AGENDA #5c
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Information on Potential Debt Service Costs of Town Operations Center
DATE: November 24, 2003
This memorandum provides information requested by the Council regarding the potential estimated annual debt service costs and tax rate equivalents of financing the Town Operations Center with Certificates of Participation.
BACKGROUND
On October 27, 2003, the Town Council approved a project budget for the Town Operations Center totaling about $42,623,000 which includes new facilities for Transit Operations, Public Works operations and Public Housing maintenance. (Attachment 1 is a summary of the project budget approved by the Council.) Agenda item 4d on tonight’s agenda recommends adoption of capital project ordinances for the Public Works and Transportation portions of the project.
On June 23, 2003, the Council approved the issuance of Certificates of Participation as a method of funding the Public Works portion of the project and the cost of the Transportation facility that is not funded from federal and State grants and the local matching funds available in the Transportation Capital Reserve Fund. The debt service costs of the Public Housing maintenance portion of the project will be funded from federal Housing Capital Grants received annually from the U. S. Department of Housing and Urban Development. The information below provides estimates of the potential debt service costs associated with these portions of the project to be funded with Certificates of Participation.
DISCUSSION
The proposed project ordinance for the Public Works and Public Housing portions of this project that would need to be financed from Certificates of Participation totals about $23,270,000. The project budget approved by the Council for the Transportation portion of the project totals about $18,318,000. We continue to believe that the Town could receive a substantial portion of this cost from federal and State grants, with the balance of local matching costs funded from the Town’s Transportation Capital Reserve Fund. These grants could be available for a period extending beyond completion of the project. If they are received after the initial capital outlay, they could be used to pay off debt incurred for eligible expenditures. However, to date we are certain only of a $1,483,000 grant for architectural and engineering services.
Because of the uncertainty of the amount and timing of the grants, we believe there is a potential need to provide temporary or permanent financing for portions of the Transportation facility cost. Therefore, we provide estimates of the debt service cost for issuing Certificates of Participation to finance the Public Works portion of the project, and estimates to finance varying amounts for the Transportation portion of the project based on different levels of federal or State grants.
We present below preliminary estimates of the annual debt service costs and the current tax rate equivalents of these costs based on current financing rates for Certificates of Participation. For illustrative purposes, we include four potential scenarios assuming Transportation grant funding at levels of 30%, 50%, 70%, and 90%. We note that these estimates are preliminary and would be subject to change reflecting economic conditions and future interest rates. For the purpose of making annual debt service estimates, we recommend using a rate of 5%.
Based on the assumptions noted above, below are estimates of the project costs, debt service costs in the first year and the current tax rates equivalents (1 cent = $426,000 in 2003-04) for these projects with the four alternative levels of grant funding.
CONCLUSION
In order to issue Certificates of Participation, the Town would need to follow the procedures and recommendations of the Local Government Commission. The Commission would require the selection of a financial firm to serve as an underwriter for the sale of the Certificates and as a financial advisor to assist the Town in developing a specific issuance schedule based on the overall cash needs and timing of the construction of the project. We will soon be recommending that the Council select an underwriter in accord with recommendations of the Local Government Commission.
Although we do not yet have a detailed schedule for issuing the Certificates of Participation, we know the approximate schedule that we would recommend for expenditures. We will soon be recommending that the Council award a contract for the design and engineering costs of the project, and we believe that we will be ready to begin initial grading of the site in the fall of 2004. Therefore, we believe the Council may need to consider issuing a substantial portion, if not all, of the proposed Certificates as early as the fall of 2004.
In accord with recommendations of the Local Government Commission, debt service payments for Certificates of Participation issued for general governmental functions would be similar to payments on General Obligation bonds, in which even principal payments are made over the life of the debt and the annual debt payments decline gradually after the first year. Therefore, estimates of the annual debt service payments on the Certificates would begin as noted above and decline gradually over the life of the Certificates.
