Town
Council Work Session
Thursday, October 6, 2005
Present:
Mayor Ernest McAlister, Mayor Pro Tem Jack Smith, Council Members Marla Dorrel,
Michael Joyce, and Julie Robison
Absent:
Council Member Nels Roseland
Council
Member Jennifer Robinson arrived late and her arrival is noted in the minutes.
Mayor
McAlister called the work session to order at
The
purpose of the work session is to review the status of active capital projects
for possible reallocation of funding to reduce the use of debt. This work
session was requested by Council at the end of the Fiscal Year 2006 budget
process.
Mayor
McAlister thanked staff for their hard work in pulling the materials together
for the work session. (Budget documents prepared by staff are attached to and
incorporated in these minutes as Exhibit
A.)
Town
Manager Bill Coleman stated that at the end of the FY06 budget process the
council directed staff to look at the breadth and scope capital projects
underway by the Town and identify the potential for reallocation of some cash
resources to potentially postpone debt. Staff has gone through the entire
capital budget and identified all active capital projects, their current status,
the total amount of capital funding appropriated, and the amount of cash and
debt funding for those projects.
Mrs.
Robinson arrived at this point in the meeting at
Mr.
Coleman said that staff also tried to identify on a broad basis the
opportunities to reallocate some of the cash to debt funding. He said that the
Town is looking at a general obligation bond sale in January for $44 million,
and the full impact of that will be an expenditure in the FY07 budget. He said
that staff tried to identify opportunities that may exist to use cash to offset
some of the debt and reduce the expenditure burden on the 2007 budget.
Finance
Director Karen Mills provided an overview of the Town’s current debt position,
why and how the use of debt is programmed into the capital budget, and where the
Town is headed in the near future, so that council has information on the
Town’s current debt, what it will be in 2007, and forthcoming debt sales. Ms.
Mills reminded council that debt is only one piece of the Town’s financial
position. She said it also includes cash, receivables, assets, equity, revenue
streams, and expenditures, and the Town is in a really good position on all of
those. (Ms. Mills PowerPoint Presentation is attached to and incorporated in
these minutes as Exhibit B)
Mrs.
Robison asked if the debt valuation for
Mrs.
Robison asked what would threaten to the Town’s bond rating. Ms. Mills
responded that as far as debt it would be a percent of expenditures, probably
18-20 percent. She said that some communities have significantly more debt but
they are very different from
Mayor
McAlister said he asked the same question of the bond rating agency
representatives when they met. He said that the response from the bond
representatives was that it is not as clear cut as the black and white factors
that feed into the Town’s credit scores, a lot of things are rolled into it.
There isn’t a municipal equivalent to an industry norm. Ms. Mills added that
everything has to be balanced—the economy, longevity of management, the
Town’s entire financial position, long-term planning, and council choices.
Mr.
Joyce asked about the scale for levels of aggressiveness on debt and where the
37.5 percent of expenditures for FY06 fits in. Ms. Mills responded that the 37.5
percent is not aggressive and that
the Town will be in a more aggressive position with all of its current plans.
She said that half of the utility rate will be debt service.
Mrs.
Robison asked about the upgrading of the Town’s utility fund rating. Financial
Analyst Cheryl Spivey responded that previously the Town carried one AAA on the
utility system but in 2004 when the Town sold utility bonds
Mayor
McAlister asked about the 2002 Town Hall certificates of participation. He said
that the Town borrowed $31 million, sold that debt in 2002, started the project
and has been spending it all along. He asked what investment vehicles are used
to ensure that the Town is getting a return on the $31 million. Ms. Mills said
that the cash is managed. She said with every forecasted project the cash flow
is forecasted on that project and those proceeds are invested to maximize the
earnings until the cash was needed. Ms. Mills said the Town is not able to
invest at the same rate of the debt interest expense, but it can be offset.
Mr.
Joyce asked if borrowing the $33 million for the Town Hall project could have
been done in three phases to provide an opportunity for the Town to recapture
the interest rate through investment earnings. Ms. Mils said that one of the
factors involved at that time was the forecasted spending and when the decisions
were made the project was not expected to last this long. She said another
factor is the cost of issuing that debt and the closing costs.
