Value Delivered:

In 1990, Sonoma County citizens overwhelmingly supported efforts to retain the area's rural allure, voting to reach into their own pockets to pay for Measure C. The new law funded the creation of the Sonoma County Agricultural Preservation and Open Space District with a one-quarter percent sales and use tax. The District's mission was to permanently preserve the diverse agricultural, natural resource, and scenic open space lands of Sonoma County for future generations. To date, Measure C funds have financed the preservation of 70,000 acres of clean water sources, scenic vistas, wildlife habitat, working farms and vineyards, parks and trails.

With the Measure C sales and use tax set to expire on March 31, 2011, voters agreed on November 7, 2006, to extend the tax for twenty years with Measure F. The new measure is set to begin immediately after the expiration of Measure C. The District developed an expenditure plan which called for the purchase of additional agricultural, wildlife habitat, and open space lands and the repayment of treasury loans made by the County. With funds from Measure F not available until April 1, 2011, the County turned to KNN Public Finance to develop a financing strategy to help the District take advantage of imminent land acquisition opportunities.

KNN's first assignment was to evaluate alternative sales tax revenue bond structures to address the four-year delay in the commencement of Measure F revenues. KNN evaluated a range of options, including: (i) Capital Appreciation Bonds; (ii) a four-year Bond Anticipation Note (BAN) which would be refunded with long-term bonds in 2011; and (iii) Current Interest Bonds utilizing four years of capitalized interest. While the BAN appeared to provide the lowest total debt service in the short term, waiting four years to issue long-term bonds posed significant interest rate risk, particularly in light of growing concerns about the potential impact of the sub-prime mortgage crisis on municipal rates.
   
Strategic Implementation:

The District and County elected to pursue current interest bonds for this transaction with capitalized interest through 2011. The added cost of the capitalized interest was offset by the potential savings in land acquisition costs and savings from the refunding of the County Treasury loans. Because capitalized interest could only be financed with tax-exempt bonds for a period of up to three years, KNN structured a second series of taxable bonds (with a single maturity in 2011) to fund the fourth year of capitalized interest.

Due to the strength and diversity of Sonoma County's sales tax base as well as debt service coverage in excess of 2.75 times, both Standard & Poor's and Fitch Ratings assigned the bonds a strong "AA" rating. FGIC provided an extremely low bond insurance bid of 15.8 basis points, providing present value savings in excess of $3.2 million as compared to uninsured bonds.

KNN sold the bonds by way of competitive sale, staggering the sale of each series by one half-hour. This helped target different underwriters for the tax-exempt and taxable series and ensure that multiple bids were received for each series.
   
Results:

The bonds priced on October 25, 2007 at low true interest rates of 4.30% and 4.70% for Series A and B, respectively. The County's timing was extremely fortunate. Since then, municipal market rates have increased by more than 13 basis points as a result of widening credit spreads due to the sub-prime mortgage crisis. During that same time period, bond insurance premiums have more than doubled while the pricing benefits of bond insurance have diminished to zero for many "AAA"-rated insurers.

Supporting the County and District for the long haul of eight months, from initial inquiry to final sale of the bonds, were KNN's David Leifer, Mark Li, and Anastasia Beckett.