AGENDA #10
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Report on Overall Debt Issues and Potential Financing Options for the Town Operations Center and Other Capital Projects
DATE: June 9, 2003
This memorandum provides a discussion of debt service for three potential capital projects.
Adoption of Resolution A would authorize the Town Manager to begin the steps necessary for the issuance of Certificates of Participation to finance the Town Operations Center.
Adoption of Resolution B would authorize the Town Manager to begin the steps necessary for the issuance of General Obligation Bonds to finance the Town Operations Center.
Adoption of Resolution C would authorize the Town Manager to begin the steps necessary for the issuance of General Obligation Bonds to finance a green infrastructure program.
Adoption of Resolution D would authorize the Manager to begin the steps necessary for the issuance of General Obligation Bonds to finance a library expansion.
The Council could consider any of the proposed resolutions tonight or could defer action until June 23, 2003. We believe that action by June 23 would be necessary if the Council wishes to schedules a bond referendum in November, 2003.
INTRODUCTION
The Town Council has been considering implementation in the near future of three capital projects:
· Town Operations Center
· Green Infrastructure Bond
· Library Expansion
This memorandum provides information on these projects, potential options for financing them, and a brief discussion of the timing and coordination issues that the Council may wish to include in its consideration of the broader debt outlook for the Town. One table below provides a summary of the estimated annual debt service costs and tax rate equivalents for each of the proposed projects. Another table illustrates several options the Council may wish to consider in terms of timing and sizing of debt issuance.
Using long-term financing for large public projects which will provide public services for many years makes sense from both an economic and a public policy perspective. Much like a house mortgage, public financing makes possible the purchase and/or construction of needed facilities when resources to pay the full price are not available. In addition, long-term financing spreads the cost of public facilities to those who will benefit from them over time.
PENDING CAPITAL PROJECTS
Town Operations Center
Project Description
The Town Operations Center will provide new facilities to house the Chapel Hill Transit System, the Town’s Public Works Department, the Public Housing Maintenance Division and, possibly, the Engineering Department. This project is a necessity because the lease for the current site of the Transportation and Public Works Departments ends on December 31, 2006, and will not be extended by the property owner, the University. It will be possible to vacate the site by then only by keeping to a very ambitious schedule of planning, design, permitting, construction, demolition of the present facilities, and the final move to the new site.
The Town has already acquired land from four owners. The 88 acres are located off Millhouse Road, north of Eubanks Road, bounded by the railroad and I-40. The first two land purchases are being financed by 10-year installment financing, with debt service being paid from the Capital Improvements Fund. The third purchase was made in cash, using funds from the Transportation Capital Reserve Fund. The fourth purchase, to be closed next month, will also be financed with a 10-year installment contract, with debt service coming initially from the debt service reserve.
Initial planning and design work has been underway since December 2002, and a concept plan and cost estimates are scheduled for presentation to the Town Council on June 23. The plans include buildings, equipment and outdoor space to accommodate the following functions, and providing space to accommodate assumptions for growth through 2036 for:
· Transit
· Public Works
· Engineering
· Public Housing Maintenance
Costs
Although the cost estimates based on the concept plans are not yet ready, we have had to make some assumptions about costs. Based on information from other jurisdictions and other industry sources, we have assumed that the transit portion would cost about $15 million, and that the Public Works portion, including the public housing and engineering functions, would cost about the same. We distinguish between transit and public works costs, because federal and State funding is potentially available for up to 90 % of total costs (80% federal, 10% State). However, we believe that the Town of Chapel Hill is the only source of funding for the other functions.
The cost to the Town of the transit facilities will depend on how much federal and State funding is available and when. It is not clear how much funding we would receive, nor is it clear in which year or years any funding would become available. Nor can we say with certainty when we might know the amount or the schedule. The most likely scenario would be for the Town to receive some, but not all of the funding for which it would be eligible, and for that to happen over a two- to six-year period. We understand that it is possible for federal and State funding to be used to reimburse a local government for eligible costs already incurred and paid. Therefore, we would not wait for news about federal funding to take the next steps in developing this project, and we would take all steps necessary to maintain our eligibility for funding.
