Meeting
of the Council Budget Committee
120 Wilkinson Avenue, 2nd floor,
Subject: Potential Delay of General Obligation Debt Issuance
Present:
Mayor Ernie McAlister, Council Members Marla Dorrel and Michael Joyce
The
meeting was called to order at
The
purpose of the meeting is to discuss alternative scenarios related to delaying
the Town’s general obligation debt issuance of $40 million and to make a
recommendation to the full council.
Town
Manager Bill Coleman stated that the original plan was to sell debt in fiscal
year 2006. Staff has examined the impact that selling debt this year would have
on the 2007, 2008 and 2009 budgets, as well as the possibility of delaying until
next year, or selling half of the debt and delaying half so that the majority of
the financial burden would fall in the 2009 budget year where a revaluation
would occur. Staff also considered the possibilities of a rate swap and use of
commercial paper.
Finance
Analyst Cheryl Spivey described the following options:
Mr. Joyce asked about the swap and commercial paper
program. Ms. Spivey responded that the commercial paper program is short
term and the Town would determine the best term length for that program. She
said that the swap locks in an interest rate now but the Town would begin
borrowing the money in 24 months—it is a forward commitment that is made at
the time the contract is signed. Ms. Spivey stated that a swap was included
in the examples to remove the interest rate risk and that most experts believe
that the rates are rising.
Mayor McAlister asked about comparing interest rate
costs. Ms. Spivey replied that costs change every week. She stated that over the
past three weeks the rate has fluctuated. Finance Director Karen Mills added
that staff tried to remove rate risk variables and a forward rate commitment
that locks in the relative value to the alternatives.
Mayor McAlister asked about the comparative costs for
commercial paper to general obligation bonds. Ms. Spivey stated that commercial
paper has a lower interest rate because of its short term nature. Ms. Mills
added that it is a short term line of credit that is drawn down as needed. She
said that it extends the life of the debt for 22 years and over the life of
borrowing more interest expense is incurred.
Mayor McAlister asked if a commercial paper program
provides another credit facility and flexibility to address future needs. Ms.
Mills responded yes.
Mayor McAlister asked if the funding for this program
would come from allocated reserves that have already been set aside for specific
projects. Budget Director Scott Fogleman stated allocated funds are set aside in
a cash pool for projects to get ready to spend. He said that those funds are
separate and apart from the sixth month reserve of operations in the general
fund fund balance.
Ms. Dorrel asked how staff’s proposal relates to the
general fund fund balance. Mr. Coleman stated that it has nothing to do with the
general fund fund balance. Ms. Mills added that the Town has $13 million over
and above the six months reserve in the general fund fund balance. Mr. Coleman
stated that those funds are available for capital projects and could replace
some of the funding already budgeted. He said that it is a decision that council
will need to make. Mayor McAlister said that adding the fund balance to the
recommendations would cause confusion and money should not be taken out of the
unallocated fund balance.
Mayor McAlister said consideration needs to be given
to the basic premise of holding off the interest carry on the debt. Ms. Mills
stated that the Town would pay interest for 20 years; it is a matter of when
council wants to start and whether the goal is to arrive at the cheapest way to
get the projects done or to postpone paying for those projects as long as
possible.
Ms. Spivey stated that governments borrow money at a
lower interest rate. She said in the past couple of years the Town’s interest
earning rate has been lower than the borrowing rate which is not the norm in
government. The norm is that governments can invest higher than what they borrow
because of the tax. Ms. Spivey added that using cash in the unspent projects
doesn’t affect arbitrage rules. She said that the Town can reinvest up to the
amount borrowed if the money is not used immediately, but only up to the amount
of the interest rate borrowed.
Ms. Dorrel asked about the revenue picture. Mr.
Fogleman said that based on current trends the Town could expect to see an
increase in revenue in the range of two-and-a-half to three-and-a-half percent
based on prior year actuals. He said that the level of sales tax would probably
be around three percent if the economy continues to grow. He said that staff
will be in a much better position to provide revenue picture information by
mid-March when the Town receives the assessed value from
Ms. Dorrel stated that she would be able to support of
a less costly approach.
