The resolution before the
Council`, authorized the Mayor to sign the Indenture with such
changes am staff and the City Attorney negotiated on behalf of the
City. If ' Council was not comfortable, staff could return with the
changes.
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City Manager Bill Zaner said with the caveats expressed by the
Senior Assistant City Attorney, the purpose of the request was to
perform a refunding under the same conditions as the original
financing, which protected the City against risk or recourse to
the City's treasury. Staff had not studied the underlying finan-
cial structure. Council might believe the finances of Lytton
Gardens were inappropriate for the City, and it was the responsi-
bility of the Lytton Gardens board of directors to assure their
finances were in appropriate condition. Staff warranted the City
was at minimal risk and with the caveats expressed by Mr.
Bennetti, staff believed the financial risk to the City was no
greater than the risk Council faced when case original financing
was done.
Councilmember Sutorius referred to page 3 of the Preliminary
Official Statement and the second sentence of t•he first full para-
graph, "The Refunding Series 1986 Bonds will be limited obliga-
tions of the City of Palo Alto...." Page 3 of the Official State-
ment read, "The Refunding Series, 1986 Bonds will not constitute
limited obligations of the City and are not...." Similar refer-
ences elsewhere in the document used terminology which implied the
bonds were, . in fact, limited. He was concerned about the contra-
dictions.
Mr. Bennetti ;paid legally the obligations were limited. The sen-
tence would now read, "The Refunding Series 1986 Bonds will
constitute limited obligations of the City and are not a lien or
charge upon funds or property." The obligations were limited
because they were a revenue bond to the City. The corporation
pledged whatever revnue it earned as security for payment of the
City's issued bonds. If there were no revenues, the City was not
obliged to make any payments, but to the extent revenues existed.
they were pledged to the payment of the bondholders.
Councilmember Sutorius claimed limited knowledge of the 1986 tax
reforms impacts, etc., but said it appeared the management contract
in terms of the financials expired on November 30, 1986, but would
automatically be extended for an eight -year period if the manage-
ment firm met care, quality, and budgetary requirements.
Presuming the contract continued as described, he queried the tax
exempt.. status of the bonds because the provisions of the contract
indicated a fee arrangement .and a SA percent of income over
expense. He asked for comment.
Mr. •Zane r said staff was informed that the management contract was
changed with regard to the fees or fixed amounts. Staff received
a packet late that afternoon but had not had an . opportunity to
review it.
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Councilmember Sutoriva said several documents repeated the consid-
eration that financial statements would be provided to the City
(if the City so requested), putting the burden on the City. He
asked if the parenthetic phrase could be struck with the under-
standing there would be ongoing communication concerning the
financial statements.
Mr. Zaner said the parenthetic phrase could be struck and the
reporting would be automatic.
Mr. Bennetti said he would make sure the change was made or would
submit with the closing documents a request for all future finan-
cial statements of the corporation during the life of the bonds.
Bill Floyd, Portola Valley, had been on the Lytton Gardens Board
of Diteete a for 10 mars and president since shortly after the
skilled nursing facility opened. He thanked staff for their time
and effort and the Councilmembers for their work in reviewing the
voluminous material. In the audience was a considerable group of
residents from Lytton Gardens facilities, half the Board of
Directors, and representatives from the underwriters, from the
State of California agency which insured the bonds, and represen-
tatives of bond counsel. Lytton Gardens had a highly dedicated
Board of about 20 people, 60 percent of whom were residents of
Palo Alto. In Lytton Gardens and II --the housing projects --
there were 300 housing unite; 43 percent of the residents were
previously from Palo Alto, 41 percent were from the immediate
local area, and the remaining 16 percent were from outside the
geographic area. With respect to the nursing facility, 43 percent
were from Palo Alto, 26 percent from the immediate surrounding
vicinity, and 31 percent from outside. The Board had raised a
total ot $2.5 million over the years, which was the equity and
seed money in the housing projects and the nursing facility. They
had a sizable payroll of $3 million within Palo Alto. He believed
they had a unique community asset in . Hillsdale Management Company
both in the housing and nursing facilities. Lytton Gardens had
been conspicuously absent from the many recent exposes in the
press on nursing facilities. Hillsdale had done an excellent job
of managing the facility. They were relicensed by the State of
California for one Year as opposed to the normal six months. The
refunding of bonds was one of several steps being taken to csre
the financial problems. The reserve for replacement funds, which
was in the initial bond issue, was set at a level keyed to
reserves required for hospitals. The reserves required for
nursing homes were much less, resulting in another substantial
savings The unmet existing obligation for the reserve fund would
be forgiven as part of the refinancing, and the debt service
reserve fund would be brought up to its full level. They were
raisin --funds from m the community to convert unused rooms to more
lour -cost nursing rooms. The interest in speed was due to cash
savings of $25.000 per month which was extremely significant.