Ms.
Mills said all Town cash is pooled and managed as a whole and the project
funding works together to support each individual project. She said that staff
will not borrow money if it is not prudent at a particular time.
Mr.
Joyce asked if projects approved by council without an identified funding source
have to come back to council when it is time to appropriate funds. Ms. Mills
responded that staff will take the funding for the project back to council;
however staff is constantly managing and looking for opportunities to improve
that cash and when necessary bring an adjustment proposal forward because if the
source is changed it has to be approved by council.
Mrs.
Robison asked about interest rates affecting timing decisions. Ms Mills said
that staff has financial advisors and underwritings who talk with them about
borrowing money at a variable rate, but now is not a prudent time to use that
tool. Ms. Mills said that rating agencies generally don’t like to see more
than 25 percent of total debt borrowing in a variable rate mode because of
the exposure. The town does not have any variable rate exposure right now in its
debt. She said that there is a difference between fixed and variable rates and
the Town can save more with a fixed rate in exchange for the risk of having the
rates increase.
Mayor
McAlister asked about interest rates the Town has seen in the last 5-10 years
and whether they have changed. Ms. Spivey responded that the lowest rate in the
past three years was for the Town Hall and Highway 55 project. She said that the
average was slightly less than 4 percent. In 2001 the Town borrowed closer to 5
percent and staff has been told that the Town’s bonds in and 11 year bond
market would sell at 4.39 percent. Ms. Mills added that staff looks at the
historical rate trends.
Mrs.
Robison stated that if the
Mrs.
Robison asked about the bond sale of $40 million for the street projects. Mr.
Fogleman said that there is probably a mix of funding, some comes from the 1999
referendum but mostly it comes from the 2003 bond referendum.
Ms.
Dorrel asked if there is a time limit for the period in which to use the bond
funds. Ms. Mills responded that the bonds have to be sold within seven years
from the referendum date but that we staff can ask the state and council for an
extension of three more years on that authority.
Mrs.
Robison stated that the Town runs the risk of not locking in good rates if the
time period lapses. Ms. Mills stated that if a good reason existed to delay
using the bond then the Town could ask the voters to approve another referendum,
but the interest rate could be different depending on the market at that time,
because the rate is determined at the time of sale.
Mr.
Joyce asked if the Town could go on its percentage of assessed value. Ms. Mills
said there is a legal debt margin, but staff would never recommend approaching
that margin. She said that the Town is at 16 percent of total expenditures for
debt service. Mr. Fogelman added that the Town is we are currently at 15 percent
of legal capacity.
Mrs.
Robison asked when the Town changed its approach to funding. Ms. Mills said that
council changed its approach for funding capital projects, going from a cash
basis to leveraging that with debt, around 1999 or 2000. She said it was a
change in philosophy to level existing margins at that time in 1999, but every
year council makes decisions on spending.
Mr.
Coleman said that the change was precipitated by the decision of the Town to
take on the responsibility of making a number of major road improvements because
the North Carolina Department of Transportation did not have the funding and it
wasn’t going to appear on the Town’s transportation improvement plan in a
reasonable time. He said that there was no way for Town could take on that
responsibility without debt financing. Additionally, at that time the Town had
just completed the parks and recreation greenways master plan a decision was
made to put more effort into funding that plan. Mr. Coleman said that once
those decisions were made financial plans were laid out that would tie the sale
of the debt service into our long range budget. Mr. Coleman said that another
factor was that in the 1990s and 2000 the Town averaged double digit revenue
growth, which was an indication that there was a reasonable revenue picture and
expenditure plan.
Ms.
Dorrel asked if the decision to add debt for Town Hall expansion was made prior
to 1999. Mr. Coleman said that his recollection was that the Town did not
originally plan to use debt but the project became bigger than originally
intended and required using debt. He said that the original cost for the project
was around $9 million for one building, but as the Town went through growth
issues were raised about expanding building B, and that the council chambers was
not adequate for looking 20-30 years into the future. It was an iterative
process and in the end the decision was made to develop the campus for a 20-30
year period and that plan was finalized around 2003. Mr. Coleman said that the
project was all debt funding.
