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HomeMy WebLinkAbout2011-06-01 PACKET 00 (6:00 WORKSHOP)REQUEST OF CITY COUNCIL ACTION COUNCIL AGENDA MEETING IT # DATE 6/1/11 PREPARED BY Finance Robin Roland ORIGINATING DEPARTMENT DEPARTMENT HEAD COUNCIL ACTION REQUEST Workshop: Public Safety /City Hall project financing. STAFF RECOMMENDATION BUDGET IMPLICATION _ BUDGETED AMOUNT ACTUAL AMOUNT ADVISORY COMMISSION ACTION DATE REVIEWED APPROVED DENIED • PLANNING ❑ ❑ ❑ • PUBLIC SAFETY ❑ ❑ ❑ • PUBLIC WORKS ❑ ❑ ❑ • PARKS AND RECREATION ❑ ❑ ❑ ❑ HUMAN SERVICES /RIGHTS ❑ ❑ ❑ ❑ ECONOMIC DEV. AUTHORITY ❑ ❑ ❑ ❑ ❑ ❑ ❑ SUPPORTING DOCUMENTS ® MEMO /LETTER: Roland 5/26/11 ❑ RESOLUTION: ❑ ORDINANCE: ❑ ENGINEERING RECOMMENDATION: ❑ LEGAL RECOMMENDATION: ® OTHER: Ehlers & Associates, Inc. memo ADMINISTRATORS COMMENTS /°' �'J �� City F dministrator ate COUNCIL ACTION TAKEN: ❑ APPROVED ❑ DENIED ❑ OTHER H: \Council items \City Council Action Fornn.doc EHLR & ASSOCIATES INC Subject: Financing Public Safety Building Following is a memo discussing the options available to finance the City's public facility projects: Background The City of Cottage Grove is proposing to finance the Public Safety portion of a Public Safety and City Hall Facility. The total project costs of $15,995,000 are to be paid by $5,300,000 of cash which has been budgeted over many years to be used for the City Hall portion of the project. The general government portion of the project is estimated to be $3,199,000, leaving an additional $2,101,000 to be applied to the Public Safety portion of the project. The public Safety project costs have been estimated, historically at $13,600,000. The estimates include soft costs for current and future design, including current and future mechanical design costs, grading costs for current and future expansion and for future uses on the larger site, and design costs for the entire building to plan for the future phases. It is estimated that the general government portion of the facility is between 16% and 20% of the total building. Legal Authority The ability to undertake the project, issue the bonds and levy taxes or pledge revenues is governed by state law. Below is a brief outline of the typical financing options for projects of this type. It is important to note that Options 1, 2, and 3 below may be financed through the competitive bond market, a local bank, or a bond pool. Low interest state and federal loans are typically limited to Options I and 2. USDA has special authority to offer a term of up to 40 -years as opposed to 30 -years outside of their program. LEADERS IN PUBLIC FINANCE 3060 Centre Pointe Drive Roseville, MN 55113 -1105 Phone: 651-697-8504 Fax:651- 697 -8555 seldridge@ehlers- inc.com To: Robin Roland M City of Cottage Grove, Minnesota W From: Shelly Eldridge & Sean Lentz M Date: May 25, 2011 Subject: Financing Public Safety Building Following is a memo discussing the options available to finance the City's public facility projects: Background The City of Cottage Grove is proposing to finance the Public Safety portion of a Public Safety and City Hall Facility. The total project costs of $15,995,000 are to be paid by $5,300,000 of cash which has been budgeted over many years to be used for the City Hall portion of the project. The general government portion of the project is estimated to be $3,199,000, leaving an additional $2,101,000 to be applied to the Public Safety portion of the project. The public Safety project costs have been estimated, historically at $13,600,000. The estimates include soft costs for current and future design, including current and future mechanical design costs, grading costs for current and future expansion and for future uses on the larger site, and design costs for the entire building to plan for the future phases. It is estimated that the general government portion of the facility is between 16% and 20% of the total building. Legal Authority The ability to undertake the project, issue the bonds and levy taxes or pledge revenues is governed by state law. Below is a brief outline of the typical financing options for projects of this type. It is important to note that Options 1, 2, and 3 below may be financed through the competitive bond market, a local bank, or a bond pool. Low interest state and federal loans are typically limited to Options I and 2. USDA has special authority to offer a term of up to 40 -years as opposed to 30 -years outside of their program. LEADERS IN PUBLIC FINANCE 3060 Centre Pointe Drive Roseville, MN 55113 -1105 Phone: 651-697-8504 Fax:651- 697 -8555 seldridge@ehlers- inc.com Financing Options Option No. 1: Issuance of General Obligation Capital Improvement Plan Bonds pursuant to Minnesota Statutes, Section 475.521. If the City determines to proceed under Section 475.521, an election is not required when issuing bonds under a capital improvement plan. To qualify for the referendum exemption, the following qualifications must be met: • Approval of the bond issuance