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They wanted to take advantage of the currently favorable bond
market interest rates. They negotiated a new contract with
Hillsdale to meet the requirements of the Internal Revenue
Service. The new contract did not have profit sharing, had been
approved by ' bond counsel, and met IRS requirements, and he
believed the new contract was less favorable to Hillsdale than the
original. Hillsdale had yet to receive any cash for the two -'year
time period they ran the facility.
Councilmember Renzel said an original objective was to have a com-
plete care facility available principally to people from Lytton
Gardens and the remainder of the community, but eventually only 10
percent of the beds were available to limited -income people.
Because of the financial tightness of the project and the fact it
had not been able to meet the objective of providing that kind of
care to people from Lytton Gardens on 100 percent basis, there
might be motivation to sell the facility. She asked what kind of
assurances the City .had that the present Board would. be the people
the City would deal with and that the original objective of pro-
viding more assisted care would be pursued in the future.
Mr. Floyd said the original Lytton Gardens Board was organized 15
years ago and several of those members were on the present Board;
they were thoroughly dedicated to the philosophy of helping the
low-income people with housing and providing skilled nursing care
to them. The limitation of having 10 percent of the beds allo-
cated to low-income people was financial due to the substantial
difference between the reimbursement MediCal provided and the
higher eeimbursement achieved when the rooms were used on a pri-
vate basis. Medical reimbursed at $52 a day, the semi -private
rooms were in the mid -$80 range, and private rooms were in the
$120-$130 range. Converting rooms to new beds would increase the
low-income capacity by about 50 percent. Over time the Board
hoped .to increase the capacity further. He did not foresee any
circumstance under which the Board would sell the facility.
Councilmember Renzel asked for clarification of the statement, "We
have restructured our debt payments to pull all the interest rate
savings into the next ten years by delaying payments of principal
on the new bonds."
Mr. Floyd said the cash flow problem had been one of having ade-
quate cash in the nursing facility to operate at a prudent basis;
and therefore they elected to teke the savings from the refunding
and put them in the early years of the bond issue where the need
for cash was the greatest. In the lath or 12th year, the amount
of the repayment went up to a level that approximately equaled
what the Board was currently obligated to pay, i.e., the increase
amounted to about $10 per day per room, which should be achieved
by normal rate increases during that time period.
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Councilmember Sutorius asked if there was any reason why the City_.
could not also be identified to receive communication in the case
of a sale/merger, in order to have prior communication dust as the
State agency had.
Mr. Floyd said the State was the guarantor on the bond so they had
a strong interest in being notified. The Board would consider
notifying the City if that was its wish.
Councilmeber Sutorius clarified the Board did
with the Citybeina notified.
Mr. Floyd • did not believe it would be appropriate to have the City
in a negotiating role but saw no problem with notices.
not see a problem
Joan Annett, 14 Sunset Drive, Kensington, worked for Smith Barney
who were hired as the underwriters on the transaction. Smith
Barney proposed a plan of finance for Lytton Gardens that would
reduce the amount of intecest paid to the new bondholders and also
restructured the debt. At present the interest rate market for
health care bonds was the lowest in seven years. Lytton Gardens
was currently paying 10.25 percent interest on its 1982 bonds and
faced the possibility of dropping that down to 6.9 percent. A lot
of pressure was put on the City staff and Council because the
interest rate environment was good at present. The total reduc-
tion in debt service was between $800,000 and $1,000,000e
depending on exactly what rate the bonds could be sold for. More
importantly, the facility faced a substantial cash flow/working
capital problem, and the plan took the savings achieved over the
lifetime of the bonds and moved them forward into the first Len
years. The present-day savings were crucial to the future well-
being of the facility. The restructuring also incorporated a one-
time cash flow infusion, moving the payments on the bonds from an
October 1 and April 1 schedule to a December 15 and June 15 sched-
ule, which would enable the facility to pay off some of the
accumulated payables. The facility should then be able to sustain
itself on a ongoing operating basis. The 1982 City of Palo Alto
bonds for the Lytton Gardens project were in technical ..default.
