When city council met on September 14th, the largest discussion on the agenda was a resolution for a $20million bond issue. (It was also last on the agenda so people wishing to speak to it were there until late.) There was little in the request for the resolution or the resolution itself to indicate what particularly the money had been, was being, or would be spent on. Councilwoman Ellen Smith and I asked during the agenda review session on September 7th for details of what the issue covered. At 4:35pm on Friday, September 18th, council received a lengthy email from Deputy City Manager Steve Jenkins giving some detail about the expenditures. I didn't see that email until some time on Sunday when it would have been too late to ask for sufficient space in the Monday Oak Ridger to print the information. Nor did we see that information presented in writing at the council meeting. So I felt the request by citizen Charles Jones that council postpone acting on the bond request until the community's questions about what was included in the bond could be answered was quite reasonable.
Then citizen and Charter Commissioner Pat Fain spoke to council expressing her dismay at conducting city finances by borrowing for ongoing maintenance, among other things. I had already decided to hold off voting "for" on an issue decided two years ago in principle in order to allow time to explain to the general populace what was being considered. When His Honor the Mayor chose to chastise Mrs. Fain for "attacking" the city finance department, my vote became not just "no." Eventually I would have to vote for the bond because it will take us some time to get out of this pattern for doing the city's business by credit card mentality and we still have to run a city. But I feel strongly that any citizen who takes the time to understand an issue or question it, to come to council meeting and speak, deserves the council's and the city's respect and attention.
Here's the thing. I believe we need to enact a plan for changing our finance philosophy
so that for all ongoing maintenance and any short term projects we pay as we go and only borrow for projects which will outlast the notes we make to pay for them. I also advocate knowing what we do with any debt we currently owe. If we borrow to extend an indebtedness, I believe we should know exactly what amount of which borrowings are being extended.
I have a meeting with a citizen on Thursday, September 24th, to listen to a concept for how we go about changing the way we do city finance. I hope that other citizens will write or call or make appointments to visit all of us on council to share ideas and opinions on this. Small or large, the thoughts you bring to us increase the total knowledge with which we approach every issue.
Below is the content of Mr. Jenkins' email on the detail of the bond issue:
"This email is in response to Council discussions, concerns, and questions regarding the $20,000,000 bond issue that is on the agenda for the September 14, 2009 City Council meeting.
A: This issue covers the period of FY 2008 through FY 2011. This issue was planned, discussed in a City Council work session, and initially approved, including legal notices posted in the newspapers, over 16 months ago. The list of projects and programs proposed to be funded by this issue has changed very little and is as follows:
b. Fiber ring to enhance communication between all City facilities $300,000 – only a portion of the total cost - Balance of funding comes from Schools and other funds.
c. Other Equipment $150,000 – see attached list
The projects and programs listed for the utility and equipment rental funds far exceed the amount of debt proceeds that are proposed for those funds. The good news is that the funds have some capacity to pay for capital projects without borrowing additional money. The bad news is if the City continues to spend at this pace, the City will be either raising rates or issuing more debt in the next 3 to 5 years.
B: Cede & Co. is the subsidiary of the Depository Trust Company (DTC) which is the electronic clearing house for bonds, stocks and numerous other securities. There is no cost to the City for this service. There are a couple of other smaller, foreign clearing house companies, but DTC handles the majority of all transactions in the United States. The only other remaining option would be to issue actual paper bonds that would be very expensive and virtually unmarketable in today’s environment.
C: There are two types of Build America Bonds (BABs):
1. "Tax Credit BABs"
a. Tax Credit BABs provide a federal subsidy as a refundable tax credit in the amount of 35% of the interest paid on the bonds to the bondholders.
b. Tax Credit BABs are less attractive to the investor since they are taking on income tax risk (especially with most economists predicting a rise in income taxes).
c. Due to low investor demand, the net rate to the City on Tax Credit BABs would be substantially higher than Direct Payment BABs and even higher than traditional tax-exempt bonds.
