DRAFT

(Contact the town clerk's office at 919-469-4011 for official minutes)

Minutes of the Town of Cary , NC

Financial Planning Work Session

March 25, 2008

5:30 p.m.

Conference Room 10035, 316 N. Academy St., Cary, NC

Present:  Mayor Harold Weinbrecht, Mayor Pro Tem Julie Robison, Council Members Gale Adcock, Don Frantz, Jennifer Robinson and Jack Smith

Council Member Erv Portman arrived late and his arrival is noted in the minutes.

Mayor Weinbrecht called the meeting to order at 5:30 p.m.

Karen Mills, of the Finance Department, stated that the purpose of the work session is to review Cary ’s financial policies using the bond rating considerations as a framework.  (Staff’s PowerPoint Presentation is attached to and incorporated herein as Exhibit A.)

Profiles of AAA Municipalities

Jamie Traudt, financial advisor from Davenport & Company LLC, said that they looked at AAA credits throughout the United States and their focus was primarily on cities and towns within North Carolina .  He said that there are four AAA counties in North Carolina :  Wake, Durham , Forsythe and Mecklenburg .  He reviewed the 10 common characteristics among AAA municipalities.  He said that 97 cities and towns in the United States are rated AAA in addition to 46 out of a little over 3000 counties.  (Discussion materials prepared by Davenport & Company, LLC are attached to and incorporated herein as Exhibit B.) 

Mr. Traudt said that debt service represents approximately 11 percent of the Town’s annual budget which puts Cary in the middle of their peer group.  He said that the national median for AAA credits is about 8-1/2 percent.

Mr. Portman arrived at this point in the meeting at 5:45 p.m.

Mr. Traudt said that a AAA rating is not just about statistics or finances.  He said there are four components to that rating: (1) the legal structure of the community, (2) economics and demographics, (3) administrative factors, and (4) financial factors. 

Mr. Portman asked about the potential weakness of debt service.  Mr. Traudt said that when debt becomes too big a part of the budget it represents a definite potential weakness in the community.  He said that is policies are designed to establish boundaries and frameworks to ensure that it doesn’t get out of control. 

Mr. Traudt said that the Town is in great shape.  He said that in 30 years of reviewing AA and AAA communities this is the first time he’s had the privilege of doing this type of analysis for a single community that ranked so consistently at the top of the peer group. 

Mr. Traudt reviewed the benefits of a AAA rating.  He said that some of the benefits of a AAA credit are that you do not have to depend on banks for credit to raise money, you don’t have to depend on bond insurance companies, you have guaranteed access to the credit market when needed, it provides increased flexibility in structuring debt, and it should provide citizen confidence in the Town management. 

General Fund Tax Supported Debt

Mr. Traudt said that the reason that Cary ’s payout ratio is low is because Cary has only been reissuing debt for a relatively short period of time.  He explained that the payout ratio is a ratio of the amount of principal that is repaid over 10 years of the general obligation debt. He said that if Cary had been borrowing every year for 20 years then Town would have a higher payout ratio.

Mr. Portman asked if the payout rate is a function of what is being financed.  Mr. Traudt said that probably 80 percent or more of the general obligation (G.O.) debt sold in the country is going to be 20 years; it’s not going to be generally amortized over a longer period of time.  He said that 20 years leveled principal has become the gold standard for the issuance of G.O. debt.  He said that as you start to deviate from that amount the rating agencies start to ask questions; most AAA’s are probably in the 60-70 percent range.

Mrs. Mills said that council has given staff the authority to move project funding around where possible.  She said there are some restricted sources that can only be used on certain projects and staff works hard to track and manage those projects.  She said the message is that the Town appropriates money to projects when council commits to them. 

Mr. Portman asked if everything in the annual capital budget is cumulative.  Scott Fogleman of the Budget Department responded no; he said it is independent. 

Mrs. Mills said that one of the key messages that council has given staff is the authority to move funds between projects in order to postpone and manage debt and staff continues to manage that very aggressively.  She said that the flexibility provided by council has served and will continue to serve the Town well.  Staff will continue to keep an eye on the committed debt at all times and stay conservative in their forecasting. 

Utility Fund Debt

Mr. Traudt said that utility assets have a long life and all of the rate payers who benefit from those assets should pay for them over their life.  He said that utility finance in the United States is done on a level debt service basis as opposed to a level principal basis.  He said that it reduces pressure on rate payers because ultimately total debt service may be a bit higher but annual debt service is consistently lower.  He said that the debt per customer for Cary is higher than the AAA and AA national medians as reported by Fitch and it is projected to grow significantly as we move through time.  He said that the total debt service on the utility system will more than double by 2014 and is projected to go higher by 2017.  Mr. Traudt said that depending on how fast rates are increased that coverage level will either be higher or lower as debt service increases.  He said that service coverage and cash in the bank are two critical factors weighing on ratings.

Mrs. Robinson asked about the policy for minimum fund balance and the implications of having such a large amount of cash on hand.  Mr. Traudt said that the cash currently on hand for operations not committed for capital projects is very close to the actual proposed policy recommendation.  He said that having cash in the bank adequate to fund one year of debt service and operations is generally where you will see high grade utility systems.

Mr. Traudt said that with the general fund and the utility system they are not suggesting to look at one policy or the other.  He said they both need to be looked at in conjunction with each other; they have to co-exist in some type of rational fashion.  He said that planned debt is the result if all issues are structured with the G.O. structure 25 year level debt service.  He said that one thing staff should be able to consider in the process of structuring debt is the impact on rate and tax payers in addition to other considerations.  He said that the peak year of debt service is the critical factor that engineers have to take into account when setting rates. He said that G.O. debt is restricted under North Carolina law and not as flexible as revenue bonds. 