Smith Barney perceived no wayof pulling the bonds out of techni-
cal default within the next two years without the restructuring.
The ongoing cash flow from operations, particularly when the
interest rate savings were incorporated, would be able to keep the
facility out of default in future. It would be appropriate for
Council to put a contingency on its approval, subject to approval
by the City's legal staff.
George Cover, Los Altos, was Treasurer of the Lytton Gardens Board
of Directors and a CPA in private practice. Lytton Gardens opened
in, the spring of 1983, and was constructed during the previous two
years based on what they believed were realistic projections. The
projections did not work out as expected due to loeg construction
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delays, dramatically higher interest rates, and their estimates of
how quickly the facility would be filled. The Board dipped into
reserve funds to handle the situation, withdrawing about $500,000
from debt service funds provided for in the second bond issuance,
and they were still short by that amount. They borrowed about
$400,000 from University National Bank, which was guaranteed with
the personal guarantees of Board members. They had a very favor-
able contract with the facilities manager that flowed deferral of
payments for an extended period of time. The operation had turned
around. As a result of filling the facility, they were beginning
to show profits of $75,000 for the first six months of the fiscal
year. The refunding would allow Lytton Gardens to not only main-
tain financial stability but to replace the debt service reserve
funds. The projections on earnings for the next two years as a
result of the refunding showed comfortable profits. In the year
ending March 1987, they expected to show a profit of $200,000, and
in the years thereafter they expected $300,000 and increasing
amounts more each year. The Board wanted to demonstrate financial
feasibility but at the same time they were fully committed to the
concept of keeping costs low in the community and of serving the
financially handicapped. They expected the MediCal percentage of
patients at Lytton Gardens to increase over time as they had the
financial capability.
Councilmember Patitucci _asked what would have happened if interest
rates had not declined.
Mr. Cover said the facility had become self-supporting and the
Board was comfortable that the modest profit would have continued
without any difficulty and probably grown modestly in future
years. The Board would have had to continue to enforce the 10
percent limit on MediCal admissions. They would have been able to
cure the technical default in several years.
Councilmember Patitucci asked the specific goals for increasing
the number from 10 percent.
Mr. Cover did not believe the Board had specifically established
goals, although they had already put in place plans to expand
MediCal beds by six to eight additional patients in .the near
future.
Vice Mayor Woolley asked what savings Mr. Cover saw the facility
encountering in the next five years.
Mr. Cover said the bases for the net income projections were a
continued occupancy► level of 104 patients, a growth in rates of 4
percent per year, and a similiar growth in operating costs. Some
50 percent of overall costs were fixed costs related to debt
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service, so the growth attributed to potential inflation produced
an increase in earnings with or without the refunding. The Board
expected to plow back the profits to increase utilization by low -
paying patients.
Ccn ncilmembor Renzelunderstood the manager had not received fees
for the last two years and asked how the relationship was struc-
tured that the Board would be in a good financial position in the
long run as opposed to the manager.
Mr. Cover said the analysis of the tax law caused the Board to
force the manager to accept a tougher contract. The previous con-
tract allowed the manager to share in the profits of the facility
while the new contract eliminated the profit motive and paid a
flat management fee. The trade-off was the Board had never
actually paid out the cash to the managers. in the past because
they tied originally contracturally agreed to defer payment on any
managerent fee until certain defaults and debts were clear. Under
the new contract, the manager agreed to accept a flat fee and
additionally would receive the previous unpaid fees over a period
of time.
Councilmember Renzel clarified the manager would be getting a
fixed fee and anything above that would be used to improve the
cash flow and capital position of the parent organizations.
Mr. Cover said that was correct, except $5,000 a month would be
used to pay down the debt to the manager.
Vice Mayor Woolley asked if staff had the information about the
new arrangement with the manager regarding a fixed fee at the time
the staff report (CMR:596:6) was written.
Mr. Bennetti said staff knew there were tax considerations going
into a restructuring of the management agreement but were un-
certain ` of the exact terms.
Vice Mayor Woolley asked for staff's comments in terms of pro-
tecting the non-taxable status of the bonds.
Mr. Bennetti believed that was a key element and was different
from the aspect he previously referred to where new tax require-
ments for annual arbitrage calculations, could also cause the bonds
to become taxable.
Byron Brown, 656 Lytton Avenue, Apt. G-218, had bean a resident of
Lytton Gardens for three years. He was a retired news media •ep-
resentative. He had never seen anything to compare with Lytton
Gardens. It was truly an establishment where people lived. as a
family. There were many programs to bring the people together.
