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CC Minutes 2001 11 01CHANHASSEN CITY COUNCIL SPECIAL MEETING NOVEMBER 1, 2001 Mayor Jansen called the meeting to order. COUNCIL MEMBERS PRESENT: Mayor Jansen, Councilman Boyle, Councilman Peterson and Councilman Ayotte COUNCIL MEMBERS ABSENT: Councilman Labatt STAFF PRESENT: Todd Gerhardt, City Manager; Bruce DeJong, Finance Director DEBT STUDY PRESENTATION. Bruce DeJong: What you've got before you is a whole bunch of information about our debt service funds, but what I'd really like to try and focus in on tonight is something fairly specific, and that is calling several bond issues that are available to be called. We've got a bunch of bond issues that do not have call provision or it's out quite a few years in the future, but right now we've got some bond issues that were issued back in the late 80's, early 90's at higher interest rates. Substantially higher than the going interest rates right now and we have an opportunity to make some money, or to save some money by paying them off early. So what I'd like to focus on is those 5 issues and they're in your packet. Starting with the fifth page back. You can see there's a sheet that talks about the 1988 G.O. Fire Station Bonds. We consider interest rates on those coupons are up 7.1-7.2%. Right now on our short term money we're getting less than 3% on short term investments of less than 6 months in general. You can see that on the 89C, the interest rates ranged from 6.5% to 6.7%. So what we're really doing right now is we're earning money at 2 1/2%, 3% to pay off bonds that are going at 6 or 7 percent so there's a substantial change that we can accrue back to the city to pay these off early. Now we do have to put some money into paying off these bond issues and there's 3 others that we discussed. 92A G.O. Improvements. The 93C bonds and the 91E bonds. In total this will take a little over a million dollars in order to actually pay all of these off, but we do have funds available. What we've talked about last year at length, during our budget discussions was how much should we have in general fund balance. I think a couple weeks ago that you heard from both Mr. Ruff and from Mr. Mal, from Tautges-Redpath, that a city should have someplace around 50% of fund balance of their general fund. Now I think that's actually in line with what other outside groups like the Taxpayer's League are saying as part oftheir's. It certainly is prudent for cities to have a reasonable fund balance. If we use the roughly $400,000 that it will take to pay off those first two bond issues that I talked about out of the general fund balance, that will bring us down someplace around 4.2 million dollars which would be a lot closer to what our general fund balance probably should be, considering that next year's budget is going to be someplace around 8 million dollars worth of expenditures. Little bit over that actually. So I think we can accomplish a couple of goals because then we also would remove from the tax levy, the levies that are associated with those issues. Right now in the proposed levy we have tax levies for the 88 Fire Station bonds of $70,000 for next year. In the 89C we have a proposed levy of $101,472. And then the 91E we have a tax levy of $220,000 associated with that. So by paying off these bond issues we can actually reduce the taxes by $390,000 for next year. Mark Ruff: I think the only caveat that I have given Bruce and I think staff has mentioned to you that in the end of November when I come back, once we get county values and tax rates, be able to give you a better explanation of the whole tax picture for homeowners and businesses within the community, but the only caveat that I had given Bruce is, the question is do you really want to reduce your debt levy that much City Council Meeting - November 1,2001 for this particular year given the fact that we still have substantial needs in other debt service funds in future years? In other words, to the extent that you drop that whole amount, which is almost $400,000 in one year, are you going to have to then in the next couple of years raise it right back up again and does that kind of gyration in your debt levy make a lot of sense. And I think that's part of what our goal is at the end of November is to give you a better longer term picture to say, what are your real needs in your other debt service funds? These decisions to make, that we have before you, which I think are relatively easy ones because it's much easier and much higher savings on these higher interest rate bonds of these size not to refund it because you're going to end up paying a whole lot of fees to save not a lot of present value money. You'll probably pay more in fees than you would actually get savings so it just makes good financial sense if you have the cash on hand to pre-pay these bonds and I think that's the main focus of our recommendations, at least initially in that debt study. It's not obviously until December that you need to make the decision on how you allocate the remaining debt service levy as to whether you do want to reduce that or if you want to leave it in there just knowing that you have, even though you paid off this bond issue, you've got some needs and some other debt service funds that you may need to retain. Especially that $220,000 levy that we talked about. Bruce DeJong: But at any rate, really the direction that we're seeking from the council at this point is the ability to call those bonds and we need to do that on a timely basis. One of those issues is a January 1 due date, and we have to give those bond holders a one month notice, according to our bond covenants in order to call those. So we need to get approval for that sometime here in November. We could do it either on the meeting of the 13th, or on the meeting of the 26th. Mark Ruff: And I think we recommended the 13th mainly because we do run into some occasions where giving those bond holders legally and they need 30 days notice, the paying agents to the banks who actually send in the payments to the bond holders. Sometimes they require 45 day notices so just to be on the safe side, we're recommending that November 13th date. Councilman Peterson: And what you're asking for now is the, that doesn't total the 390,000. How much does what you're asking for now total up to? Bruce DeJong: So what we're asking for is the authority to go ahead and call all 5 of those bond