they are specified on page 12 of the report. we recommend that you accept those recommendations. >> a few questions for the airport. that is not -- you just did not ask for the total amount because the opportunities are for the other ones? >> the reason why we did not ask for all of that is because the magnitude -- this is what we see in the next couple of years. we are calculating a finite amount.

>> you are only asking for 329? >> there is previously issued an appropriation that was provided about $3.9 million. did you calculate the authorization? >> the $1.6 billion basically restores a request that we have made over two years ago where we asked for refunding savings. the two-five is a number we would like to have in place for refund bonds and to remedy any variable rate debt. supervisor chu: and a final question in regards to the variable portfolio.

we will talk about the variable rate portfolio. it looks like you have gotten rid of all of your auction rate bonds. the potential is to enter into a new instrument. >> there is a new instrument on the market. it is based on the spread of municipal -- it doesn't require liquidity. it is based on the credit of the airport. we see it as another tool in the toolbox. if they became distressed, which we could move it if we needed to. >> why don't we open this item up for public comment.

public comment is closed. supervisor mirkarimi: motion to approve. supervisor chu: without objection. i have actually -- i see our clerk who is sitting here. can we return to this item and go to closed session first? thank you. [closed item number six, please. >> resolution approving the restructuring of $120,400,000 for revenue bonds series.

to the execution of [unintelligible] including other matters where the city and other additional material. supervisor chu: this item is notice dd to allow the board to enter closed session. one of the things that we could do is go through the presentation that does not require the closed session confidentiality. if there are questions and then we can go into it at that time. why don't we begin with the controller?

>> i am going to briefly walked to the transaction that is here before u-hauyou. -- walk through the transaction that is here before you. as much as anything else, i will answer questions you have regarding the proposals. the foundation that is a non- profit organization serves to support the functioning of the city department for the purposes of a fixed rate debt.

across tethe plaza here -- it was refinanced in 2005. the term is extended somewhat i. interest rate refunding. at that point, the foundation who entered into a hedge against interest rates moving, which is a complicated mechanism. those purchases made by the foundation -- both the variable

rate debt markest ants and the d market is a debt that brings us here today. we had a couple of things happen. the bonds overall were downgraded as a result of the bond insurers at that point. the foundation began to have to make collateral postings to the primary bank. the required additional costs and fees to keep the transaction viable. we see the beginning of problems in 2008 and 2009.

as a reminder here, the foundation bonds are not an obligation of the city at this point. we have these material effects that cause the foundation to begin to make collateral postings as a result of bond insurance that is depleting endowment. you have increased fees as the result of masking the overall transaction. you have the effect of the downturn as a whole. it lost a material amount of his its return.

they would have trouble servicing this on a going- forward basis. they will notify him j.p. morgan that there was going to be trouble meeting the obligations of this and that -- debt. it accelerated a negotiation as it became increasingly clear that there was the rest of the foundation defaulting that would have significant impact on the city. i can talk about it later. additional events antedates - - an- and dates. without the letter of credit,

the transaction was no longer viable. it triggered a set of provisions. 23 years of debt outstanding, the timeline over which the foundation repaid them was dramatically accelerated. it increased the pressure and the likelihood. we completed a negotiated agreement, and the package that is here before you, that is why we are here. it stops in our steps down that path that will likely lead to the foundation, frankly disappearing. it offsets city costs.

the foundation's de fault would have that effect on our ability. a chart showing what the deal looks like before and after the transaction. $119 -- it calls for the banks to forgive 20% outright. it is down to $98.4 million. it is no longer a variable rate debt, more of a vanilla fixed rate loan. when you consider all the fees inherent, paying for the letter

of credit, the synthetic rate swap, the rate of the deal is lower as well. we have negotiated an extension of the term. it stretches the payments out over a longer term. which reduces the maximum annual debt service. from $10 million to just over $6 million. since the downturn has been torn up, there is no swap required.

as of december, it fluctuated daily with the markets. if this deal is approved, it will flow back to the foundation. $7.7 million reserve. so fundamentally, the deal calls for less debt outstanding. some of the key assumptions required to make this work going forward, it assumes that the unrestricted endowment, the interest will be making service payments going forward. if you assume a 6% rate of return, that will be the life

of this debt, it will be required. that is the number required to make this work. the foundation committed to reaching those targets. it is a schedule of payments. this is somewhat sensitive to interest rates. if the return is less than 6% going forward, it is something that we will be modifying year by year. the reason we are here today is because none of this financial arrangement is possible without the city's involvement. the deteriorating financial condition, they were hit in the financing agreement and the lead

downgrades of the foundation as of december. the reduced the rating on the foundations that is below investment grade. they would not be practical or possible. what we are proposing here today is that the city will enter the deal and provide a contention guarantee standing behind the foundation. in some ways, and the city -- the city is co-signing this loan. we are talking about the conditions. if they are met, a fund-raising target over the next three years, there is no out-of-

pocket cost to the city to make this transaction work. that is what we're proposing to you. as part of the essence of credit, we are asking for things in return. the foundation agrees to retain a management consultant to complete a review of operations by june 30 to provide insight to improve museum operations. there are key restructurings. the controller's office will be required to approve the annual budget. we are part of in-the-loop. there are non-voting seats with

