Memorandum

City of Lawrence

Finance Department

TO:	David L. Corliss, City Manager
FROM:	Ed Mullins, Finance Director
DATE:	May 28, 2014
RE:	Projected Debt Ratio Guidelines

Background

The current debt policy and associated guidelines were adopted in 2002.  Since that time, the city has remained within the levels listed in the guidelines.  The guidelines were developed, not as a limit on the amount of debt that can be issued by the city, but rather as an early warning mechanism concerning the city’s debt rating.  In 2002, the city’s debt rating by Moody’s was an Aa2.  It has since improved to Aa1, one notch below Moody’s highest rating.

Description

A projection of the guidelines to include a $28.0 million debt issue is attached.  With the debt issue, one of the guidelines is exceeded. The ratios of net direct debt (general obligation debt minus debt to be paid from enterprise funds) to appraised (full) value and general obligation debt to the statutory debt limit are higher than the guidelines.  The general obligation debt to the statutory debt limit would exceed the 60% guideline because general obligation notes have been issued to temporarily fund projects that will be financed with revenue bonds. It is proposed that the guidelines be revised to exclude general obligation notes that will be paid for with revenue bond proceeds.

The net direct debt to appraised value is calculated to be 1.83% in 2015.  This exceeds the 1.50% in the guidelines.  The Moody’s ratio range for a Aa rating is 0.75% to 1.75%.  The city’s guideline of 1.50% is in the upper part of this range.

The ratio of debt service payments to governmental expenditures is projected to be 13.6% in 2016 based upon the proposed issue and other debt issues presently planned.  The city has $55.5 million in general obligation temporary notes that will likely be refinanced with general obligation bonds in September.  The principal and interest on these bonds were included in the 2016 projected ratio.  In addition, governmental expenditures will be reduced once the library and recreation center are completed.

The city’s net direct debt per capita is projected to be $1,417 in 2015.  This is below the guideline of $1,500.   The overlapping net direct debt to appraised value ratio is projected to be 3.34%, below the 3.50% guideline.  The overlapping debt is used to account for the burden on the tax payers from the debt of other jurisdictions, such as the county and school district.  Since the majority of the city taxpayers also pay county and school district taxes, the combined burden from all three organizations should be monitored.  The projection does not include future debt issuance by the county or school district.  The guideline for the 10 mill debt levy was set as the maximum amount of property taxes that should be devoted to debt service.

Conclusion

A projection of the city’s debt guidelines is attached.  Including a $28.0 million debt issuances, the guidelines for debt per appraised value are exceeded.  It is recommended that the city consider a change in the debt as a percent of the statutory debt limit to exclude debt to be repaid from enterprise funds.  It is recommended because this debt will not be repaid from either property or sales taxes.  To stay within Moody’s guidelines for a Aa rating, it is not recommended that the ratio of net direct debt to appraised value be increased to above 1.75%.