A favorable bond market has enabled Beverly Hills to save more than $1 million on a $75.3-million loan to refinance construction of its new civic center, according to the city's financial director.
The city obtained the new loan Tuesday as major investors who had been keeping their money in short-term accounts decided to shift into longer-term municipal securities, said Bernard J. Mikkell Jr., who handled the transaction for the city on behalf of the Goldman Sachs investment firm.
"We were not necessarily smart; we were lucky," he said.
The sale of $75.3 million in securities Tuesday was prompted in large part by the City Council's decision last month to drop plans for a 500-seat theater at the civic center.
The decision meant that $60 million worth of securities originally issued last year had to be paid off because they promised that the civic center would include a theater.
Another motive, city officials said, was the market's recent trend to lower interest rates, which made the refinancing even more attractive because the city would be paying less for its money.
Ordinarily such a trend would scare investors away. But demand for municipal securities has remained strong, largely because of investors' fears that tax reform measures being considered by Congress would limit the number of tax-free investment opportunities, according to Donald J. Oblander, the city's finance director.
"A lot of people are buying now in anticipation of Congressional action," Oblander said. "They want to get it while they can."
The city's investment advisers were worried that the city's decision to use a type of security known as certificates of participation might scare buyers away, since payment on such loans is not automatic, as it is on most bonds.
Payment has to be authorized every year by a vote of the City Council, which could be questionable in less prosperous municipalities. Failure to authorize payment could result in loss of the building to the lenders. But the city's prosperous image paid off.
"That's where the name Beverly Hills comes in," Millikin said. "You could see the images spinning around in the heads of the salesmen. It would be different if we were selling, say, Berkeley bonds."
Millikin credited Mayor Edward I. Brown for pressing the city's representatives to price the new securities as aggressively as possible.
New York Protest
At one point, the Goldman Sachs trading desk in New York protested that Beverly Hills was ahead of the market because of Brown's demand that the interest rate be set at 8.9% at a time when similar issues were selling for 9.12% to 9.25%.
These tactics initially scared off at least one potential buyer, the Franklin Fund, which had offered to take $25 million worth of the Beverly Hills issue.
But after two days of trading, the entire issue was sold at interest rates no higher than 8.9%, including $25 million to the Franklin Fund. The highest interest rate for the previous issue was 10 5/8%.
"The market turned up on that day, so it worked to my advantage," said Brown, whose businesses include financial consulting.
The transaction was complicated because Beverly Hills could not use the new loan to pay off the old one. The terms of the old securities said they could not be retired before 1994.
So the city turned to an option known as advanced refund under which the proceeds of the new loan are invested in federal securities and the resulting revenue goes to pay off the original securities as they comea due. This is one of the techniques that may be barred by Congress as part of tax reform proposals under consideration.
The new issue is larger than the old one because of several factors, including the lower rate of return the city will get from the federal securities. Also, the city needs to prepay an additional year of interest because of a one-year delay in construction of the project.
As a result of falling interest rates at a time of steady demand for municipal bonds, however, yearly payments through the year 2004 will be about $118,000 less than they would have been for the previous loan, Oblander said.
The $14-million theater was dropped in order to keep down the total cost of the civic center, which was originally estimated at $65 million.
Before the theater was dropped, council members said they were concerned that the total could go over $91 million.
So far the city has spent about $17 million on the project. A parking lot north of City Hall has been completed, and a 563-space garage is expected to be finished soon.
Plans also call for renovating the library and building new police and fire department headquarters.