by at least a 3 /5ths vote of the council membership. • Is part of a five -year capital improvement plan. In 2004 the City refinanced the 1995 EDA Public Project Revenue Bonds that financed the Fire Station with a CIP Bond. • A public hearing is held on the using the Capital Improvement Plan Bonds as a the financing option. • At least fourteen days published notice is provided before the public hearing. • Is subject to a thirty -day reverse referendum period after the public hearing. • Is subject to net debt for municipalities. Below is a calculation of the City of Cottage Grove's payable 2011 Net Debt Limit: Net Debt Limit Assessor's Taxable Market Value 2,695,641,900 Multiply by 3% 0.03 Statutory Debt Limit 80,869,257 The debt service is paid from ad valorem taxes on all taxable property within the City. The annual levy for debt service must not exceed .16% of taxable market value of all property in the City. However, in the case of a shared facility in which one or more municipalities participates, the annual levy and net debt limitations are allocated to each participating municipality in proportion to its required financial contribution. Below is a calculation of the City of Cottage Grove's current Annual Levy Limit: Annual Levy Limit Assessor's Taxable Market Value 2,695,641,900 Multiply by. 16% 0. 0016 Statutory Levy Limit 4,313,027 Option No. 2: Lease arrangement under Minnesota Statutes, Section 465.71. If the City determines to proceed under Section 465.71, an election is not required. The City could utilize its Development Authority ( "EDA ") to issue lease - revenue bonds to the competitive market. Depending on the conditions, a competitive process for selecting an underwriter could be used to negotiate the lease as well. In any event, the lease is not a general obligation or indebtedness of the City but a special obligation payable solely from lease payments annually appropriated by the City. This means that the City has the ability to annually levy for lease payments while reserving the right to annually terminate the lease, without penalty. Because of this penalty provision, the City is not allowed to make a large initial cash contribution to decrease the bond size and could see interest rates at least .25% to .35% above a general obligation bond rate. If the City determines to proceed under the direct lease financing method, the following points should be noted: The City utilized an EDA Lease Revenue Bond for the Ice Arena improvements in 2008. • May require a reserve which must be funded by bond proceeds. The estimates have a I year debt service reserve included in the bonds. • The bond rating is usually I step below the City's GO rating due to the annual appropriation element of the Bond, thereby raising the interest rates some. • A public hearing may be required for approval of a redevelopment plan. Option No. 3: Lease arrangement through a private placement with Bank of America's Banc of America Public Capital Corp ( "BAPCC "). If the City determines to proceed under Section 465.71, it has the ability to negotiate with Bank of America for a private placement through the BAPCC program. The Bank of America could provide financing through a direct lease arrangement or through the purchase of a privately placed bond or loan. The BGACC purchases both bank qualified ( "BQ ") and non BQ Tax - Exempt and Taxable Bonds, Loans and Leases (which include General Obligation Unlimited Tax or Limited Tax Pledge, Leasehold Revenue with annual appropriation) from all governmental entities including Cities, Counties, School Districts, Special Districts. They prefer issues with par amounts between $3,000,000 to $50,000,000, with terms up to 20 years and a preference on level or front -end amortizations. The coupon rates can be locked up to 12 months in advance of closing date. The BGACC does not require a bond rating for the issue but the issuer must have a credit profile that is "investment grade ". The Bonds will be issued without an Official Statement but will required to pay BAPCC `s legal expenses ranging from $5,000 to $10,000 depending on complexity of the transaction. • The cost of issuance is less due to the absence of an underwriters discount and bond rating fee. • The City may be able to contribute a larger amount of cash. • The City could negotiate an interest rate for a future closing, reducing the risk of the possibility of the market rates increasing. • The equal annual payment requirement is less flexible if wrap around debt service payments are ideal. • The Bonds could be called /refinanced after half term is paid at a 101% premium. 