Because of the uncertainty of grant funding, we believe that the Council should assume that the Town would need to finance the entire cost of the project, in the range of $30 million, plus $2.4 million for design and engineering.
Green Infrastructure Bond
On April 30 the Council’s Sustainability, Energy and Environment Committee recommended consideration of a Green Infrastructure Bond to include funding for:
· Construction costs for 50% of sidewalks listed on the current sidewalk plan within five years ($2,600,000)
· Construction costs for 50% of the greenways listed in the Greenway Master Plan within five years ($8,000,000)
· Sufficient funds to establish an Energy Bank in the Town budget, and for an Energy Coordinator in 2004 (($1,000,000 in bonds and $60 -80,000 in operating funds)
· Upgrades in pedestrian amenities to five intersections ($340,000)
· Open space purchases ($3,000,000)
· Neighborhood, pedestrian and bicycle safety improvements ($650,000)
On May 28, the Council considered preliminary cost estimates for the elements noted above. The total of the preliminary estimates was $15.6 million to be financed, and about $60 – $80,000 to be paid from annual operating costs for an energy coordinator. The Committee requested that they have an opportunity to review the costs and recommend priorities to the Council on June 9. The Council concurred. Without that revised recommendation, we assume the full cost of $15.6 million for this potential bond issue and can assist the Council in making whatever adjustments may be discussed.
Library Expansion
Project Description
On April 14 the Council unanimously adopted the Library Building Program as a part of the Library Master Plan. The Plan calls for the expansion of the present library building from 27,000 square feet to 75,500 square feet, the addition of user seating to accommodate 279 users instead of the current 120, and an increase in books and other materials.
Costs
The initial preliminary cost estimate was in the range of about $16.3 million for construction and design work. Because this estimate was high, the staff considered alternatives that would have the building expansion occur in two separate phases. We also considered the amount of space that had been considered “unassignable.” The consultant had estimated that 30% would be unassignable, that is, used for such things as circulation, utilities and mechanical spaces. However, the current library has only 20% that is “unassignable,” so we have assumed that the library expansion will be as carefully and economically designed, and that only 20% need be considered “unassignable.”
In addition, we have considered the most important elements of interior space and have concluded that building a portion of the final recommended expansion might be easier for the budget to accommodate now and would still significantly improve library services. We would focus the extra space on the children’s collection and seating, the adult collection and seating, the internet center and the lobby. We also recommend adding parking as part of the first phase of expansion. Because we believe that as much of Pritchard Park as possible should be preserved in a wooded state, we recommend that the parking be added as a deck over the existing parking lot. A deck cannot be built in stages, so the full deck would need to be included in any first phase at a cost of about $1,650,000.
A smaller expansion would include an additional 14,400 square feet and the parking deck totaling about $8.5 million. A larger expansion would include an additional 27,000 square feet and the parking, totaling about $11.5 million. The remaining space would be developed in a future period.
FINANCING OPTIONS
Methods
We believe that the basic options for financing long-term capital projects with an expected life of more than twenty years include the issuance of General Obligation bonds or the issuance of Certificates of Participation. A third option of private placement might be suitable for shorter term projects with maturities between 10 and 15 years. Below is information about each of these financing options.
Another method of financing general purpose projects would be to issue Certificates of Participation which do not require approval in a referendum, but must be approved through an application to the Local Government Commission. Certificates of Participation carry a general pledge to pay debt service from whatever revenues are available. A normal term for Certificates of Participation is twenty years, although maturities of 25 and 30 years are also commonly used, depending on the expected life of the proposed project. The Local Government Commission recommends this form of financing for projects that are essential for government operations, as we understand it.
