Karen Mills
Director of Finance
Town of Cary
Speaking on October 29, 1998, about the financial issues of the $149 million February 2, 1999 Bond Referendum.
"The Town of Cary is just like you (citizens): you have your day-to-day expenses, and then you have large capital needs, like your homes, for example."
"Cary has historically been very conservative in its projects and has been able to use taxes and other sources of funds to take care of those smaller, day-to-day projects. But when it comes to a large project, like your home, we must finance that just like you do. So, we go out and look for loans. In the government finance area that is called ‘issuing bonds.’"
"Bonds, in government, are equivalent to, for example, your home mortgage. We go out looking for financing just like you look to a bank for a home mortgage; we’re looking for a bank to make us a loan. These banks have to evaluate us just like they would evaluate you. They look at our history and our future just like someone would look at how well you have paid your loans in the past."
"They look at our financial condition both historically and our forecast for the future. They look at our managerment and how well they think we have done with what we have and where we are planning to go. They look at the debt we have currently and how well they think we have managed that versus what we have paid cash for, and they look at our economy and how well we are situated in the region and how well we’re responding to the challenges and opportunities placed in front of us in regards to the economy."
They also look at how long we want to borrow that money for, just like a home mortgage. Typically, a bond is for 20 years, so it is important that this matches the life of the project. For example, the water plant should last 20 years, and the bond should be 20 years to match the life of the project. The banks also look at what we’re offering in terms of collateral, just like with your home mortgage. If you fail to meet your obligation, then they will come and take your home. Well, we obviously can’t let them come and take the Town, but we can make promises to pay. I will go into more detail about that because it comes into our choices about how we finance things."
"For governments, financial health is typically represented through a rating process conducted by rating agencies like Standard and Poors or Moody’s. They give everybody (governments) standards on a scale: A, B, C... Nobody wants to be a C or even a B."
"Government investment grade bonds are in the A category. Within the A category, you can get an A, AA, or AAA. AAA is as high as you can go. With A or AA, there are also designations of AA+, AA-. Right now, Cary is a AA+ and AA1. That is an excellent credit rating. It is next to the very best rating of a AAA, which remains our goal." [Cary recently received AAA ratings from Fitch IBCA and from Moody's.]
"I want to talk a little bit more about why that is our goal. Our evaluated risk, i.e., how sure we are to pay our bonds, how good they feel about our opportunities, and our resources to pay our bonds are part of what determines our interest rate. Obviously, if they feel it’s riskier, they are going to give the loan at a higher interest rate. Since a higher interest rate obviously incurs higher interest costs to our citizens and therefore higher taxes, our goal is a AAA rating, the least risk opportunity in the market, for the lowest cost to our citizens."
"I want to talk a little bit more about those different types of promises to pay back government loans. There are three different types of government bonds and they differ in what we promise and what they are used for."
"General obligation bond is the one we are going to talk most about because that is what the referendum is proposing to you. The general obligation comes from the idea that it’s a general obligation of the Town’s taxing authority. Revenue bonds are another alternative that the Town has, and those are a promise to pay for a project through the revenue generated by that project. The last type is like your home mortgage: it’s an asset-backed loan where you would promise to give up the asset that the debt is supporting, and those are called COPS, Certificates Of Participation."
"Based on the purpose and the security of these three types of bonds, each generate a different interest rate. An asset-backed loan like your home mortgage can’t be used for roads, for example. A bank can’t take the road if we choose not to pay for it like they could come in and take your house. It is also perceived as a riskier type of loan because they don’t want to have to come and take the asset; therefore, it’s the most expensive type loan and bears the highest interest rate."
"A revenue bond is paid back from revenues generated from the project, and we can’t use that for roads either, because roads don’t generate revenues. Parks generally aren’t acceptable for revenue bonds, either, because they don’t support themselves,"
"The last one--general obligation bonds--is based on the taxing power of the government, and it can be used for any purpose whether it’s for the utility system, roads, parks, those types of things. The market just loves these types of bonds because we’re promising to raise the taxes as necessary in order to meet the obligations that we have made. They really like these because before we promise to raise the taxes if necessary, we go to the voters and ask for their permission to make that promise, and that is what the referendum is about."
"To talk a little bit more about general obligation bonds, because that’s what we are proposing, I want to talk about the promise to raise the property taxes. It’s only a promise to raise the taxes if it’s absolutely necessary. Like I said, the voters must approve this at the referendum. Even when a bond referendum is passed, however, we don’t have to use taxes. We can use the utility rates; we can use other fees in order to meet the debt obligations. We don’t have to raise the taxes if our current tax revenues plus our other revenues are adequate to meet our obligations as well as our operating costs."
