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HomeMy WebLinkAbout04 02 2018 Debt Overview Report and Presentation 4646 Dakota Street SE Prior Lake, MN 55372 CITY COUNCIL WORKSHOP REPORT MEETING DATE: APRIL 2, 2018 PREPARED BY: CATHY ERICKSON, FINANCE DIRECTOR PRESENTED BY: CATHY ERICKSON TOPICS: B. DEBT OVERVIEW DISCUSSION: Introduction The purpose of this workshop item is to provide a debt overview as directed by Council. History The City Council is provided debt and debt service tax levy projections as part of the annual Capital Improvement Process (CIP). The annual debt service tax levy projection is also included in the review of the City’s five-year tax projection. Current Circumstances Staff has prepared the attached Debt Overview PowerPoint presentation for the Council work session. Projected debt based on the 2017-2021 CIP projects is shown on the table below. • Tax supported debt is funded by the property tax levy and is included in our five- year property tax projection. • Revenue supported debt is funded by user utility rates. • Special Assessment supported debt is paid by the property owners who benefited from the street improvement project. The city finances the property owner special assessment amount. The property owners pay the city back over five years (street overlay) or ten years (street reconstruction). As the city council is aware, the Capital Improvement Program and budget, working together, comprise the total tax levy. Therefore, in the interest of providing the city council and public with a comprehensive picture, we also have a long-range planning workshop topic tonight that includes a five-year property tax projection. The annual debt service portion of the five-year property tax projection is highlighted in yellow on the table below. The debt service level includes our existing and proposed debt service based on the projects in the 2017-2021 CIP. YE 2017 2018 2019 2020 2021 2022 2023 Tax Supported Debt 15,849,604 18,220,746 19,275,103 20,550,846 21,831,357 21,914,512 21,756,687 Revenue Supported Debt 7,000,000 9,210,000 8,567,000 7,909,000 7,231,000 6,533,000 5,795,000 SA Supported Debt 16,365,000 15,943,754 15,051,640 14,674,992 13,439,672 13,158,154 12,574,560 Total Debt 39,214,604 43,374,500 42,893,743 43,134,838 42,502,029 41,605,666 40,126,247 Page 2 The debt service levy projection is based on ten-year level annual debt service payments. The proposed increase in tax levy for debt service obligations for 2019 is $119,205 which translates to a property tax increase of about .99%. The City has debt service of $425,000 falling off in 2019, but the CIP includes debt service for proposed CIP projects of $538,000 as shown on the table below. The 2018 CIP projects that require bonding and impact the 2019 debt service tax levy are as follows: LONG RANGE FORECAST Adopted Budget 2018 2019 2020 2021 2022 2023 Tax Levies: General 7,779,182 8,213,358 8,826,039 9,235,439 9,772,104 10,288,012 Equipment Revolving Fund 550,000 600,000 600,000 600,000 600,000 600,000 Revolving Park Equip Fund 238,184 339,292 433,276 527,649 632,832 903,913 Facilities Management Fund - - 30,000 80,000 80,000 105,000 PIR Fund - 95,000 175,000 175,000 185,000 185,000 EDA Fund 140,000 140,000 140,000 140,000 140,000 140,000 Debt Service 3,370,172 3,489,377 3,696,058 4,134,348 4,609,593 4,792,951 12,077,538 12,877,027 13,900,373 14,892,436 16,019,529 17,014,876 Breakdown of Change in Levies: General 586,390 434,176 612,681 409,400 536,665 515,908 Equipment Revolving Fund 175,000 50,000 - - - - Revolving Park Equip Fund 24,778 101,108 93,984 94,373 105,183 274,981 Facilities Management Fund - - 30,000 50,000 - 25,000 PIR Fund - 95,000 80,000 - 10,000 - EDA Fund - - - - - - Debt (276,784) 119,205 206,680 438,291 475,244 183,358 Total Change 509,384 799,489 1,023,345 992,064 1,127,092 999,247 General 8.15% 5.58% 7.46% 4.64% 5.81% 5.28% Equipment Revolving Fund 46.67% 9.09% 0.00% 0.00% 0.00% 0.00% Revolving Park Equip Fund 11.61% 42.45% 27.70% 21.78% 19.93% 43.45% Facilities Management Fund n/a n/a n/a 166.67% 0.00% 31.25% PIR Fund n/a n/a 84.21% 0.00% 5.71% 0.00% EDA Fund 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Debt -7.59% 3.54% 5.92% 11.86% 11.50% 3.98% Total Change 4.40% 6.62% 7.95% 7.14% 7.57% 6.24% Projected 1 2 3 4 5 6 7 2019 Debt: Existing CIP (425,209) Proposed CIP 537,549 Market Referendum 6,866 Change in Debt Levy 119,205 Page 3 If the city council desires to reduce the tax levy so there is no dollar difference between 2017 and 2018 projects, then it could reduce the tax levy associated with one of more of these projects by $119,000. The most straight forward way to accomplish this would be to shift a street project to a future year. However such action is inconsistent with the council’s objective to retain the average street OCI at 