Mr.
Joyce provided a proposal to council to use cash for certain projects for the
next two years to postpone debt, and then to make a reimbursement resolution.
(Mr. Joyce’s proposal is attached to and incorporated in these minutes as Exhibit
C.)
Mr.
Coleman said that staff wanted to provide council with a review of the Town’s
debt picture. The proposal is to look at all cash balances in capital projects
for which debt will be issued in January 2006, look at matching available cash
with that debt, and replace that it with cash for the purpose of lowering the
debt burden on the 2007-08 budget. He said that the goal is not to eliminate or
remove any of the projects but to change the timing and type of funding for
them. He said that there is $60 million of available cash in the general fund
budget and around $53 million in the utility fund budget that could be used as
an offset. Staff would have to find $10 million in cash to generate $1 million
reduced expenditures in 2007. Mr. Coleman said that if the debt service
expenditure in the 2007 budget is going to be $4.2 or $4.4 million resulting
from the January 2006 bond debt sale then it would take $44 million to
eliminate it, and the proposal is to look and see how much of a reallocation
could be done to offset the impact on the 2007 budget. Staff would need to look
at the projects funded, look at the existing cash balances, determine their
source and whether it could be used for those projects, and bring a list back to
council to decide whether to make that reallocation. He said that would mean
changing the timing and financing of those projects.
Mrs. Robison asked if there was a
difference in the existing process. Mr. Joyce said that is something already
done by the Town. He said it was done with the Town hall campus. He suggested
that staff review the proposal and come back to council with line item
decisions. Ms. Mills responded that decisions staff brings to council are based
on knowing that a project will be funded with debt. She said that balancing each
project and the individual timing is different from reprogramming the original
source of money.
Mayor
McAlister said that it is timely for council to reexamine each project. He said
that the work session has allowed council to go back over the list of projects
with a fine tooth comb, to receive an update on those projects, and to determine
if there are funds that can be allocated. He said it is important to make a
distinction between how a project will be funded and any accounting and cash
flow implications. Council needs to determine how to fund those projects, how to
account for that funding, and how to do it in such a way that it adds the least
amount of debt burden.
Ms.
Dorrel asked for confirmation that council is not going to eliminate or delay
projects, only change the timing and method of funding. Mayor McAlister said
provided confirmation. He said that further along it is likely that council will
have to consider delaying or deleting projects but before that is done council
needs to find available cash for the current projects.
Ms.
Dorrel asked if the goal was to reduce the impact of debt service in the coming
year. Mayor McAlister responded that the timing and differences are being
addressed. He said it does not solve the entire process but ensures due
diligence from council.
Ms.
Dorrel suggested that council provide staff with targets because it is not
reasonable to believe that they can offset $42 million. Mayor McAlister asked
staff if it would be helpful to have a target. Mr. Coleman responded that
staff would prefer to go review the projects themselves to determine what is
reasonable and then provide options to council.
Mayor
McAlister suggested setting parameters that would not question the council’s
commitment to a particular project. They want to address the accounting and
funding timing issues.
Ms.
Dorrel said she hopes that council is looking to the future and what will happen
in 2010 or 2012 as a result of their decision. Mayor McAlister said they are
focusing on the near term issue but not to the exclusion of the long term
concern.
Mr.
Coleman said that staff is only looking at appropriated debt at this time, not
at all of the Town’s debt authority. He said that if more capital projects
were undertaken and more debt added the picture would look different. Ms. Mills
added that for every year debt is not borrowed it goes down the next year.
Mayor
McAlister said that another work session may be needed once the information is
compiled, and he asked staff when Council can expect to receive the requested
information. Mr. Fogleman responded that project managers will have to examine
their projects and forecast spending needed in the next 12 to 14 months so
that the budget department can assimilate the numbers. Mr. Fogleman said that
staff could probably have something to council by the end of October.
Meeting
adjourned at