2. "Direct Payment BABs”
a. The Direct Payment BABs provides a federal subsidy as a direct payment to the issuing agency (i.e. the City) in the amount of 35% of the interest paid to the bondholders.
b. The City is neutral to the Income Tax risk as it is not subject to any income taxes.
The City, not the investor, chooses to issue the type of debt that will result in the most favorable net interest cost for the City. Depending on market conditions at the time of sale, this could be either of the above or traditional tax exempt debt. The real risk to the City under the Direct Payment BABs is that the Federal Government could stop the rebates or default on its obligations. Neither is a likely scenario, but it could happen.As is common with fixed rate bond issues, regardless of the type of debt issued, there is a 10 year call provision for the bonds.
D: It should be noted that any projects that the City has funded through the issuance of long term debt have at least a 5 year capital life. The City cannot borrow long term debt for operations in the same way that a personal credit card would be used by an individual to purchase consumables. The City has never borrowed short term debt to fund operations nor is there any plan to do ever do so.
E: A few reasons why the City reimbursed itself with this issue are shown below.
In the future, staff may recommend the issuance of debt in advance of the project or program. Markets conditions, type of debt, and type of program or project will be primary factors in making that determination. Of course, City Council has final approval of any bond issue that staff recommends.
F: Finally, this bond issue will be competitively bid. The investment firm or bank with the lowest overall cost to the City will be awarded the bonds. This assures that the City will get the lowest true interest cost available on the day that this debt is sold.
Representatives from Cumberland Securities will be available to answer questions.
Steve Jenkins
Deputy City Manager
Then citizen and Charter Commissioner Pat Fain spoke to council expressing her dismay at conducting city finances by borrowing for ongoing maintenance, among other things. I had already decided to hold off voting "for" on an issue decided two years ago in principle in order to allow time to explain to the general populace what was being considered. When His Honor the Mayor chose to chastise Mrs. Fain for "attacking" the city finance department, my vote became not just "no." Eventually I would have to vote for the bond because it will take us some time to get out of this pattern for doing the city's business by credit card mentality and we still have to run a city. But I feel strongly that any citizen who takes the time to understand an issue or question it, to come to council meeting and speak, deserves the council's and the city's respect and attention.
Here's the thing. I believe we need to enact a plan for changing our finance philosophy
so that for all ongoing maintenance and any short term projects we pay as we go and only borrow for projects which will outlast the notes we make to pay for them. I also advocate knowing what we do with any debt we currently owe. If we borrow to extend an indebtedness, I believe we should know exactly what amount of which borrowings are being extended.
I have a meeting with a citizen on Thursday, September 24th, to listen to a concept for how we go about changing the way we do city finance. I hope that other citizens will write or call or make appointments to visit all of us on council to share ideas and opinions on this. Small or large, the thoughts you bring to us increase the total knowledge with which we approach every issue.
Below is the content of Mr. Jenkins' email on the detail of the bond issue:
"This email is in response to Council discussions, concerns, and questions regarding the $20,000,000 bond issue that is on the agenda for the September 14, 2009 City Council meeting.
A: This issue covers the period of FY 2008 through FY 2011. This issue was planned, discussed in a City Council work session, and initially approved, including legal notices posted in the newspapers, over 16 months ago. The list of projects and programs proposed to be funded by this issue has changed very little and is as follows:
- Completion of the high school $6,500,000 – citizen referendum
- Electric Distribution expansion and improvements $4,000,000 - See attached listthat only covers FY 2009 and FY 2010
- ETTP system improvements – Approximately $400,000
- Under ground cable replacement program – Program Approved by City Council May 24, 2005, Resolution 5-57-05 $800,000 to $1,000,000 annuallyfor 4 years. Primarily Dillard Construction Contract and wire purchases.
