Memorandum
City
of
Finance
Department
|
TO: |
Dave Corliss, City
Manager |
|
FROM: |
Ed Mullins, Finance
Director |
|
CC: |
|
|
Date: |
May 28, 2008 |
|
RE: |
2008 Bond and Note
Issuance |
Debt Issuance
Process
To minimize issuance costs, the Finance Department typically issues general obligation debt once a year. The City currently has one temporary note (also known as a bond anticipation note) outstanding with a maturity of October 1, 2008. The City will refinance this note with another note or more permanently finance it by issuing a bond.
Temporary notes are issued instead of bonds because at the time of issuance the cost of the project is typically not known. Since debt is only issued on an annual basis, it may be months before a project is even started. In addition, some projects may take several years to complete. In order to finance our expenses, a note is issued in the estimated amount of the project. In most cases, by the time the note matures the cost of the project is known. A bond is then issued in this amount and the note is retired either through bond proceeds or unspent note proceeds. By waiting until the cost of the project is known, the City avoids expending additional interest cost over the twelve year term of the general obligation bond.
Temporary notes may be issued with a maximum term of four years. Because the interest paid on the notes is exempt from income taxes, the City can typically invest note proceeds at a higher rate of interest than it pays the owners of the note. As a result, if a project is delayed the City can recover at least part of the interest cost paid on the notes from interest earnings.
2008 Notes and
Bonds
The planned 2008 list of projects to be funded with notes and bonds is attached. Because of the debt service fund has a balance in excess of $7.7 million, the city can make current principal and interest payments that exceed revenue. However, as the fund balance is reduced it is important to bring revenues and expenditures in line to avoid the need for a significant increase in the debt levy. As illustrated in the attached spreadsheet, if property valuations only increase by 2% per year and the city issues $5 million in debt payable from property taxes, a levy increase may be required starting in 2013. If future property valuations increase by 4%, no debt levy increase may be required.