In addition to the estimated annual debt service costs of this project, the Council will soon be developing a schedule to consider the issuance of the General Obligation bonds approved in November. We have previously presented information to the Council on the potential impact and tax rate equivalents of the estimated debt service costs for these bonds that could cumulatively total as much as 6.9 cents if issued over the next seven to 10 years. (Attachment 2 includes a portion of the memorandum that was presented on September 23, regarding potential debt service costs and timing.) As noted in this information, estimated debt service payments on new General Obligation bonds would also decline gradually after the first year, and about $15 million of currently outstanding bonds ($20,070,000) would be retired over the next 10 years, so that a substantial portion of the new General Obligation debt would be offset by debt being retired. We believe the Council will want to consider the schedule for issuing the General Obligations bonds in conjunction with the overall schedule and timing of the proposed Town Operations Center that would need to be completed by December of 2006.
We look forward to working with the Council to develop a coordinated schedule for issuing the proposed Certificates of Participation and the approved General Obligation bonds.
ATTACHMENTS
1. Town Operations Center Preliminary Budget (p. 5).
TOWN OPERATIONS CENTER
PRELIMINARY BUDGET
October 27, 2003
Public Works/Housing Transit TOTAL
Construction $17,264,754 $12,788,100 30,052,854
Equipment 1,719,080 1,828,200 3,547,280
Subtotal (a) $18,983,834 $14,616,300 $33,600,134
Off-site (utilities, roads, signals) 1,626,900 1,646,900 3,273,800
Demolition 126,500 126,500 253,000
Subtotal (b) $20,737,234 $16,389,700 $37,126,934
10% Design, value engineering,
testing 2,073,723 1,638,970 3,712,693
Subtotal (c) $22,810,957 $18,028,670 $40,839,627
1% for Art 228,109 180,286 408,395
Subtotal (e) $23,039,066 $18,208,956 $41,248,022
Relocation expense 44,000 13,000 57,000
Removal underground tanks 75,400 96,000 171,400
Subtotal (f) $23,158,466 $18,317,956 $41,476,422
Public Housing Maintenance* $1,120,400 1,120,400
Subtotal (g) $24,278,866 $42,596,822
Addition for Millhouse widening** $25,775
SUBTOTAL# $24,304,641 $18,317,956 $42,622,597
Sales Tax Refund - 540,700 - 402,000 - 942,700
TOTAL#
$23,763,941 $17,915,956 $41,679,897
# Approved Oct. 27, 2003 (bolded numbers only in resolution)
* Including 10% for design, value engineering and testing
** Including 10% for design, value engineering and testing and 1% for art
Excerpt from Memorandum from Town Manager to Town Council, September 22, 2003
POTENTIAL EFFECT OF SELLING BONDS ON THE TOWN’S
PROPERTY TAX RATE
In a bond referendum, the question before the voters is whether the Town should be authorized to sell general obligation bonds for a class of capital projects. A “general obligation” bond is one which pledges the Town’s full faith and credit including the potential levy of taxes to ensure payment of the debt and interest costs.
If some or all of the bond issues are approved by the voters in the November referendum, the Town Council could decide to issue none, all or any portion of the bonds over a seven year period. Unlike mortgage debt, general obligation bonds are structured so that principal is paid off steadily, causing the debt payments to decrease regularly from the first payment to the last. Therefore, the schedule of issuance makes a difference in the total debt service payments in any given year. If all are sold at once, the peak debt service is maximized. If they are issued in several sales over a period of time, the amount of debt service in any one year can be reduced.
The cost of debt service could be accommodated by a decrease in other Town expenditures or increases in the tax rate or in other revenues, or any combination of these options. Below we provide information on the cost of the debt in terms of the tax rate. We emphasize that the projections are based on assumptions regarding several major variables: future growth of the tax base, interest rate at which the bonds are actually sold, the schedule of sales and the amount actually sold.
Below are Town staff estimates of the tax rate equivalents of the estimated annual debt service cost of issuing various amounts of bonds. The table shows estimated debt service payments in the first year for specified principal amounts assuming an interest rate of 5% and a normal general obligation bond maturity of 20 years. (Debt service payments would decline each year thereafter by 5% of the amount of principal retired each year of the 20-year maturity.)
With these assumptions, the debt service on each $1,000,000 of debt issued would be $100,000 in the first year. With 1 cent of the tax rate now generating about $426,000 in property taxes, this table shows the tax rate equivalents of estimated debt service payments for various levels of estimated debt service.