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The seniors met and talked and people were interested in how they
were. Palo Alto had one of the greatest assets he had ever seen,
and anything they could do to maintain that was in the interests
not only of the residents but the whole community.
Dale Flournoy, Slate of California, Sacramento, was invited by the
Corporation to comment on the insurance program and answer any
questions. The State of California had been involved in the proj-
ect since its inception. It was a different program from that
usually seGn• in Sacramento with acute hospital remodeling. They
not only had an ongoing operation in Lytton Gardens I and II with
a positive record with HUD in San Francisco, but the Board was
more community -based and brought City involvement through the
Redevelopment Agency in acquiring the land. The City was involved
in a bridge loan prior to the initial bond financing. The State
found that interesting along with the amount of funds raised in
the community. With that background, the State saw fit t ► insure
the project. They agreed to the refinancing in 1982 and were
presently in a position of continued involvement in the subject
refinancing. Because of construction and occupancy problems ini-
tially, the State found itself in a situation to control variable
costs by hiring the outside management firm and the present oppor-
tunity to restructure the fixed costs and bring •that down to a
more manageable level. The bonds currently outstanding were
insured by the State of California, and the full faith and credit
of the State of California was behind those obligations, contained
in Article 60, Section 4, of the State Constitution. If the
bonds were issued, they would also be insured AAA by the State of
California and, should they go into default, became obligations of
the Health Facilities Construction Loan Insurance Fund 'in which
there were reserves to essentially retire the bonds, The State
agency believed it made sense to bring down costs, which would
hopefully be passed on in terms of more MediCal over time. The
corporation should be able to mitigate future rate increases. The
Director of the Office of Statewide Health Planning issued a let-
ter of commitment. They were prepared to insure the transaction.
Vice Mayor Woolley asked whether any analysis about financial pro-
jections occurred when the State did an evaluation in order to
decide whether to insure the current refinancing.
Mr. Flournoy said 90 days ago .when they saw interest rates were
down and staying there, the State contacted the corporation
regarding a refunding analysis and a variety of present --value
calculations from Smith Barney and other underwriters. Since
1984, the State also received monthly income statements and bal-
ance sheets from the corporation and could look at what ,the
present -value analysis would do to the fix costs savings and, ; on
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an informal basis, looked at the numbers from Smith Barney. Mr.
Floyd and other Board members met with the State every three
months and with the Director of the office every six months. They
dealt in an ongoing dialogue with respect to controlling costs,
increasing revenue, increasing MediCal, and essentially making the
project more viable. There was ongoing involvement from
Sacramento and real concern that the project remain alive as a
community -based facility, not to be sold through a bankruptcy thee
State had to pay off, which then might not result in a community -
beefed provider.
Councilmember Sutorius clarified the State initiated a contract
to suggest the kind of review that led to the refinancing.
Mr. Flournoy suspected the Board was also watching the market and
making independent inquiries..
Counciimember Sutorius asked if Mr. Flournoy was reasonably com-
fortable with the fact the particular refinancing structure had a
*wrinkle' five years hence.
Mr. Flourney believed Lytton Gardens had turned the corner in
terms of actual financial performance to date and the. refinancing
would improve the performance dramatically faster than the piece-
meal, incremental approach. In fact, the structuring of the
payback of principal was brought to the State office for review,
and the Director concurred to that particular feature of the
transaction.
Bob Medial: is, 858 Arbor Road, Menlo Park, had numerous business
interests in Menlo Park and Palo Alto. He assured Council that
the Board of Directors carefully reviewed the financial statements
of Lytton Gardens on a monthly basis, and one of the standard
questions asked was whether the time was appropriate to do some
refinancing. The development of a continuum of care facility in
Palo Alto was first talked about almost 19 years ago. What
occurred since that date would not have happened without a group
of dedicated individuals behind the project. There had been in
excess of 500 meetings, and the Board had raised over $2,500,000,
of which a substantial portion came from the members themselves.
In addition, there had been times when the Board was called upon
for guarantees, warranties, and representations behind funding and
had, without question, stood behind those. The question vas not
whether the Board was behind the project, which was a shining star
in the City of Palo Alto, but was. the City behind it.
