HomeMy WebLinkAbout03 27 2017 Capital Financing ReportPhone 952.447.9800 / Fax 952.447.4245 / www.cityofpriorlake.com
4646 Dakota Street SE
Prior Lake, MN 55372
CITY COUNCIL WORK SESSION REPORT
MEETING DATE:
AGENDA #:
PREPARED BY:
MARCH 27, 2017
B
DON URAM, FINANCE DIRECTOR
PRESENTED BY: DON URAM
TAMMY OMDAL, NORTHLAND SECURITIES
AGENDA ITEM: CAPITAL FINANCING
INTRODUCTION: Tammy Omdal, the City’s Financial Advisor from Northland Securities will
present an overview of the Capital Financing and Bond Issuance processes.
TOPICS: Discussion topics will include an overview of City’s authority to issue debt, types
of sale (competitive vs. negotiated), structuring provisions, issuing process
including bond ratings, and finalizing the sale.
CONCLUSION: This work session topic is intended to brief the new members of the Council and
to refresh the knowledge of the existing members about the process the City
follows when issuing debt. The Council will receive further detailed information
at upcoming meetings as we prepare to issue debt for the 2017 projects as
outlined in the CIP.
ATTACHMENTS: 1.PowerPoint Slides
City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.1
Overview of Capital Financing
Bond Issuance
City of Prior Lake
City Council Workshop
March 13, 2017
Overview
Debt Issuing Authority
Method of Sale
Structuring Provisions
Issuing Process
Bond rating
Execution
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc. 2
Authority
Borrowing money provides funds to finance
needed capital improvements
Debt obligates local revenues for many years
in the future
Unlike private companies, cities can’t simply
take out a loan
Public debt requires specific statutory
authority
Debt that results in issuance of municipal bonds is
governed by federal securities regulations
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Authority
Three basic buildings blocks for debt:
Legal authority to incur debt
Cannot borrow without specific statutory authority
Tax treatment of interest on the debt
Governed by federal tax law
Form of the debt under federal securities regulations
Municipal debt is not always a municipal security subject to a wide
range of federal regulations
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc. 3
Authority
Authority is not contained in a single section of
state law
General authority is provided in MN Statutes
Chapter 475
Powers in Chapter 475 are typically linked to other
statutory authority or to voter approval to issue
bonds
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Authority
Statutory requirements vary by the type of authority
used to issue the bonds, here are a few examples:
Improvement Bonds require at least 20% of the costs of
improvement is assessed to benefiting property and four-fifths
vote to order the improvements following hearing
Street Reconstruction Bonds require adoption of a street
reconstruction plan approved by a four-fifths vote following
hearing
Capital Improvement Plan Bonds require adoption of a CIP
plan and simple majority vote following hearing and there is a
30-day reverse referendum period
Revolving Fund Bonds require at least 20% of the costs of
improvement is assessed to benefiting property and four-fifths
vote to order the improvements following hearing
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.4
Authority
Continued
Utility Revenue Bonds may be issued by a simple majority to
build, construct, reconstruct, repair, enlarge, improve, or in any
other manner to obtain sanitary sewer, water, and storm sewer
facilities, and maintain and operate the facilities
Equipment Certificates may be issued by a simple majority by
a statutory city to purchase public safety equipment,
ambulance, and other medical equipment, road construction
and maintenance equipment, and other capital equipment, as
well as computer hardware and software (the statute doesn’t
define “other capital equipment”)
Reverse referendum period applies if the amount of the borrowing
exceeds 0.25% of the estimated market value of taxable property
within the city
Abatement Bonds may be issued following a hearing by a
simple majority and used to finance a variety of development
activities and public improvements
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Authority
Bond series may include multiple purposes or use of
different authority as part of one bond issuance
Combining multiple purposes under one bond series reduces
the cost of issuance and in some cases the market interest in the
bond sale
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Example Bond Series
Total Issue Sources And Uses
Improvement CIP
Street
Reconstruction
Revolving
Fund
Water
Revenue
Sewer
Revenue
Issue
Summary
Sources Of Funds
Par Amount of Bonds $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00
Total Sources $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00