Table 1
Estimated Debt Service Payments on Proposed 2003 Bonds
and Tax Rate Equivalents of Debt Payments
|
Principal Amount of Bonds Issued |
Debt Service Payments (First Year) |
Current Tax Rate Equivalent (1 cent = $426,000) |
|
1,000,000 |
100,000 |
.2 cents |
|
5,000,000 |
500,000 |
1.2 cents |
|
10,000,000 |
1,000,000 |
2.4 cents |
|
15,000,000 |
1,500,000 |
3.5 cents |
|
20,000,000 |
2,000,000 |
4.7 cents |
|
25,000,000 |
2,500,000 |
5.9 cents |
|
29,360,000 |
2,936,000 |
6.9 cents |
Based on these estimates, the cumulative tax rate equivalent of estimated debt service payments if the total amount of proposed bonds were issued would be 6.9 cents if all the bonds were sold at one point in time. It is more likely, however, that the bonds would be issued in different amounts over the seven to ten year period that the bonds would be authorized.
The above view of the tax rate equivalent of debt service payments assumes that the value of 1 cent of the tax rate remains constant over the seven to ten year period of the proposed bonds. In reality, the tax base changes each year, increasing the revenue generated by 1 cent on the tax rate. Table 2 below shows how the tax base and the value of 1 cent of the tax rate have grown over the last ten years.
Table 2
Changes in 1 Cent Tax Rate Equivalent Over Last Ten Years
|
Year |
Tax Base (in billions) |
1 Cent Tax Rate Equivalent |
|
1993-94* |
$ 2.015 |
$ 201,000 |
|
1994-95 |
$ 2.095 |
$ 209,000 |
|
1995-96 |
$ 2.190 |
$ 219,000 |
|
1996-97 |
$ 2.296 |
$ 229,000 |
|
1997-98* |
$ 2.769 |
$ 276,000 |
|
1998-99 |
$ 2.883 |
$ 288,000 |
|
1999-00 |
$ 2.944 |
$ 294,000 |
|
2000-01 |
$ 3.039 |
$ 303,000 |
|
2001-02* |
$ 4.021 |
$ 402,000 |
|
2002-03 |
$ 4.168 |
$ 416,000 |
*revaluation years
Based on information in Table 2 above, the value of 1 cent of the tax rate increased from $201,000 in 1993-94 to $416,000 in 2002-03.
Table 3 below illustrates how the tax base and the value of 1 cent might grow over the next seven to ten years.
Table 3
Illustrative Estimates of Potential Changes in Tax Base and
Changes in 1 Cent Tax Rate Equivalent Over a 10-Year Period
Based on information in Table 3, estimated tax base growth under various scenarios could increase the value of l cent of the tax rate over a ten year period, from $426,000 in 2003-04 to as much as $813,000 in Example 1, $774,000 in Example 2 and $628,000 in Example 3. Consequently, the tax rate equivalent of various levels of debt service payments would be affected by the growth in the tax base.
In addition to the changing value of 1 cent of the tax rate, the estimated debt service payments also decline each year throughout the normal 20-year maturity of the bonds. Therefore, with declining debt service each year and increasing tax rate equivalents each year, the actual tax rate equivalent of the debt service payments would decline over the expected time frame in which the bonds would be issued.
Retirement of Current Bonds
A portion of the Town’s existing bonds outstanding will be retired each year over the next ten years. Based on the Town’s current debt service schedule, $15,245,000 of the current bonds outstanding would be retired over the next ten years, thus reducing the total net amount of bonds outstanding and of debt service obligation.
Operating Costs of Proposed Bond Projects
In addition to the debt service cost for issuing new bonds, we believe there will be increases in annual operating costs for some of the proposed projects, primarily for expansion of the Town Library. Our preliminary estimate of the increased operating costs of a larger Library could be about $350,000 annually (in today’s dollars) based on the full expansion recommended in the Library Master Plan. The Council would make final decisions on the size and timing of the proposed expansion and whether to issue all or a portion of any bonds authorized by the voters.
For the sidewalk, open spaces and energy efficiency projects, we believe future operating costs for most of these projects would be minimal and could be partially offset by funds currently provided annually by the Capital Improvements budget.