Mary Collins, 600 Montgomery Street, San Francisco, said Orrick,
Herrington 4 Sutcliffe was also bond counsel for the Series 1981
and 1982 issues' for Lytton Gardens by the City of Palo Alto. The
proceeds of the bond issue would be used to defease the out-
standing Series 1982 bonds and to replenish the reserve fund for
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past technical defaults. The resolution authorized execution of
the indenture which authorized issuance of the bonds. The con-
tract of purchase would sell the bonds to the underwriters, Smith
Barney. The official statement would provide public information
concerning the bond issue and act as a disclosure document. Other
required documents included the loan agreement to Lytton Gardens
for repayment of the bonds and the escrow agreement by which the
1982 bonds were defeased. The State of California agreed to
insure the bonds as evidenced by the contract of insurance. Bond
counsel focused on the tax aspects of the financing. The Tax
Reform Act of 1986 put a different light on the tax issues. In
1981, and 1982, when the City issued the bonds, Council signed an
arbitrage certificate and bond counsel opined the bonds were tax
exempt and there was really nothing the corporation could do to
make the bonds taxable. Under the Tax Reform Act of 1986
regarding "arbitrage rebate," the investment earnings on the
reserve fund which exceeded the yield on the bonds would have to
be rebated to the federal government every five years. The inden-
ture and the corporation would be responsible for snaking rebate
calculations and annually depositing with the trustee the rebate
amounts necessary to the federal government, which risk the City
did not face in the prior transactions. As in any bond or conduit
issue where the only revenues the City pledged were the revenues
it received from Lytton Gardens under the loan agreement, if the
issue went to default and the bondholders were not paid or if the
bonds became taxable, everyone would be sued including bond coun-
sel and the City. The management contract was changed to satisfy
the Tax Reform Act guidelines and certain revenue rulings, in
order for bond counsel to provide an opinion that the bonds were
tax exempt upon issuance. Bond counsel put its own liability on
the line and had a basic allegiance to the City to ensure it was
protected in the documentation. Lytton Gardens was responsible
for paying off the conduit revenue bonds, but the City was the
issuer; the debt was a limited obligation of the City,
Councilmember Sutorius asked if there was one more advance
refunding available.
Ms. Collins said no, the subject refunding was the last until the
call date was reached, when Lytton Gardens could refund the bonds
and pay off the prior issue w±thin 90 days. The advance refunding
bonds would be outstanding until 1992 and could not be refunded
again for another eight to ten years, depending on when the call
date was set.
Councilmember Sutorius asked if the 2 percent cap on cost of issu-
ance applied.
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Ms. Collins said yes, Smith Barney agreed to cover the cost of
issuance and their underwriting spread all within the 2 percent
requirement.
Nancy. Rayburn, 1212 Vancouver, Burlingame, spoke on behalf of
Smith Barney, and said the City of Palo Alto was the one issuer
available to Lytton Gardens who could move to do the refinancing
on a timely basis. Every tax exempt bond had to go through a
municipal issuer, and .the alternative for Lytton Gardens would be
the State Health Facilities Authority. Smith Barney elected not
to go that route because the Health Facilities Authority met only
once a month, often canceled its December meetings, and had a
lengthy application process, which could delay the financing 60 to
90 days. The Health Facilities Authority also had a significant
financing fee, and its bankers did not have the flexibility to
make fee commitments like the underwriters made to Lytton Gardens.
Smith Barney agreed to absorb all the financing costs in excess of
the 2 percent limit so Lytton Gardens would pay nothing more than
2 percent for its legal fees, underwriting, printing, trustees,
etc., which was a substantial discount on fees normally seen on a
refunding. Smith Barney needed the City's cooperation. Nobody
involved with Lytton Gardens wanted to take the gamble that in 60
or 90 days the markets would be as good as they were. at present.