Uses Of Funds
Costs of Issuance 115,212.53 13,560.60 21,654.92 6,517.50 21,549.79 21,444.66 199,940.00
Deposit to Capitalized Interest (CIF) Fund 64,619.48 7,606.35 12,153.65 3,645.42 -- 88,024.90
Deposit to Project Construction Fund 5,300,000.00 620,000.00 1,000,000.00 300,000.00 1,000,000.00 1,000,000.00 9,220,000.00
Rounding Amount 167.99 3,833.05 (3,808.57) (162.92) 3,450.21 (1,444.66) 2,035.10
Total Uses $5,480,000.00 $645,000.00 $1,030,000.00 $310,000.00 $1,025,000.00 $1,020,000.00 $9,510,000.00
City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.5
Method of Sale
Primary Methods of Sale
Competitive sale
Negotiated sale
Private Placement
Government Finance Officers Association
(GFOA) recommends that issuers select a
method based on a thorough analysis of the
following:
Relevant rating
Security
Structure and other factors pertaining to the proposed
bond issuance
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Method of Sale
10
Competitive Sale Negotiated Sale
Rating of the bonds is at least in single-A
category
Rating of the bonds is lower than single-A
category
Bonds are G.O. obligation or secured by a
strong, known and long-standing revenue
stream
Bond insurance or other credit
enhancement is unavailableor not cost-
effective
Structure of bonds does not include
innovative or new financing features that
require explanation
Structure of the bonds has features that
may be better suited to negotiation
Issuer is well known in the market Issuer desires to target underwriting
participation to include disadvantaged
business enterprises or local firms
Other factors that favor negotiated sale
Summary of GFOA recommendations comparing methods ofsale
City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.6
Method of Sale
Statutory considerations for method of sale
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Item Competitive Sale Negotiated Sale
Sale process Bidding Direct negotiation
Timing Set by Council
Stay fixed to facilitate fair bid
process
Set by Council
Possible to adjust up and during date of
pricing
Award True interest cost (TIC) of low bid City determination that bond purchase
agreement is fair and reasonable
Rescheduling City can cancel or postpone at any
time
Rescheduling requires new date and
time for bids
City can delay pricing for any reason
Rescheduling involves coordinating
underwriter commitment with City
approval
Unacceptable
Results
Council can reject bids and rebid at a
later date or negotiate with an
underwriter
Pricing does not conclude until City is
satisfied with the results
No obligation to accept proposed bond
purchase agreement
Structuring
Certain structuring provisions are required by
state law
First principal payment must occur not less than three years
from the date of issue
For bonds maturing 25 years or less, largest amount of
principal due in any calendar year cannot be more than 5x the
smallest amount, and 6x for bonds maturing 25 years or later
Except as otherwise provided in state law, the City’s debt is
subject to a debt limit which limits net debt to no greater than
3% of the estimated market value of taxable property in the
municipality
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc. 7
Structuring
Prior Lake has an adopted debt management
policy which informs the structuring of bonds
City will pay back debt within a period not to exceed
the expected useful life of the capital improvement,
with at least 50% of the principal retired within 2/3
of the term of the bond issue
Total general obligation debt shall not exceed 3% of
the total market value of taxable property in the City
(statutory debt limit)
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Structuring
Prior Lake legal debt margin as of May 2, 2016 (from 2016A
Official Statement) was $69.8 million of debt capacity
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc. 8
Structuring
Principal (par amount of bonds)
Payable annually with minimum $5,000 denominations
Amount of principal due in any given year is a function
of structuring the debt to meet project cash flow (i.e., debt
service levy limitations)
Level annual debt service (principal and interest) is
common
Interest
First payment typically occurs within 12 months of date
of issue
Premium pricing
Payment Dates
Semi-annual debt service payment dates are set by the
issuer
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Structuring
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Example Debt Service Schedule
Date Principal Coupon Interest Total P+I Fiscal Total
05/30/2017 - - - - -
12/15/2017 - - 110,368.65 110,368.65 110,368.65
06/15/2018 - - 101,878.75 101,878.75 -
12/15/2018 865,000.00 1.500% 101,878.75 966,878.75 1,068,757.50
06/15/2019 - - 95,391.25 95,391.25 -
12/15/2019 875,000.00 1.700% 95,391.25 970,391.25 1,065,782.50
