4.4.1 Master Lease

ACTION 4.4.1 Office of the Superintendent of Schools MONTGOMERY COUNTY PUBLIC SCHOOLS Rockville, Maryland January 13, 2009

MEMORANDUM To:

Members of the Board of Education

From:

Jerry D. Weast, Superintendent of Schools

Subject:

Amendments to Master Lease Agreement

Montgomery County Public Schools (MCPS) finances its annual acquisition of vehicles and equipment under a Master Lease Agreement with First Southwest Leasing Company (First Southwest). The capacity of the instrument that has been in place since 2004 is not adequate to fund the FY 2009 and FY 2010 equipment acquisitions. The current authorized amount is $89.8 million. This amount needs to be increased by $43.2 million, to a total of $133.0 million, to fund this year’s and next year’s purchases. The current economic climate in the credit market prevents finding an investor willing to finance MCPS FY 2009 acquisitions at the interest rates provided under the current Master Lease Agreement. One investor has offered to provide financing to MCPS at slightly higher rates. Therefore, it is necessary to amend the Master Lease Agreement’s interest rate calculation so that required FY 2009 master lease financing may be secured. Background Vehicle acquisitions generally include school buses and commercial vehicles. Equipment acquisitions include technology modernization equipment and classroom furniture. The currently active Master Lease Agreement with First Southwest (formerly Carlyle Financial Services) was approved by the Board of Education on January 13, 2004. Applicable interest rates vary by term and are indexed to the average life Municipal Market Data AAA scale (MMD AAA). Actual interest rates are established based on the MMD AAA scale published five business days prior to the date funding takes place. For example, interest rates for the June 2008 funding were 3.475 percent for technology modernization equipment and 3.815 percent for school buses. The agreement allows First Southwest to submit a written request to MCPS to revise the rate calculations on or after June 25, 2007. First Southwest submitted a written request on December 5, 2008. MCPS may accept or reject any such request.

Members of the Board of Education

2

January 13, 2009

FY 2009 Funding MCPS desires to fund its FY 2009 acquisition financing in late January 2009. Market uncertainty has created liquidity issues impacting even the municipal leasing market. The MMD AAA yields, while generally a stable index, have fluctuated daily with market conditions by as much as 7 to 10 basis points. First Southwest has an investor who is willing to provide financing if the master lease rates are brought in line with market conditions. Adjusting the master lease interest rates would increase slightly the overall estimated financing costs for the FY 2009 funding. Total financing costs for the FY 2009 funding could increase approximately $60,000 over the six-year average life of the lease. That amount equates to approximately 0.3 percent of the total FY 2009 acquisition costs financed. Projected market rates at this time are slightly lower than the June 2008 interest rates. First Southwest has agreed to forgo its normal fee if interest rates for the FY 2009 funding are amended to approximate current market rates. Recommendation Illiquidity and uncertainty in the credit markets, including the municipal leasing market, has adversely impacted MCPS’ ability to obtain necessary financing for the FY 2009 lease acquisition funding. Allowing the Master Lease Agreement interest rate calculation to include a market conditions factor will make it possible to identify an investor willing to finance the FY 2009 funding. I recommend that you approve the following resolution: WHEREAS, The Board of Education, on January 13, 2004, approved a Master Lease Agreement with Carlyle Financial Services, now First Southwest; and WHEREAS, Montgomery County Public Schools needs to increase the funding available to finance vehicles and equipment under the Master Lease Agreement through FY 2010; and WHEREAS, Montgomery County Public Schools staff has determined that financing the FY 2009 acquisitions is dependent on Master Lease Agreement interest rates that reflect current market conditions; and WHEREAS, The Board of Education’s Fiscal Management Committee voted on January 5, 2009, to support this amendment to the Master Lease Agreement; now therefore be it Resolved, That the total amount of vehicles and equipment specified for financing under the Master Lease Agreement Section 1 be increased to $133,002,753; and be it further Resolved, That the Board of Education amend the Master Lease Agreement Section 3(b) to provide for an adjustment factor that reflects current credit market conditions to be applied to calculated interest rates based on the MMD AAA scale; and be it further Resolved, That the superintendent of schools be authorized to execute all documents necessary to complete this financing. JDW:SGD:vnb