issues. And that would require additional cash to be put in. Little bit in excess of $400,000 I'm proposing would come from the general fund, and the remainder of the money would come from the Historic Preservation Trust Fund, which has kind have been established out of some excesses that have been generated over the course of the years, but to use it for paying down debt is probably a fairly good association. Mark Ruff: We think you will from, not the first 2 that Bruce talked about that are clearly supported by taxes but the other 3 that are improvement bonds. You will have some residual special assessments that will be received by the city. Would not have any debt outstandings so you obviously will have some, it's not a net dollar amount, a million dollars, you've got to come up with a million dollars cash today but probably over the next 5, 6, 7 years you'll be recovering about $300,000-$400,000 of that through special assessments yet to be received. Councilman Peterson: So $600,000, approximately $600,000 would come from the Historic Preservation Fund getting you to the million? Mayor Jansen: You said this was going to cost about a million dollars. A little over a million. City Council Meeting - November 1,2001 Mark Ruff: Approximately $400,000 is coming from the general fund. Councilman Peterson: Yeah, and then the 6 number is what I'm questioning. That's coming from Historic Preservation, give or take. Ma~ Rum ~g~. Councilman Peterson: But going back to my first question, the million dollars that we're talking about defeasing now doesn't correlate to $390 you referenced lowering the debt service for 2002. Cost. Mayor Jansen: For the levy. Councilman Peterson: We've got two different discussions going. I just want to clarify that we're. Bruce DeJong: It's just that I wanted to highlight for the council that by paying off these debts, you know calling those bond issues early, you will avoid having to levy money during the course of the next several years. When you look on the estimated tax levy sheet that I handed out, well it's been a few months now, but that shows that you have debt service levies scheduled for the next 2 years on both the fire station, the 88 Fire Station and the 89 Corporate Purpose Bonds, and those levies are approximately $400,000. Combining that with the $220,000 that is scheduled to be levied on the 91E and the $400,000 worth of assessments that Mark mentioned, I mean the net effect is that we're going to come out whole in this over time, but it does require some cash up front in order to make those savings. We're just really adjusting how we pay for those debts and when the money comes back to us. Councilman Ayotte: I'm having a hard time here because I keep on hearing 2 things. We service the debt and you reduce the levy. Is there a trick someplace in this thing? Mayor Jansen: We would actually be using our cash on hand to pay off these debts instead of having to levy our taxpayers the $390 this year that we would otherwise have to. I mean this is sounding very positive to me. Councilman Ayotte: Yeah, that's what I'm trying to find out. Mayor Jansen: Very positive. Councilman Peterson: We're talking about 2 different things though so let's talk about one at a time. Defeasing these doesn't, is the first conversation that they want feedback on. The second one is a different conversation so. Councilman Ayotte: I understand, but they are linked in terms of. Mayor Jansen: But it is the rationale behind doing this because what we're looking to do is reduce our levy to our taxpayers and we would in fact be able to do that, and in fact you mentioned in your memo an additional savings to our taxpayers, and I don't know if you were able to calculate this. What the actual interest savings would be to us for defeasing these now. Bruce DeJong: Yes I did calculate that. City Council Meeting - November 1,2001 Mayor Jansen: Because that's an additional cost to our taxpayers. Bruce DeJong: The interest savings over the life of the bonds is slightly over $250,000. So that's interest of the next 3 years that we would avoid paying by paying them off early now. Now it's the same way if you pay off your house mortgage a couple years early, then you don't have to make the interest payments that would be associated with it otherwise down the line. Mayor Jansen: That's terrific. So where our total levy to our taxpayers is a sum of our expenses for your annual budget, you can call them all off but our debt service is a huge part of that and for staff to have figured out that we can reduce that debt levy, since we've been so prudent and staff I should again compliment you. Staff has been so prudent with the budget, to try and help us reduce those costs, but they're not coming up with nearly the dollars that we're hoping for. And instead they've come up with not only a way to reduce next year by the $390,000 but now telling us we're saving $250,000 over 3 years in taxpayer dollars. Councilman Ayotte: I get it all. I'm just trying to find out the bad news. Mark Ruff: Well the bad news, ifI can hit it is, should we really reduce the debt levy by $390,000 and that's the only question that we say that we really need to look at holistically at the whole city's financial picture. Mayor Jansen: And you'd be able to give us then, what you're saying is if we do direct you to move forward with this strategy, you could give us a schedule to show us what this impact would be if there is one of those big bleeps that pops up in say 4 to 5 years, because from what you just said, this one would affect at least 2 of them the next 2 years, so that would be consistent for 2 years anyway. And then the 1 is just the 1 year. Councilman Ayotte: But if we don't vote for this, then we'd never know so I come again to the point. Councilman Peterson: And we're not voting tonight either. Mayor Jansen: Staff's looking for direction. Councilman Ayotte: Well giving direction, yeah. Councilman Peterson: The other concept, and to Mark's point, the other way in which you could use those surplus funds, other than keeping them, is instead of indirectly lowering the tax levy, which we all want to lower the tax levy. I mean nobody's going to argue that. You know you use surplus funds to directly lower the levy like we did last year. So it's, we do it indirectly by paying down debt. You lower your interest payments. You do it directly by utilizing surplus, that same surplus to lower the tax