Private Placement
This method of financing involves installment contracts with private financial institutions as authorized by General Statute 160A-20. Private placements are often used for equipment purchases with terms of less than 5 years, and for shorter-term capital improvement projects of between five and 15 years. Normally financial institutions would not offer private placements for more than 15 years. Major equipment purchases and capital improvements using debt with a maturity of more than five years require approval through the Local Government Commission and a public process that includes a public hearing. With private placements, the financial institution requires a security interest in the project being financed or in some other asset of the local unit.
Costs
The costs of issuing General Obligation bonds, regardless of the value of the bonds, is about $25,000 per bond sale including the cost of obtaining bond ratings, services of bond counsel, preparation of an official statement, and printing and marketing costs of the Local Government Commission. Issuance costs of Certificates of Participation would be higher than for General Obligation bonds, but this additional cost in relation to the total financing is not significant when considered over the term of the Certificates.
The annual debt service cost for General Obligation bonds and Certificates would be about the same, depending on exact maturities. Based on today’s market, a general rule of thumb is that annual debt service costs would be about $100,000 for each $1,000,000 of debt issued. This estimate would assume a 20-year maturity and an interest rate of 5%.
Based on the estimated tax base for 2003-04, each l cent of the tax rate generates about $426,000 annually. Therefore, the tax rate equivalent needed to fund each $1,000,000 of debt issued with initial debt service cost of $100,000 would be about .2 cents. Using the same assumptions, the initial annual debt service for $10,000,000 would be about $1,000,000, or a tax rate equivalent of about 2.3 cents annually.
The timetable and steps involved in issuing General Obligation bonds is quite different than the time and steps required for the issuance of Certificates of Participation. As noted, General Obligation bonds require approval by the voters. The steps for authorizing bonds begin with a two-month public process requiring a public hearing, adoption of bond orders specifying questions to appear on a ballot for voter approval, and culminate in a referendum by voters approving or disapproving the issuance of bonds to finance specific capital projects.
Before this two-month process begins, the governing body of a unit normally appoints a special citizens committee to provide information about proposed projects and to advocate for approval of bonds to finance the project. In accord with State law, we believe that the staff of a governmental unit may provide information about a project, anticipated construction and debt service costs, but may not advocate for either positive or negative votes in a bond referendum.
For Certificates of Participation, voter approval is not required. The process for approval does include a public hearing, application to the Local Government Commission for approval, and use of an official statement for marketing of the certificates by financial underwriters. This process normally requires about 60 to 90 days for completion prior to the actual marketing and issuance of Certificates.
Private placements used for smaller projects with shorter terms of five to 15 years can be accomplished in 30 to 60 days and require a shorter public process and approval by the Local Government Commission.
METHODS OF FINANCING RECOMMENDED FOR PROPOSED PROJECTS
Town Operations Center
Because of the need to proceed with the timely design and construction of the proposed Town Operations Center to meet the December 2006 deadline, we believe it would be helpful for the Council to consider now how to finance this project. While we believe we may secure funding for a significant share of the transit portion of the project, we do not yet know what the timing and final amounts may be. Therefore, we assume for now that we will have to finance the full cost of the Operations Center.
We recommend that the Council consider the issuance of Certificates of Participation as authorized by General Statute 160A-20, and as recommended by the Local Government Commission. This method of financing does not require approval by voters and is commonly used for essential purpose projects. The construction of a Town Operations Center is necessary for several essential governmental purposes. The terms and debt service payments for Certificates would be similar to General Obligation bonds.
We believe Certificates of Participation offer the best flexibility for funding any short-term needs for the Town Operations Center. Certificates could be issued for short time periods to provide cash flow while we continue to work toward the 2006 deadline and either wait for funding to become available or wait for information about future funding. Should grant funding not become available, it is possible to consolidate the short-term debt with a larger and longer-term financing.
Based on our conversations with the Local Government Commission and with members of the financial community, we believe that such an issue would be attractive in the financial markets and that we would have no difficulty in marketing certificates with the assistance of an underwriter.