06/15/2020 - - 87,953.75 87,953.75 -
12/15/2020 885,000.00 1.850% 87,953.75 972,953.75 1,060,907.50
06/15/2021 - - 79,767.50 79,767.50 -
12/15/2021 910,000.00 2.000% 79,767.50 989,767.50 1,069,535.00
06/15/2022 - - 70,667.50 70,667.50 -
12/15/2022 920,000.00 2.150% 70,667.50 990,667.50 1,061,335.00
06/15/2023 - - 60,777.50 60,777.50 -
12/15/2023 935,000.00 2.250% 60,777.50 995,777.50 1,056,555.00
06/15/2024 - - 50,258.75 50,258.75 -
12/15/2024 960,000.00 2.350% 50,258.75 1,010,258.75 1,060,517.50
06/15/2025 - - 38,978.75 38,978.75 -
12/15/2025 975,000.00 2.450% 38,978.75 1,013,978.75 1,052,957.50
06/15/2026 - - 27,035.00 27,035.00 -
12/15/2026 1,010,000.00 2.600% 27,035.00 1,037,035.00 1,064,070.00
06/15/2027 - - 13,905.00 13,905.00 -
12/15/2027 1,030,000.00 2.700% 13,905.00 1,043,905.00 1,057,810.00
Total $9,365,000.00 - $1,363,596.15 $10,728,596.15 -
City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc. 9
Issuing Process
Participants
Bond counsel
Law firm with expertise in municipal securities law retained
by an issuer
Municipal advisor
Subject to certain exceptions, a party that provides advice to
an issuer on the issuance of municipal securities that must
be registered with the SEC as a municipal advisor
No federal or state requirement to retain a municipal
advisor
Underwriter
Purchases the bonds
An issuer may work directly with an underwriter on the
purchase of bonds
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Issuing Process
Planning
Determine the City’s source of advice and federal regulation
requirements on those providing the advice
Determine the project costs to be financed
Consider options available to finance the project and why
different options may matter
Set size of issuance to cover construction costs, issuance
costs, and possibly other funds
Structure the bonds based on cash flow considerations for
tax levies, special assessments, utility revenues, and other
sources of revenue
Consider other items such as capitalized interest,
compliance with City policy, refunding of existing bonds,
decision on rating, bond insurance, Council approvals, etc.
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.10
Issuing Process
Issuance Costs
Most often paid from bond proceeds
Underwriter’s discount
Municipal advisor / pricing opinion fee
Legal fee
Rating fee
Paying agent fee
Escrow agent fee
Other fees
Total costs range may range from 2-3% of par
amount
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Issuing Process
Preparation
Set sale
Prior Lake has used in the
past what is commonly
referred to as “trigger”
resolution
Disclosure
Preliminary Official
Statement (POS)
Rating
Prior Lake holds a “AA+”
rating from S&P and “Aa2”
rating from Moody’s
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Investment Grade Ratings
Moody’s S&P
Aaa AAA
Aa1 AA+
Aa2 AA
Aa3 AA-
A1 A+
A2 A
A3 A-
City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.11
Issuing Process
Prior Lake Rating Rationale from S&P for AA+ rating (as ofApril 25, 2016)
Very strong economy
Strong management
Adequate budgetary performance
Higher score in this rating category would require that the City’srevenues over expenditure increases compared to total expenditures
Very strong budget flexibility
Very strong liquidity
Weak debt and contingent liability
Total governmental fund debt service at 24.2% of total governmentalexpenditures (e.g., higher score would require total governmental funddebt service to be below 15%)
Net direct debt at 173.6% of total governmental fund revenue (e.g., higherscore would require net direct debt to be below 120%)
Approximately 74.0% of the direct debt is to be repaid within 10 years (acredit positive)
Strong institutional framework (same for all cities in MN)
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Execution
Approval of underwriting terms
Process for approval depends on whether a
competitive sale or negotiated sale process
Final terms of sale are set by resolution of the
City Council
Closing on the bonds is typically 3-4 weeks
after the sale approval
Debt management and establishment of
accounts
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City of Prior Lake, City Council Workshop March 13, 2017
NorthlandSecurities, Inc.12
The information contained in this presentation has been derived from sources believed to be reliable, but is
not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the
material discussed. The opinions expressed herein do not necessarily reflect those of Northland Securities,
Inc., and are subject to change without notice.
Northland Securities, Inc.
45 South 7
th Street, Suite 2000
Minneapolis, Minnesota 55402
800-851-2920
www.northlandsecurities.com/public_finance
Questions
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Tammy Omdal
612-851-4964
tomdal@northlandsecurities.com