70. Conclusion The city has worked to identifiy opportunities to minimize our debt load. • The City entered into a Cooperative Water Agreement with the SMSC to meet future demands for water as the City continues to develop within our existing limits as well as the Orderly Annexation Area. A stand alone water treatment plant would cost $14,900,000. The City’s share of a joint water treatment plant is estimated to be $8,700,000. This is a savings of $6,200,000 for the City. Our intial cost is capped at $2.5 million for the construction of two filter cells. The City has added water capacity without an excessive upfront investment which would have required bonding/debt issuance. This agreement also provides a hedge against slowed or reduced demand in the annexation area. • Staff strives for PayGo funding versus bonding in the Utility Funds to limit our debt issuance. Additional ideas to mimimize our annual debt service levy are as follows: Short-term approach: • Shift street project(s) to future years to minimize the debt levy impact when the City has multiple projects that occur based on the timing of partnership projects with the state, county, SMSC, etc. Log-term approach: • Adjust our debt service levy from even annual debt service payments to one that targets an annual debt service cash flow of $3.2- $3.5M and still meets our Comprehensive Financial Management Policy. This would help smooth the debt service levy impact in 2020-2023. Staff would work with our financial advisor to develop this plan. • Establish a debt service revolving fund to be used as projection against spikes in debt service in a given year. The city could build the balance in this fund by allocating a portion of General Fund reserves in excess of 50% to debt service Improvement Estimated Annual Debt Service Tax Levy Impact County Wide Flashing Yellow Signal Conversion 13,500 Duluth Avenue / TH 13 Signal 115,000 Franklin Trail (CR 44 to Summer) (1972)133,000 Huron/Wildwood/Woodside/Santee (1986)115,300 Fire Pumper 84,000 Fire Station #2 SCBA and Parking Lot 78,000 Total 538,800$ Page 4 on an annual basis. As the debt service reserve is built up, it can be used to smooth the annual debt service tax levy that can occur based on timing of our street reconstruction needs and partnership projects • Reduce the target of two miles of street reconstruction annually. Staff does not recommend this approach. The city has over 100 miles of streets. At the rate of two miles of replacement per year, it will take 50 years to replace all streets. Additionally, our annual street maintenance costs for sealcoat, filling cracks/holes, etc will increase. . Debt Overview April 2, 2018 Finance public improvements large capital costs/long useful life Spread the cost of the improvement over multiple years current and future property owners will benefit from the improvement Why issue debt? 2 Tax levy impact or impact on rates is considered to be too great by the Council/policy makers Capital improvements that occur annually/regular basis should be considered to be funded on a pay-go basis Scheduled equipment replacement Scheduled regular repair and maintenance Under what conditions should cities refrain from issuing debt? 3 The “right amount of debt” is a local policy determination. Factors to consider: city’s ability to repay the debt impact on local taxpayers and/or customers. What is the right amount of debt vs tax levy? 4 Bonding has been required for large equipment purchases, large facility improvements and street improvement projects paid back over 10 or more years. Pay-go funding for our long-term plans would require a higher annual tax levy amount and higher utility user rates. Prior Lake’s 2017 bond rating is a AA+ What is the right amount of debt vs tax levy? 5 Financing Methods Recap Pay-As-You-Go (Cash) Pay project costs from cash on hand using either current revenues or reserve funds. budgetary items/replacement items Computers Scheduled regular repair and maintenance For the our long-term plans (Revolving Equipment, Parks Equipment and Facilities funds) tax levy is the typical funding source For our utility funds, user rates are the typical funding source Pay-As-You-Use (Debt) Issue debt and pay project costs from bond proceeds. Debt is repaid over time by the users of the project. large capital costs/long useful life Large equipment purchases (fire truck) Major improvements (streets, facilities) If we don’t issue debt for large capital costs, then we would need to increase the annual tax levy to build up funds over time to pay cash for these capital costs. Credit Ratings Purpose of a Credit Rating Provides an understandable measure of the degree of risk of an issuer’s securities. The ratings are used by investors to aid them in making investment decisions Rating Agencies Moody’s Investors