Mayor McAlister asked about other municipalities using
commercial paper. Ms. Spivey responded that although commercial paper is fairly
new to
Mayor McAlister asked how auditors and bond rating
agencies view commercial paper. Ms. Mills responded that it is irrelevant to the
auditors. Ms. Spivey added that it hasn’t caused any problems for other
municipalities with the rating agencies. She aid that having strong management,
making prudent decisions, and maintaining a strong fund balance allows for
flexibility on financing.
Mr. Coleman said that council may want to look at the
issue of 2009 being a revaluation year. He said that with every revaluation the
benchmark is reset for taxes and the resulting tax rate affects every class of
property differently. He suggested delaying the full impact of the $3.7 million
until the 2009 revaluation when the tax rate will be recalibrated.
Ms. Mills stated that staff is okay with drawing cash
reserves in order to postpone the debt sale for one year. The commercial paper
program was added because they were not as comfortable drawing out cash balances
for two years worth of projects. Mr. Coleman said that the best alternative
would be to use the cash and delay debt for two years. He said it would be a
matter of whether the Town could manage the expenditure schedule of those
projects to that timing. Ms. Mills stated that staff did not look at that
alternative.
Mr. Coleman said that the problem with commercial
paper is that it adds $2.5 million to those projects. He said that if the goal
is to reduce the impact on the operating budget of debt until revaluation,
council may want to look at using cash and delaying debt for two years and use
the commercial paper as a fall back to help the finances at the very end. Ms.
Spivey stated that there would sill be lost investment income. Ms. Mills
added that it would also bring in the value of those capital projects and any
inflation costs.
Mayor McAlister asked what can be done to manage the
rate of spending. Mr. Coleman said to look at the big projects and stretch the
projects out a little longer. Mr. Joyce is not in support of anything that
extends projects.
Mayor asked about staff preference. Mr. Coleman said
that staff has looked at putting together a financing plan for all projects
based on public comment. He said the that original plan was developed to have
the least cost manner to the public now and in the future—adding the goal of
reducing the impact on the FY07 and FY08 budgets in order to get to the
recalibration in 2009 is different from where staff started. Mr. Coleman stated
if that is the goal then his preference is the $20M/$20M (commercial paper)
because it is going to be just as much of an issue in 2009 as it is in 2007. He
said consideration needs to be given to any additional debt that may be approved
in the FY07 and FY08 because it is likely to affect FY09.
Ms. Mills stated that staff is comfortable drawing
down $20 million on the unrestricted funds. Mr. Fogleman said that using
the commercial paper program would allow staff to get a clearer picture,
although he is concern about any appearance of affecting on taxes in FY09.
Ms. Dorrel said that the $20M/$20M provides an
advantage and meets the stated goal.
Mr. Coleman said that all of the alternatives have
potential but the overall goal is to reduce the budgetary impact of debt in FY07
and FY08 at the lowest possible cost, not delay capital projects, and
potentially use different methods of financing. He suggested that the committee
recommend to the full council to let staff make decisions in the best manner
possible using all of the scenarios but with the primary goal of reducing the
budget impact in the FY07 and FY08 budgets.
Ms. Dorrel asked if bonds will be sold in March. Mr.
Coleman responded no. Mayor McAlister added that council is not authorizing a
bond sale in March but they may be asked to do so at an appropriate time.
Ms. Dorrel said that the council needs to be clear on
the goal and policy direction given to staff.
The committee agreed that the goal should be to delay
as much debt service as possible related to the pending $40 million general
capital debt sale beyond FY 2007 and FY 2008. Having reviewed several specific
methods and considered the pros and cons of each, the committee agreed not to
direct staff to execute a particular financing mechanism, but to allow staff the
flexibility to choose which mechanism, or combination of mechanisms, would work
best to achieve this goal at the lowest overall cost possible.
It was further confirmed that these financing decisions will not impact
the current schedules related to individual projects.
Staff will continue to update council periodically on the forecasted
impacts and related obligations that will be necessary to achieve this goal
given project spending patterns, forecasted interest rates, and the impact of
future appropriations.
Meeting ended at