3. Cash Financing (Option No. 4) The combination of current investment rates at very low levels and the possibility of eliminating interest expense from the total cost of the project make the concept of using cash financing for the Public Facility Projects attractive. The use of cash, particularly to fund 100% of the proposed project, needs to be discussed thoroughly to review the potential impacts on the City's overall and long term financial situation. The City is currently rated (AA +) by Standard and Poor's and (Aal) by Moody's Investors Service. Both of these ratings are one notch below the highest possible rating of (AAA /Aaa). One of the primary contributing factors to the City's high rating is establishment and maintenance of a strong fund balance. The City's current fund balance policy requires maintaining at least 50% of expenditures with an additional 10% for contingencies, for a total minimum of 60% of annual expenditures. As of December 31, 2009, the City has a General Fund Balance of approximately 74% of expenditures. The strong reserve allows the City to meet cash flow requirements and manage unforeseen changes in revenues (ex. state aids, building permits, other). The use of General Fund Reserves to pay for a capital project is not necessarily a precursor to a rating downgrade, but a perceived loss of long -term financial liquidity could place downward pressure on the City's rating. All other factors equal, a downgrade would add additional interest expense to future City financings. Items to consider regarding using Cash Financing for the Public Facility Projects: • Will the use of cash violate the City's current fund balance policy? • What other funds, besides the City's General Fund, could be used to contribute monies to the project cost? • What are the prospects for building the fund balance back up to current levels? • Are the costs of the project allocated too heavily to current residents with the use of cash financing as compared to debt financing? • What future projects will require debt financing and what could the impact be on the interest expense for future projects? • How will the City's cash flow be impacted by the draw down on current cash reserves? • How will the existing investments be impacted by the reduction in cash reserves? Will the term of investments need to be reduced? • Will a combination of cash and debt financing allow the City to maintain its financial liquidity and reduce the interest cost for the project? • Possibility of future State action requiring use of reserves during transition period? (ex. Stricter or more rigid levy limits) Amount to Borrow and Structure For illustration purposes, we have used $15,995,000 as the total cost of the project. After the contribution of $5,300,000 the project costs to be financed is $10,695,000 for each of the options. Using this figure as the base assumption, we have prepared and attached a Summary of the financing Options except Option 4. As the discussions progress, we will update the numbers accordingly. The City has not made a final decision on the length of time that will be needed to repay the bonds. However, the Summary includes the averages for 15 and 20 year issues for Options 1 through 3. The Council and Staff needs to select the term that best fits the project and to verify the other finance assumptions. Summary The decisions to be made by the Council are as follows: Decide on a finance option described in this memo. 2. Set the term of the debt. Implement the chosen finance option. (Timing to coincide with awarding of construction contract) 4. Direct Ehlers, working with your bond counsel, to solicit bids for the sale of the bonds. (If applicable) Public Safety Facility Project * Assumes +20 basis points due to Non -Bank Qualified and normal call features City projections = 6700,000 annual levy EHLE LEADERS IN PUBIC FINANCE Shelly Eldridge Sean Lentz Public Financial Advisors (651) 697 -8500 5/2312011 DebtComparison Capital Improvement EDA Lease Private Placement G.O. Bond Revenue Bond Bank of America Subject to Debt Limit? Yes Yes Yes Rating AA+ AA Non -Rated Assumed Proceeds 10,695,000 10,695,000 10,695,000 Plus Underwriter's Discount 110,500 134,420 0 Plus Costs of Issuance 60,000 70,000 56,000 Plus Capitalized Interest 183,254 238,473 233,431 Plus Debt Service Reserve (12 months) 0 1,081,245 0 Rounding Amount 1,246 863 569 Total Principal of Debt 11,050,000 12,220,000 10,985,000 Interest Rate (TIC)* 18827% 4.4950 % 3.7500% Average Annual Payment 978,504 1,078,499 979,775 Net Annual Levy 1,027,430 1,078,499 979,775 s U -e 1 20 Interest Rate (TIC)* 4.3337% 4.9190% 4.25% Average Annual Payment 833,206 928,870 826,339 Net Annual Levy 874,866 928,870 867,656 * Assumes +20 basis points due to Non -Bank Qualified and normal call features City projections = 6700,000 annual levy EHLE LEADERS IN PUBIC FINANCE Shelly Eldridge Sean Lentz Public Financial Advisors (651) 697 -8500 5/2312011 DebtComparison City of Cotta Grove Minnesota To: Honorable Mayor and City Council members Ryan Schroeder, City Administrator From: Robin Roland, Finance Director Date: July 1, 2010 Subject: Public Safety /City Hall Project Budget and Financing Introduction This memo will recap the preliminary budget and financing scenarios for the Public Safety /City Hall Project. These very broad estimates of project costs, based on the staff