Issuing Certificates of Participation would require a 60 to 90 day public process, and involve use of an underwriter and special legal counsel. Depending on whether we receive a grant for design of the transit portion of the project, this process may not need to begin immediately, and could be timed to begin closer to the time of executing the construction contract. We recommend Certificates of Participation as the best option for financing the Town Operations Center project.
Alternatively, if the Council wishes to pursue financing the Town Operations Center using General Obligation bonds, we believe the Council would need to start the formal approval process of calling for the referendum at its meeting on August 25, 2003. The process for approval of a referendum would be completed in September and October, followed by a referendum on November 4, 2003. The Council might also wish to consider on June 23, the establishment of a committee of citizens to provide information and support before the Nov. 4 referendum. The committee would have the summer months to gather information and prepare to promote approval of the bonds during September and October.
We believe the Green Infrastructure improvement project is an appropriate project for financing by General Obligation bonds that need to be approved by the voters. The Council could choose to implement all or any portion of the projects under consideration now or in future years. If the Council wishes to consider all or any portion of these projects in a referendum this November, we believe it should begin the process of calling a referendum. As noted above, the first legally required step must be taken by the Council’s August 25 meeting, and, if the Council chooses to establish a citizens committee, that would best be done at the June 23 meeting. If there is more than one bond issue on the November ballot and the Council wish to use a citizens committee, we recommend that a separate committee be established for each one.
We believe it is feasible for the green infrastructure projects to be implemented in phases in future years. Phasing the projects could reduce the financial impact of additional annual debt service that would be required to finance the projects. The bonds authorized in a single referendum could be sold in two or three different sales over a 7-year period. This plan would be similar to the voters approving a line of credit and the Council being able to sell bonds as the overall financial situation of the Town allows and as opportunities and/or needs present themselves.
We believe the Library expansion is also an appropriate project for financing by General Obligation bonds that need to be approved by the voters. While the approval of the total project could be decided in one referendum, we believe it would be feasible to accomplish the Library expansion in two phases that would meet projected service needs within a reasonable time frame and reduce the financial impact of the additional debt service cost associated with a full expansion in one phase. If the Council wishes to proceed with a referendum on the Library Expansion this November, we would recommend the same steps noted above for General Obligation Bonds.
SUMMARY OF PROJECT COSTS
Below is a summary of the roughly estimated construction costs and estimated initial annual debt service costs for the four projects under consideration by the Council. We are not able to predict at this time the amount of short or long-term financing that will be needed for the transit portion of the Town Operations Center until more information is known about the timing and amount of federal and State funds that would be available for this project. The table below, therefore, shows the initial annual cost of financing the total cost of the transit facility in the short term.
Summary of Rough Estimates of Project Costs and Annual Debt Service
|
Project |
Rough Estimate of Construction Costs |
Estimated Initial Annual Debt Service Costs |
Tax Rate Equivalent of Debt Service Cost |
|
Town Operations Center- Public Works |
$15 million |
$1,500,000 |
3.5 cents |
|
Town Operations Center- Transit |
$15 million |
$1,500,000 |
3.5 cents* |
|
Library Expansion Smaller Larger |
$8.5 million $11.5 million |
850,000 1,150,000 |
2.0 cents 2.7 cents |
|
Green Infrastructure Bond |
$15.6 million |
$1,560,000 |
3.7 cents |
|
|
|
|
|
|
Totals (smaller Library)** |
$54.1 million |
$5,410,000 |
12.7 cents |
|
Totals (larger Library)** |
$57.1 million |
$5,710,000 |
13.4 cents |
*Maximum estimated annual debt service cost of funding entire project from local funds. This cost could be reduced significantly depending upon the level and timing of federal and State grants that may be awarded for the project.
**Totals represent the total if all the bonds are sold in one year. The maximum annual cost could be moderated by adjusting the timing of the bond sales.