- Other system improvements and maintenance – transformers, wire, labor for distribution system
- Electric Substation improvements and expansion - $1,000,000 Substation 800
- Water and Wastewater distribution expansion and rehabilitation programs. $4,000,000 - includes SR95 $1,600,000 - See Attached list
- Water and Wastewater Plant improvements $1,000,000 – See attached list
- Street Resurfacing $2,500,000. This will bolster reserves in the General Fund, which will allow more flexibility in setting future tax rates.
- Equipment replacement $750,000.
b. Fiber ring to enhance communication between all City facilities $300,000 – only a portion of the total cost - Balance of funding comes from Schools and other funds.
c. Other Equipment $150,000 – see attached list
The projects and programs listed for the utility and equipment rental funds far exceed the amount of debt proceeds that are proposed for those funds. The good news is that the funds have some capacity to pay for capital projects without borrowing additional money. The bad news is if the City continues to spend at this pace, the City will be either raising rates or issuing more debt in the next 3 to 5 years.
B: Cede & Co. is the subsidiary of the Depository Trust Company (DTC) which is the electronic clearing house for bonds, stocks and numerous other securities. There is no cost to the City for this service. There are a couple of other smaller, foreign clearing house companies, but DTC handles the majority of all transactions in the United States. The only other remaining option would be to issue actual paper bonds that would be very expensive and virtually unmarketable in today’s environment.
C: There are two types of Build America Bonds (BABs):
1. "Tax Credit BABs"
a. Tax Credit BABs provide a federal subsidy as a refundable tax credit in the amount of 35% of the interest paid on the bonds to the bondholders.
b. Tax Credit BABs are less attractive to the investor since they are taking on income tax risk (especially with most economists predicting a rise in income taxes).
c. Due to low investor demand, the net rate to the City on Tax Credit BABs would be substantially higher than Direct Payment BABs and even higher than traditional tax-exempt bonds.
2. "Direct Payment BABs”
a. The Direct Payment BABs provides a federal subsidy as a direct payment to the issuing agency (i.e. the City) in the amount of 35% of the interest paid to the bondholders.
b. The City is neutral to the Income Tax risk as it is not subject to any income taxes.
The City, not the investor, chooses to issue the type of debt that will result in the most favorable net interest cost for the City. Depending on market conditions at the time of sale, this could be either of the above or traditional tax exempt debt. The real risk to the City under the Direct Payment BABs is that the Federal Government could stop the rebates or default on its obligations. Neither is a likely scenario, but it could happen.As is common with fixed rate bond issues, regardless of the type of debt issued, there is a 10 year call provision for the bonds.
D: It should be noted that any projects that the City has funded through the issuance of long term debt have at least a 5 year capital life. The City cannot borrow long term debt for operations in the same way that a personal credit card would be used by an individual to purchase consumables. The City has never borrowed short term debt to fund operations nor is there any plan to do ever do so.
E: A few reasons why the City reimbursed itself with this issue are shown below.
- The most important reason is that market conditions made borrowing difficult last year. By using reserves, the City was able to continue the projects, and delay the borrowing until market conditions improved.
- For construction projects that span a longer period, there is more information related to actual project costs and revenues, which keeps the City from over or under borrowing.
- There are also federal spend-down requirements that could create penalties if a project is delayed.
- In some cases the City can actually shorten the debt service payments, which saves the City interest costs.
- Staff generally tries to issue debt in larger amounts for several projects, rather than small issues for each. This saves issuance costs for debt issues.
In the future, staff may recommend the issuance of debt in advance of the project or program. Markets conditions, type of debt, and type of program or project will be primary factors in making that determination. Of course, City Council has final approval of any bond issue that staff recommends.
F: Finally, this bond issue will be competitively bid. The investment firm or bank with the lowest overall cost to the City will be awarded the bonds. This assures that the City will get the lowest true interest cost available on the day that this debt is sold.
Representatives from Cumberland Securities will be available to answer questions.
Steve Jenkins
Deputy City Manager
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