Smith Barney was willing to sign on that day for rates they
expected to be below 7 percent and move forward with the
refunding. The operation of Lytton Gardens had improved signifi-
cantly both as it related to census, financial controls, and
bottom -line performance, so even without the refunding it was
currentlya viable financial institution; however, part of the
technical default was the deficiencyin the bond reserve of sev-
eral hundred thousand dollars. In the absence of a refunding, it
would. be awhile before money could be deposited into the bond
reserve fund to cure the technical default. She reiterated as
part of the refinancing the restructuring of the management con-
tract no longer allowed Hillsdale to take a piece of the profits
generated at Lytton Gardens. In regard to the delay of principal
payment on the refunding issue, she stressed that under the 1982
bonds a certain level of principal, and interest payments was
required. In the restructuring of the debt, from year 11 to 30,
the obligation on Lytton Gardens was not increased over what it
was on the 1982 bonds; however, during the first ten years, Lytton
Gardens /AS allowed to effect significant savings. In regard to
liability regarding the City's involvement, the City had a limited
liability_ on the bonds, :limited to those revenues deposited with
the' tru*tee by Lytton Gardens. The City could not take the reve-
nues paid by Lytton ;.Gardens on a monthly basis and use them for
other purposes, but only those revenues were the ones the City had
the obligation to use to make payments to bondholders. She recog-
nized the arbitrage rebate became an issue and certainly had been
considered throughout the country. She assured Council the provi-
sions in the bond issue were similar to those in millions of other
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bond issues, and no one in the industry believed a conduit issuer
would ever be held liable in the event something went wrong with
the arbitrage calculations. The problem was one everyconduit
issuer in the country would face theoretically, and as they pur-
sued the arbitrage regulations with diligence, performed the
calculations required by the indenture, and the oversight of their
trustees in administering those calculations, they hoped to assure
as much as possible that the bonds would never become taxable,
because the control mechanisms were set up in advance in the docu-
ments to preclude the possibility that they could, accidentally or
otherwise, slip into a taxable environment.
Councilmember .Bechtel asked if the concerns raised could be
resolved to the Senior Assistant City Attorney's satisfaction in
order for the financing to be done by later that weeks
Ms. Rayburn was absolutely confident that was possible.
Mr. Bennetti did not believe the problem was insurmountable.
Mayor Cobb asked Mr. Floyd how Council could be assured that
Lytton Gardens would remain financially viable, even given unpre-
dictable extrinsic situations.
Mr. Floyd said one of the key variables was the level of census
which was adequate as long as the census stabilized over 100
people. Another positive effect was the extra beds which would
provide low-cost care and also be a positive influence of about
$100,000 a year on cash flow not taken into account in the Projec-
tions presented to Council. Another area of concern which had
recently stabilized was the difficulty in getting nursing help.
He expected those areas to continue under control, and in addition
there was the positive $24,000 cash per month provided by the
refinancing. On an operation which had revenue of $4 million per
year, as did the nursing home, $300,000 savings was significant.
Also, in the prior six months they made a profit even with the
existing debt service and had maintained their own on a cash
basis.
Vice Mayor Woolley said the public did an excellent job of pro-
viding Council with information to feel comfortable in going ahead
with the refinancing.
MOM': Vice Moyer Woolley noveds, seconded by Sutorius, to
14010 liWsolution 6577 prepares by Orrick, Herrington & Sutcliff
and authorise the Mayer and staff to sign the necessary documents
to complete the refunding provided the concerns addressed by
Senior Assistant City Attorney Sonnetti and COuaciluenbor Sutorius
aro s*tisfied,
Vice Mayor Woolley said Lytton Gardens was doingan excellent job
in a field where the need could only get greater. Council wanted
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1
1
to see the facility succeed, and there was no question about the
worthwhile public service involved in the City's participation.
Councilmember Bechtel concurred with Vice Mayor Woolley and said
the presentations made were excellent. She commended staff who
were under a ireat deal of pressure to evaluate voluminous quanti-
ties of materials.
Councilmember Sutorius echoed the comments made by his colleagues
and believed those involved welcomed the hard questions asked.
The hard questions also came from the tact that Palo Alto was
negatively impacted in another situation where a credit agency did
a very limited investigation into a situation in which Palo Alto
participated with other municipal agencies. He was pleased to
support the motion and was impressed with the changes communicated
to Council that evening.
Councilmember Patitucci supported the motion but believed it would
be more useful in the future to work out a process with issuing
agencies to receive documents in sufficient time for staff to make
a recommendation and take actions before the fact rather than
after.
Councilmember Menzel said her principal concern with respect to
Lytton Gardens 1I1 was that so little of the project was available
to low- and moderate -income people. She was hopeful the refunding
would result in the facility serving people otherwise not served
by the market place. She was happy to support the motion, par-
ticularly with the provisions outlined by Vice Mayor Woolley.
Mayor Cobb strongly agreed with Councilmember Patitucci. He
believed it was unfair that Council had so often to respond to
things without time to get the kind of staff input a needed. He
was in agreement with all the positive comments made about Lytton
Gardens and the need for refinancing. He encouraged the directors
to watch the situation carefully and ensure the organization
stayed. viable.
NOTION PASSIM aaasimessly, Pletcher, Klein, Levy absent.
ADJOURNMENT
Council adjourned a t 9:01 p.m.
ATTEST:
APPROVED:
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