Attachment 1 provides three examples of possible project funding scenarios and the projected debt service requirements in future years for each scenario. The options vary by how much federal and State funding is received for the transit-related costs of the Town Operations Center. These are provided as illustrations only. We recommend the Council make final decisions on the timing and amounts of funding for each proposed project.
CONCLUSION
Funding any or all of the projects discussed above would require additional debt service costs over the next twenty years that could require tax increases. Considering all these projects in the context of existing and projected debt service and other projected needs is helpful in making the best decisions.
Because the Town Operations Center is required in order to offer essential municipal services and because it needs to be built and occupied by the end of 2006, a decision on financing would be timely now. We recommend the use of Certificates of Participation.
The Council may have more flexibility in its decisions regarding a Green Infrastructure bond and a library expansion. We recommend the use of General Obligation bonds for financing these projects. If the Council wishes to proceed with a bond referendum for either of these projects in November, we recommend that the Council begin the legally required approval process and consider appointment of a citizens committee to promote the projects.
RECOMMENDATION
We recommend that the Council adopt Resolution A declaring the Council’s desire to use Certificates of Participation for financing the Town Operations Center project.
Alternatively, Resolution B would declare the Council’s intent to use General Obligation bonds to finance the Town Operations Center project and begins the steps necessary to call a bond referendum for approval of the project by voters.
If the Council wishes to fund a Green Infrastructure Bond, then Resolution C would declare the Council’s desire to use General Obligation bonds to finance these projects and begin the steps to call a bond referendum for approval of the project by voters.
If the Council wishes to fund a library expansion, then Resolution D would declare the Council’s desire to use General Obligation bonds to finance the project and begin the steps to call a bond referendum for approval of the project by voters.
TABLES
1. Potential Bond Sale Amounts (p. 14)
2.
Estimated
Annual Debt Service Costs (p. 15).
Additional Information-Revised Tables for Agenda item #1
Additional Information-Green Infrastructure Bond
A RESOLUTION REGARDING FINANCING FOR PROPOSED TOWN OPERATIONS CENTER (2003-06-09/R-13a)
WHEREAS, the Town’s current Public Works operations facility and Transit operations and maintenance facility are located on land leased to the Town by the University and the lease at this site will not be extended after December 31, 2006; and
WHEREAS, the Town has acquired land for a new Town Operations Center to include a facility for the operations of the Public Works Department, for operations and maintenance of the Town’s public transit system, for a Public Housing maintenance facility and possibly for Engineering offices; and
WHEREAS, the Town Council has considered the financing options available for financing the proposed new Town Operations Center, including the issuance of General Obligation bonds, a private placement and Certificates of Participation; and
WHEREAS, the Council finds that the proposed project is needed to provide essential public services and that timing of potential federal and State funding will likely require flexibility in the terms of the potential debt;
NOW, THEREFORE, BE IT RESOLVED by the Council of the Town of Chapel that the Council hereby declares its intent to finance the Town Operations Center project using Certificates of Participation, and hereby authorizes the Manager to take the steps necessary to plan for such financing in a timely manner, including holding preliminary discussions with the Local Government Commission and soliciting proposals at an appropriate time from potential underwriters for financing this project.
This the 9th day of June, 2003.
A RESOLUTION REGARDING FINANCING FOR PROPOSED TOWN OPERATIONS CENTER (2003-06-09/R-13b)
WHEREAS, the Town’s current Public Works operations facility and Transit operations and maintenance facility are located on land leased to the Town by the University and the lease at this site will not be extended after December 1, 2006; and
WHEREAS, the Town has acquired land for a new Town Operations Center to include a facility for the operations of the Public Works Department, for operations and maintenance of the Town’s public transit system, for a Public Housing maintenance facility and, possibly for Engineering offices; and
WHEREAS, the Town Council has considered the financing options available for financing the proposed new Town Operations Center , including the issuance of General Obligation bonds, a private placement and Certificates of Participation;
NOW, THEREFORE, BE IT RESOLVED by the Town Council of the Town of Chapel, that the Council hereby declares its intent to finance the Town Operations Center project using General Obligation bonds.