Service Standard & Poor’s Corporation Credit Ratings Cost Benefit Ratings broaden the potential investor base Lowers cost of debt in most cases Perform a cost benefit analysis Primary Credit Factors Economic –trends & diversity Debt –structure & burden Financial –operations & flexibility Management –policies & flexibility Prior Lake’s 2017 S&P bond rating is a AA+ Credit Ratings S & P Highest AAA AA+ AA AA- A+ A A- BBB- BBB Lowest (Investment Grade)BBB- Credit Rating Comparison S&P Global Rating 2017 Bond Issue Criteria Prior Lake Savage Economy Very Strong Very Strong Management Strong Very Strong Budgetary Performance Adequate Strong Budgetary Flexibility Very Strong Very Strong Liquidity Very Strong Very Strong Debt and Contingent Liability Weak -Total governmental debt service carrying charges is 22.3% of expenditures and net direct debt that is 190.2% of total governmental fund revenue Weak -Total governmental debt service carrying charges at 27.7% of expenditures and net direct debt that is 178.4% of governmental fund revenue Rating AA+AAA Other factors:•Diversity of tax base•Cash balances (reserves) Credit Rating (continued) What would the city gain and/or lose with a AAA rating? May incur a lower cost of debt May need to maintain a greater level of reserves If we collect more revenue than planned, we historically have spent down some of our fund balance for capital/one time planned expenditures. Credit Rating (continued) How can the City improve it’s credit rating? Regarding the Budgetary Performance Criteria: Maintain a greater level of reserves Regarding the Management Criteria: Extend the horizon and formalize the CIP approval process Formalize our long-range financial planning (Five year plan for each fund) Regarding Weak Debt and contingent Liability Position Increase in total governmental fund expenditures and revenues Increase in the rapid amortization of the City’s debt City Outstanding and Anticipated Debt - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 50,000,000 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE 2017 2018 2019 2020 2021 2022 2023 Debt Outstanding History & Projections Total Debt Total City Tax Supported Debt - 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000 50,000,000 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE 2017 2018 2019 2020 2021 2022 2023 Debt Outstanding by Segment Tax Supported Debt Revenue Supported Debt SA Supported Debt 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Annual Debt Levy Existing Debt Levy Future Debt Levy 20 6 , 6 8 0 43 8 , 2 9 1 47 5 , 2 4 4 18 3 , 3 5 8 Annual Change in Debt Levy 11 9 , 2 0 5 City Property Tax Projection LONG RANGE FORECAST Adopted Budget 2018 2019 2020 2021 2022 2023 Tax Levies: General 7,779,182 8,213,358 8,826,039 9,235,439 9,772,104 10,288,012 Equipment Revolving Fund 550,000 600,000 600,000 600,000 600,000 600,000 Revolving Park Equip Fund 238,184 339,292 433,276 527,649 632,832 903,913 Facilities Management Fund - - 30,000 80,000 80,000 105,000 PIR Fund - 95,000 175,000 175,000 185,000 185,000 EDA Fund 140,000 140,000 140,000 140,000 140,000 140,000 Debt Service 3,370,172 3,489,377 3,696,058 4,134,348 4,609,593 4,792,951 12,077,538 12,877,027 13,900,373 14,892,436 16,019,529 17,014,876 Breakdown of Change in Levies: General 586,390 434,176 612,681 409,400 536,665 515,908 Equipment Revolving Fund 175,000 50,000 - - - - Revolving Park Equip Fund 24,778 101,108 93,984 94,373 105,183 274,981 Facilities Management Fund - - 30,000 50,000 - 25,000 PIR Fund - 95,000 80,000 - 10,000 - EDA Fund - - - - - - Debt (276,784) 119,205 206,680 438,291 475,244 183,358 Total Change 509,384 799,489 1,023,345 992,064 1,127,092 999,247 General 8.15% 5.58% 7.46% 4.64% 5.81% 5.28% Equipment Revolving Fund 46.67% 9.09% 0.00% 0.00% 0.00% 0.00% Revolving Park Equip Fund 11.61% 42.45% 27.70% 21.78% 19.93% 43.45% Facilities Management Fund n/a n/a n/a 166.67% 0.00% 31.25% PIR Fund n/a n/a 84.21% 0.00% 5.71% 0.00% EDA Fund 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Debt -7.59% 3.54% 5.92% 11.86% 11.50% 3.98% Total Change 4.40% 6.62% 7.95% 7.14% 7.57% 6.24% Projected 1 2 3 4 5 6 7 Joint Water Treatment Facility with the SMSC Project bids favorable to estimated costs Strive for PayGo funding in the Utility Funds – (Minimize the use of bonding in the Utility Funds) 17 Opportunities to Minimize Debt Load 2018 Bonding Projects Improvement Estimated Annual Debt Service Tax Levy Impact County Wide Flashing Yellow Signal Conversion 13,500 Duluth Avenue / TH 13 Signal 115,000 Franklin Trail (CR 44 to Summer) (1972)133,000 Huron/Wildwood/Woodside/Santee (1986)115,300 Fire Pumper 84,000 Fire Station #2 SCBA and Parking Lot 78,000 Total 538,800$ To minimize 2019 debt service tax levy impact, we could shift a street project to a future year. DISCUSSION/QUESTIONS?