"For example, in 1994 we had a referendum and based on the choices that the voters made, we had said to voters that we expected to increase taxes 4 cents over time. Because of other revenues that we had and the tax growth that we had, we have not had to raise those rates and so your taxes have not been raised in 10 years."
"General obligation bonds, like I said, are perceived by the market to be the least risky, so they are the least costly and have the lowest interest cost. Also, just like your home mortgage, where you have your closing costs and attorney fees, we have to pay what we call issuance costs, attorney fees, publications to markets, etc. and so the general obligation bond has been inexpensive compared to the other types of bonds. It is our only choice for roads and parks projects, and it is the most economical choice that we have for our water system."
"How do we fulfill our debt obligation and what is our plan? For the roads, parks and aquatics center, we would anticipate using taxes and fees. For the water system bonds, we would propose using revenue from water rates, not from taxes."
"To go back and summarize the bond that we spoke about tonight, in total we are talking about $149,145,000: $10,000,000 in parks, $10,000,000 for the aquatics center, $62,635,000 for roads, and $66,510,000 for the water system. The amount for roads, parks and the aquatic center are pretty straight forward, but the water system bonds and how we got to that number is pretty complex."
"Kim Fisher [Director of Public Works and Utilities] described the upgrades for liability and regulatory needs and expansion needs of $69.7 million dollars. Apex has demonstrated an interest in participating in their continued ownership of 23% of the plant; their portion of the $69.7 million would be $16 million dollars making the Town of Cary’s net cost $53.7 million. We have set aside $3.7 million in other sources of funds over time (just like you might have a savings account), which reduces our bond need for the plant to $50 million."
"Now comes the complicated part - capitalized interest, which we’re proposing to be $6.5 million. If you decided to build a house, and in the meantime you were renting and had to take out a loan for the construction of that house while you were still renting, you would not want to be obligated to pay both your rent and the home mortgage at the same time. In government we have this opportunity to not begin paying on the debt service for the water plant, and we can postpone the principal payment. We do this by issuing more bonds than we actually need for the project itself and set them aside in a savings account and use that money during the construction of the plant to pay the interest obligations on the bond. Once the construction of the plant is complete and our purchased water costs from Raleigh and Durham go away, then the debt service obligations become a cost of the utility system, and we have transitioned from one type of cost into another type of cost without any unreasonable increases in utility rates. That, in a nutshell, is capitalized interest."
"This makes a total of $56.5 million for the plant. When you add in the $9.95 million for the four elevated water storage tanks, it makes a grand total of $66.5 dollars for the water system improvements."
"Let’s talk about what the tax impact of those rates for parks and the aquatic center would be and before I do that I want to talk to you about assumptions that we have made as we forecasted those impacts. We have assumed continued commercial growth, slowed residential growth, and continued operations at current service levels. Continued service levels means, for example, we’ll continue to pick up your garbage once a week from your backyard, continue to pick up yard waste from the curb, continue to pick up your recycling, continue to provide fire service within 4 minutes, etc. Another assumption is that we will continue to pay cash for some of our small and medium type projects like parks and fire stations, as well as the operations of those new projects."
"So what does it really come down to? It really comes down to a 2 cent tax increase in 2004 (3.7%) which would cost $40 a year on a $200,000 home. The tax increase would not take place until 2004 because, unlike a home mortgage, we can take down portions of the debt over time. For example, assuming the bonds are passed, if some of the road projects are begun immediately, we would sell a certain amount of bonds on the market to cover those projects. Later, when construction begins on more projects, we would go back and issue more debt. By doing it this way, all of the debt service doesn’t begin at one time. Later, in 2007, we can expect another 3 cent tax increase, another 5.6%, or $60 a year on a $200,000 home. All of this comes out to 5 cents total by 2007 which is 9.3% cumulative, on top of the current 54 cent tax rate, or $100 a year on a $200,000 home. If you have a typical monthly mortgage where escrow pays your taxes, that would come out to an additional $8.33 a month. Again, we may not have to raise taxes, but this is the current plan."
"As a result of the water system bonds, what would happen to the utility rates of an average user (7,000 gallons per month)? The cumulative average increase would be 14.1% by 2004. This would equate to $3.20 more a month on your water bill, or $38 per year."
Q & A
You may Email your comments to Karen Mills at kmills@ci.cary.nc.us or call her at 469-4110.