updated space needs study and square footage costs, as well as the funding sources for the project, involve many assumptions which will undoubtedly change as the project progresses. The overall approach to the project costs and financing is therefore more important than the "exact' numbers at this time. Discussion The Building The following summarizes preliminary project cost estimates and funding which have been discussed in previous council communications. Revenues Expenses Municipal buildingfund $ 4,320,000 Professional services including $ 1,026,450 Transfer from General Fund 1,000,000 Architect Bond proceeds 11,680,000 Environmental Total $ 17,000,000 Engineering/Testing Construction contract 11,405,000 site improvements 2,015,085 Furniture & equipment 515,000 land acquisition 1,306,800 contingency 731,665 Total $ 17,000,000 Cash on hand in the Municipal building fund and the transfer from the General fund would be spent first. The bond sale would occur after the construction bids are received. Staff proposes using Capital Improvement Plan (CIP) bonds and anticipates the sale of the bonds later in 2011. However, because of the requirements of this particular type of bonding, Council will be asked to hold a public hearing on the project /CIP plan at the first meeting in September. Once the hearing is held and the bonds approved, a 30 day period must elapse before the bonds may be sold, to allow for reverse referendum. Holding the public hearing in September will assure the appropriate steps are followed well in advance of when the bond proceeds are necessary to fund project costs. As discussed previously, the future tax levy required for annual debt service on the bonds is already in place — included in the current tax levy. Two bond issues which are currently levied for would be called (paid off) on February 1, 2011 using existing dedicated debt service fund balances and freeing those current levies for other debt repayment. This funding scenario benefits the City budget in several ways. Cash which has been set aside under Council policy in previous years is used for the dedicated purpose intended (either building or debt). It does not require significantly increasing the current tax levy beyond levels the Council is comfortable with and which would adversely impact taxpayers. Additionally, the ratio of debt levies to the overall levies remains at a level less than 10% which is identified in the Debt Policy adopted by Council earlier this year. Finally, the use of a cash transfer from the General Fund reduces the amount of bonding necessary while maintaining the fund balance level required by policy and keeping it within the range recommended by the City's auditors and the State Auditor's office. Please note that the project expenditure estimates currently include land costs. Since the East Ravine site is Council's stated preference we could revise or remove this amount. However, we will continue to leave this amount in the project budget until such time as we have an agreement with Washington County regarding how (and when) the required land swap would occur. The Infrastructure Construction of the Public Safety /City Hall building on the East Ravine site will require construction of roadway to access the site. The Ravine Parkway project in the City's 2010- 2014 Capital Improvement Plan identifies an estimated $4.8 million cost for this street extension. Sources of funding for the construction of the Ravine Parkway are State MSA Construction funds and the City's MSA Construction Capital Project Fund, Washington County cost sharing for the bridge and City Trunk Water and Storm Water funds. The current balance in the State MSA Construction account is $2.419 million as of June 30, 2010. The State allocates approximately $1.2 million a year to the City for construction of MSA routes and the City has not used any of its 2009 or 2010 allocation to date. Furthermore, the City's MSA Construction Capital Projects Fund had a balance of $1.7 million at December 31, 2009 and these funds would be available for the project as well. City Water and Storm Water trunk funds have ample reserves to cover the anticipated $400,000 costs attributed to them. The Ravine Parkway project is listed as a post 2014 project in the Capital Improvement Plan as it will eventually be constructed whether or not the Public Safety /City Hall building is constructed on the East Ravine site; only the timing is in question. Completing the Parkway project in conjunction with the PS /CH building simply accelerates the timeline to 2011 -2012. 7516 80 Street A discussion regarding the ultimate disposition of the current City Hall facility will need to take place at a later date, assumedly in 2011 -2012 but prior to vacating the site. The sale or reuse of the existing building by other entities (public or private) are obvious alternatives but more options may become clear as the construction project commences. Recommendation No action is required at this time.