CITY COUNCIL AGENDA ITEM
ACTION REQUESTED:
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Pass the ordinance authorizing the issuance of Series 2025 General Obligation Bonds for an amount not to exceed $46,000,000, including the defeasance of Series 2013 General Obligation Bonds
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DEPARTMENT: Finance Department
SUBMITTED BY: Raymond Munch, Director
BOARD/COMMISSION REVIEW:
The Financial Advisory Board (FAB) reviews debt issuance plans as part of the annual budget process. The proposed bond issuance was specifically discussed at the September 4 and October 28, 2024, board meetings during the review of electric and water utility rates. FAB is supportive of bonds as a strategic financing mechanism for capital improvement projects.
BACKGROUND:
In November 2023, the City Council approved the 2024 Annual Budget and Capital Improvement Program (CIP). The 2024 CIP included $44,377,000 in capital projects without an identifiable funding source. Then, in December 2024, the City Council approved the 2025 Annual Budget and CIP, which included $53,900,000 in unfunded capital projects. By adopting these budgets, the City Council tentatively authorized staff to pursue issuing bonds for the payment of all unfunded capital projects, with the City Council having final approval of any bond sale.
Since 2018, the City has issued bonds using a project reimbursement methodology. This allows staff to analyze capital project spending and make any adjustments to the required borrowing amounts. This practice also allows staff to manage cash flow better and reduce the amount of interest costs incurred.
To use this methodology, the City is required to pass an Official Intent for Reimbursement Resolution regarding capital projects. This allows projects approved through the annual budget to be included in any future bond sale. The resolution itself does not provide the authorization to borrow, it only reserves the ability to fund current projects with a future bond sale.
On January 16, 2024, the City Council adopted Resolution 24-003, making any capital expenditure included in the resolution eligible for reimbursement over the following 18 months. Then, on January 21, 2025, the City Council adopted Resolution 25-001 for the reimbursement of 2025 capital project expenditures.
Staff have analyzed capital project spending and are ready to proceed with a bond issuance for the funding of 2024 and 2025 capital projects.
Staff also worked with our bond advisor, Speer Financial, to evaluate any outstanding bonds eligible to be redeemed or refinanced. One bond series, Series 2013 General Obligation (GO) bonds, is eligible for redemption.
DISCUSSION:
New Issuance - Series 2025
The City proposes to issue Series 2025 GO Bonds with the proceeds reimbursing the Capital Projects, Electric Utility and Water Utilities funds for costs incurred on capital projects in 2024 and 2025. Those capital projects include the replacement of the public safety radio system, various roadway improvements, capacity and process improvements at the Springbrook Water Reclamation Center, construction of an elevated water distribution tank, and the replacement of electric utility infrastructure, including underground distribution cables and transformers.
The total project expenses reimbursed from the Series 2025 bonds will be $45,000,000, and are allocated to the following funds:
• Capital Projects Fund - $15,000,000
• Electric Utility Fund - $10,000,000
• Water Utilities Fund - $20,000,000
The bonds will finance the cost of those projects over 20 years, which is less than or equal to the life expectancy of the assets created or improved. The resulting debt service will be allocated proportionally according to the fund breakdown above.
Series 2013 Redemption (Defeasance)
The Series 2013 bonds were issued for general government capital improvements with the annual principal and interest paid from the Debt Service Fund. The remaining principal as of July 1, 2025, is $1,920,000 payable through 2031 at an interest rate of 4.0%. The bonds were callable as of December 1, 2023, which means the City has the opportunity to refinance the bonds at a lower interest rate or redeem the bonds, otherwise known as defeasance. Through defeasance, the City would pay the remaining principal in 2025 using accumulated balances in the debt service fund, thus eliminating future interest costs.
Summary
Staff is seeking a not-to-exceed value of $46,000,000 for this bond issuance at a projected true interest cost (TIC) of 4.14%.
The differential between the $46,000,000 not-to-exceed value and the projected $45,000,000 in project expenses is to provide the City protection against market and sale conditions, as well as to accommodate the costs of issuance of the bonds. The City will only sell bonds in the amount necessary to cover actual and projected project expenditures incurred during the eligible reimbursement period, plus issuance costs. Staff will provide the City Council with a final report on the bonds sold after the sale is completed.
As part of the bond issuance process, City representatives participated in credit rating calls with Moody’s and Standard & Poor’s. Both agencies will issue an official rating opinion before the bond sale. Staff is confident that the City will maintain its AAA bond rating with both agencies, given that the City’s financial position has remained strong since the last rating in 2024.
FISCAL IMPACT:
The Series 2025 bonds will have their first interest payment due in December 2026 and the final payment will occur in 2045. The portion of the bonds related to general capital follow the City’s required repayment schedule of 20% of principal and interest (P&I) in the first five years and 50% of P&I in the first 10 years. Interest is payable semi-annually on June 1 and December 1, and the principal is due annually on December 1.
The average annual debt service payment will be $3.53 million. All debt service attributable to the Electric and Water Utilities will be fully funded through utility revenue and abated from the property tax levy annually. The principal and interest payments are in line with the assumptions made in the 2024 electric and water rate studies.
The Series 2013 bonds' defeasance will be funded through cash balances in the Debt Service Fund resulting from annual Food and Beverage Fund transfers that exceeded budget estimates. The early payoff of these bonds will save taxpayers $259,200 in total interest payments over the next six years.
All costs associated with this bond issuance are included in the issuance itself.