levy. Maintain the debt service. I mean so there is, it good news either way. Mayor Jansen: Well and on that note, one of the concerns that staff has really continually raised to us, and Mark I think it's been one of your messages to us pretty consistently is that our bond rating keeps improving because we do have this cash that's on hand. Now do we see that same improvement if we're reducing our debt? Is that not a significant indicator to the rating services if we pull these issues off our debt? City Council Meeting - November 1,2001 Mark Ruff: It is definitely, I mean you can pay down debt. That's a good thing as long as the rating agencies are assured that you're not paying down too fast, and by too fast they mean reducing your flexibility over the next several years to meet all your obligations and that's why Bruce talked about that 50% of annual expenditures being a really good minimum on your general fund discussion. Councilman Peterson: From the bond rater's perspective, you're robbing Peter to pay Paul so it's almost a push. You're taking away surplus, which they like, and paying down debt which they don't like so it should be a wash. Mark Ruff: Well it's not quite a wash because at least in their mind you're paying, you're spending it on good things. The rating agency always assumes you're going to spend your cash. Councilman Peterson: Well, they should assume that Chanhassen's going to spend it on good things all the time anyway. You're endearing yourself to them so they understand that so. Bruce DeJong: Let's just say that the rating agencies are skeptical. They don't necessarily trust us. But I think it really does meet the objective that from the staff perspective we want to try and keep our annual revenues matched up with our annual expenditures in the general fund. That is just one of the basic tenants of good governmental finance to try and match those on an annual basis so that you're not building a surplus or creating a deficit in one year. It really means that you're asking today's taxpayers to pay for today's services. Now the surpluses that we have and... (There was a tape change at this point in the discussion.) Bruce DeJong: ... it's by no means a decided question and I think regardless of what we decide on an internal basis, it could certainly be questioned at some later point by an outside authority, whether that's the Office of the State Auditor, you know or the Attorney General or whatever. So until we get a better handle on what those projections are, it's not prudent to get rid of, or spend down all of our surplus funds, but certainly when we get to a point where we've got a number that staff, our consultants and the council can come to some consensus on, I'm more than willing to look at utilizing fund balances to pay down debt or to pay for projects that we're currently bonding for rather than issuing equipment certificates. Utilize cash on hand to transfer it into our capital replacement fund. Things like that. But we are trying to, from the staff level, meet the council's desire to keep the tax levy down and minimize the amount of surplus funds that are sitting out there, but also to try and keep our debt service on an even keel so that we don't see tremendous spikes in that debt service levy and we don't see wild fluctuations from year to year. I think it's much easier for the city taxpayers to budget if they know that their taxes are going to be somewhat steady on some basis. So those are the competing objectives and I think the calling of these 5 bond issues really helps to meet a lot of those from both the council perspective, the taxpayer's perspective and the staff perspective. Mayor Jansen: Let me ask you this. A large part of our revenue projection of course is our building permits, and now in light of what is obviously now becoming a very soft market, how conservative a number, is staff still comfortable with the projection that you put in as I'm assuming you've probably revisited that as you're starting to see the market soften on us and all this talk about recession, that's the one that could come back to really hit us if we fall short of that building permit revenue. Bruce DeJong: Well you know. City Council Meeting - November 1,2001 Mayor Jansen: Did you take projects that were basically slated like the Puke and some of the others that are definitely coming in? Are those the majority of what's out there or was there a lot of speculation in the number? Bruce DeJong: No, I don't think that there's a lot of speculation. There are still some significant commercial projects that are coming through. And with the Puke coming on line, that will certainly help. Residential has not been very strong the last few years. Last year was actually one of the lowest years for residential building permits. I think Kate highlighted that in a presentation earlier to you. But I guess I'm comfortable with the number that's included in there right now and I'm comfortable that we have sufficient reserves. If we're short there or that there may be some areas that we don't fully expend all of our funds. Certainly every year there is a proportion, granted it's been fairly small the last few years that the departments have been under budget but it's always some amount that isn't spent in each one of those line items. So I think that overall, as long as the council is comfortable that staff is going to spend only the resources required, that we'll be within a close enough approximation of meeting our budget numbers on the revenue side, that I don't think the expenditures will be a problem. Mayor Jansen: Okay, very good. Any other questions for staff? Any other comments? Councilman Boyle: I have none. Mayor Jansen: Okay. Do you need a motion from us or do you just, you've got the general direction. I think we're feeling very positive about this approach. Thank you for bringing this forward and addressing, as you said, our objectives in coming up with this as an alternative so just getting back to us I guess with that chart of what it does to our debt as we go forward and if there's any spikes would be terrific. Okay. Councilman Peterson: I'd like to motion towards the door. Mayor Jansen: Motion to adjourn please. Councilman Peterson: So moved. Councilman Ayotte: Second. Councilman Peterson moved, Councilman Ayotte seconded to adjourn the meeting. All voted in favor and the motion carried. Submitted by Todd Gerhardt City Manager Prepared by Nann Opheim