Mrs. Mills said that staff has always looked at the least expensive debt service to the entity as a whole.  She said that the sooner you pay off debt the less interest you pay.  She said staff is looking for a consensus from council to begin considering the rate payer impacts as well as the overall economic cost to the utility system. 

Discussion on Proposed Policies

Mrs. Mills summarized Cary ’s strengths and challenges.  She reviewed the financial policy recommendations stating that staff’s proposal is to take advantage of Cary ’s flexibility and use targets, ceilings and floors for policy parameters to allow for flexibility. 

1. Confirm council goals for AAA bond ratings

There was a consensus among council to maintain goals to achieve a AAA rating.

2.  Formalize fund balance policy

General Fund:  Staff proposed lowering fund balance targets to four months with a floor of three months

Mr. Smith said he would prefer to keep it at 50 percent but he would agree with a managed goal of reducing it with set criteria surrounding that goal. 

Mrs. Adcock asked if reducing the goal would change things.  Mrs. Mills responded that all of the council’s capital decisions might have been different if there had been a different target.  She said there is flexibility without risking the bond ratings.  Mr. Coleman added that council’s choice is the same as it is every year.  He said even if they pay down debt they will still be faced with capital choices and whether or not to borrow money.  He said it’s a choice between paying more cash and issuing more debt.

Mrs. Robison said it doesn’t behoove Cary citizens to just sit on their tax dollars.  Mr. Portman said that the spending question is separate from the policy and he asked why staff thought it was important.  Mrs. Mills said there is flexibility to use this in lieu of debt to meet the Town’s capital needs and make different budget choices. 

Mr. Smith said it’s a risk tolerance level and weighing consequence of the risk protection.  He said Cary ’s peers are at the four month level and the question is whether they we want to be above that level.  Mrs. Robinson said they should target six months with a floor of four months to see what the economy will do and then reevaluate it in a year.  Mayor Weinbrecht said he wants to target four months.  Mr. Frantz said that he supports going to four if it is restricted to debt; if not he prefers six and he agreed with Mrs. Robinson

Mayor Pro Tem Robison asked about the added value of sitting on that much cushion and whether there is a need to keep that much money in the bank.  Mrs. Mills responded that Cary ’s AAA bond ratings are secure; Cary has earned it.

Mrs. Mills said that staff is proposing a definition change.  She said that the Town is already at six months under that definition.  She said as the budget increases the target number increases.  She said that it’s a one time budget decision.  Mr. Coleman added that after taking a comprehensive look at the overall financial policies and bond ratings staff’s recommendation, along with the consultants, is that we target four months with a three month floor with no risk to our AAA bond rating.  He said there is enough flexibility to cover any risks. 

Utility fund balance:  Mrs. Mills said that staff is proposing a change in the terminology and benchmark ratio for the operating fund.  She said that staff’s recommendation, along with the consultants, is a target of one year days cash on hand with a floor of nine months.  She said this is more conservative than the general fund because weather fluctuations dramatically affect the utilities.  She said that the equity currently in utility fund should stay there. 

3.  Set debt ratios

Debt vs. assessed value:  Mrs. Mills said staff’s recommendation is to consider the benchmark of net tax supported debt to assessed value.  She said this would be a ceiling; it is not something where a target would be set; it’s a boundary.  She said that staff’s proposal is a ceiling of two percent. 

Debt service vs. expenditures:  Mrs. Mills said that staff’s recommendation is to set a target and ceiling on debt service versus expenditures.  She said that staff’s proposal is a debt ceiling of 15 percent and a policy target of 12 percent.  She said this has to be considered along with the

debt structure consideration. 

Mrs. Robinson asked why the target and ceiling aren’t more in line with the national or peer medians.  Mr. Traudt said North Carolina has higher medians than most other states in the US .  He said Cary has a stronger than normal fund balance policy.  He said that the recommendation is not to unilaterally adopt the policies but for staff and consultants to meet with the rating agencies to ensure there aren’t any factors that may not have been considered.  He said the Town should be below that standard. 

Mr. Traudt said that if there is a policy in place the Town would be expected to live within the policy.  He said that policies can’t be taken casually.  He said the intent is that if you don’t believe you can live within your policies you are expected to meet with the rating agencies and explain why you are proposing to change the policy.  He said that having targets and ceilings allows for flexibility so that they are not absolutes. 

Utility debt coverage:  Mrs. Mills said the Town has never committed to utility debt coverage.  She said it would be prudent to adopt coverage ratios higher than 2.0 for revenue bond coverage and 1.10 for all bond coverage.  Mr. Traudt added that those are below national medians even for AA utilities.  He said it would be formalizing a floor for revenue bonds significantly higher than the legal requirement. 

4.  Adopt a policy to consider rate and tax implications of new debt structure

Mrs. Mills said she heard council agree to use those tools to help manage rate impacts for the rate and tax payers in the general fund. 

ACTION:  Mrs. Adcock moved go forward with staff’s recommendation as presented; for staff to meet with the rating agency to receive feedback and bring the recommended policy updates back to council through the operations committee prior to budget discussions.  Mrs. Robison provided the second.  Mr. Frantz voted “no.”  All others voted “aye” and the motion passed by majority vote.

The meeting ended at 7:45 p.m.