BE IT FURTHER RESOLVED that the Council authorizes the Town Manager to take the steps necessary for calling a referendum on November 4, 2003. These steps would include:
· holding preliminary discussions with the Local Government Commission concerning a proposed bond issue.
· gathering and organizing information about the project and projected cost estimates of financing the project.
· providing to the Council at its June 23 meeting a proposed procedure for establishing a citizens committee to provide information and support for the proposed issuance of bonds to finance this project.
· selecting and holding preliminary discussions with special bond counsel regarding a timetable and actions required by the Council to begin the process for calling a bond referendum in November, 2003.
This the 9th day of June, 2003.
A RESOLUTION REGARDING FINANCING FOR PROPOSED GREEN INFRASTRUCTURE BOND PROJECTS (2003-06-09/R-13c)
WHEREAS, the Town Council has considered the need for financing various projects including sidewalks, greenways, and pedestrian and bicycle improvements all under the rubric of a Green Infrastructure Bond; and
WHEREAS, the Town Council has considered the financing options available for financing these capital improvement projects, including the issuance of General Obligation bonds, a private placement and Certificates of Participation;
NOW, THEREFORE, BE IT RESOLVED by the Town Council of the Town of Chapel Hill, that the Council hereby declares its intent to finance Green Infrastructure improvement projects using General Obligation bonds.
BE IT FURTHER RESOLVED that the Council plans to begin the steps necessary for calling a referendum on November 4, 2003 for approval of such bonds by the citizens of Chapel Hill. These steps would include:
· holding preliminary discussions with the Local Government Commission concerning a proposed bond issue.
· authorizing the Manager to development information about the project and projected cost estimates of financing the project.
· requesting that the Manager prepare a budget amendment for the Council’s consideration on August 25 to fund an Energy Coordinator position to manage the energy improvement projects.
· providing to the Council at its June 23 meeting a proposed procedure for establishing a citizens committee to provide information and support for the proposed issuance of bonds to finance this project.
· selecting and holding preliminary discussions with special bond counsel regarding a timetable and actions required by the Council to begin the process for calling a bond referendum in November, 2003.
This the 9th day of June, 2003.
A RESOLUTION REGARDING FINANCING FOR A PROPOSED EXPANSION OF THE TOWN LIBRARY (2003-06-09/R-13d)
WHEREAS, the Town Council has considered the need for financing an expansion of the Town Library; and
WHEREAS, the Town Council adopted the Library Building Program as a part of the Library Master Plan on April 14, 2003; and
WHEREAS, the Town Council has considered the financing options available for financing these capital improvement projects, including the issuance of General Obligation bonds, a private placement and Certificates of Participation; and
WHEREAS, the Council finds that the estimated $16,260,000 cost of the full expansion recommended in the Library Building Program would be an excessive cost at this time;
NOW, THEREFORE, BE IT RESOLVED by the Town Council of the Town of Chapel, that the Council hereby declares its intent to finance an expansion of the Town Library using General Obligation bonds in the amount of $_____
.
BE IT FURTHER RESOLVED that the Council plans to begin the steps necessary for calling a referendum on November 4, 2003, for approval of such bonds by the citizens of Chapel Hill. These steps would include:
· holding preliminary discussions with the Local Government Commission concerning a proposed bond issue.
· gathering and organizing information about the project and projected cost estimates of financing the project.
· providing to the Council at its June 23 meeting a proposed procedure for establishing a citizens committee to provide information and support for the proposed issuance of bonds to finance this project.
· selecting and holding preliminary discussions with special bond counsel regarding a timetable and actions required by the Council to begin the process for calling a bond referendum in November, 2003.
This the 9th day of June, 2003.