the investment committee. there is a lot of documentation here before you today. it includes mutual releases. a lot of documents to memorialize this agreement. in summary, the city owns the building. we own the collection. neither are pledged to the original thadebt. it was augmented by the private financing. each year, the charter requires

that we display the exhibit. it reduces the cost by approximately $7 million. the city is signing on to this agreement. with no longer able to serve this -- service debt, it would be absent the city's involvement. there are risks, but signing on to the agreement is lesser and more remote. as you can see, by approving

this item, we avoid the repayment of the 2005 bond over a five-year-period. we avoid the negative publicity that would come from defaulting. we avoid the loss of significant offsets to the budget that the foundation provides. and we avoid a possible interruptions. almost certainly, it would have led to litigation and resulted in a time where the museum would be not operational. again, and the city lends its credit, signed on to the

agreement -- again, the city lends its credit, signs on to the agreement. if those conditions are not met, the controller's office -- the city would have to make appropriations of the foundation is not able to. it would require my office has proposed agreements to the board of supervisors to make those service payments. a very high level summary of the transaction. i would be happy to talk you through the further detail. we have jay chou. supervisor mirkarimi: first, i

want to express my complement's to the comptroller, the city attorney's office. that is what it looks like in trying to save this, rather rapidly. it appears to be a decent save. the 2005 bonds have been tendered to the bank. correct? >> correct. supervisor mirkarimi: i gather that there is no choice unless we want to flip a coin having to pay down in five years or

benefit from [unintelligible] >> that is correct. in december, we hit a trigger in the financial documents. they are now owned by j.p. morgan. it suddenly became due in 5 years. supervisor mirkarimi: have we been in this position before? >> this is a first for me into the city to be in this circumstance. the non-profit entity was impacted by the downturn. it is the unique non-profits.

i share that sentiment. this is a very unique foundation. for the purpose of improving the public building, and displaying art we own. it is a non-profit established to assist the city. if this were a privately owned building or collection, the dynamic would be different. there is the situation where we have a chartered apartment, he city own collection and a non- profits supporting it. even there, there are differences. i think it is a unique

arrangement. supervisor mirkarimi: what is the collateral? >> in the original transaction, it is the balance sheet of the foundation to secure the debt. if the same dynamic exists, he the the building is pledged. -- if the building is pledged, in a worst case scenario, it is unable to make the payment. my office would have to propose supplemental >> the supplementals would be originated by my office.

of course, this board cannot bind a future board of supervisors to approve a supplementals. if there is a default, the bank gains certain rights. they gain the right to hire a chief restructuring officer to advise, and they have the right to raise ticket prices at the museum to the average of three museums in california. that is the remedy here. that is the best outcome at the end of this if all the worst- case scenarios are met. no one intends to get there. but if you are asking for the maximum exposure, that is it. supervisor mirkarimi: with the dual objective of drawing down the debt after the transfer,

how is it that a capital campaign enhances the attractiveness of getting greater visitation so that revenue is significantly increased, i assume, so that it is staving off the potential of us being in this position? >> i will return to jay shu. i think the financial nut to crack -- in all of the conversations we had with the museum, the foundation, and the board in the past couple of months, it is clear that long- term the asian art museum benefits from a much more robust endowment than they have today. it's standard museum practice is not to operate on an endowment as minimal as this one is. in essence, it is pledged to

make debt service payments on the building we have already constructed. we are still somewhat short. our hope is that the capital campaign can be driven to finish the financing on this building. it can continue above and beyond that needed to make the financing work and leave the asian art museum and foundation of the end of this with a true endowment that is there to spin off entrance -- interest earnings and support the is in going forward. that is our hope at the end of all of this. this is still a comparatively young museum, in the larger municipal or geological cents. we are talking about a museum that, for many years, until they relocated to this facility, was in essence a part of the young and golden gate park sharing space. there are still growing as a stand-alone museum. part of that will be growing and

endowment overtime beyond what is needed to make this work. supervisor mirkarimi: i am also hearing other museums that are struggling, yet we are not stepping up to cosign for them or to provide that kind of a backstop. >> that is very true, and i think this is a very unique circumstance, where the collection was gifted to the city in a perpetual trust. it is a requirement in our charter that we persuaded -- that we displayed it. there are very few cases out there where we have museums that meet that test. in essence, we are the owner of the art. we have no authority or ability to give it to anyone else. our own charter gives us the responsibility to display the artwork. there are only a couple of museums like that in the city. the young is one, the region of honor is another, and the

academy of sciences is the third. in the universe, the asian art foundation is by far the most precarious the financially secure with him. the academy of sciences and the young both benefit from much larger endowments, much more stable structures. this is the one that was at risk. unfortunately, we find ourselves in the position of having to backstop. supervisor mirkarimi: in the early warning signs that are built in for the next era of the museum that helps us steer clear of these potentials -- >> in entering into this agreement, the city has, by necessity, built into these much more oversight and involvement in the foundation's activities. we gain a couple of key seats, where we will have city- appointed members attending and monitoring he committees, like the capital campaign commi