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G-2. Authorizing Transfer of Funds and Establishing a Loan to the City's Water Fund for Construction of Well No 15F MEMORANDUM —a CITY OF TO: Mayor& City Council CHANHASSEN ', FROM: Greg Sticha, Finance Director 7700 Market Boulevard DATE: March 9, 2015 Ol PO Box 147 Chanhassen,MN 55317 SUBJ: Authorizing Transfer of Funds and Establishing a Loan to the City's Water Fund for Construction of Well No 15 Administration Phone 952 2271100 Fax 952 2271110 PROPOSED MOTION: Building Inspections "The City Council approves a"Resolution Authorizing a Transfer from the Phone 952 2271180 Fax 952 2271190 General Fund and Capital Equipment Replacement Fund of$1 4 million to the City's Water Fund. The funds will be used for the construction of Engineering Well No 15 and Repaid to the Capital Equipment Replacement Fund and Phone 952 2271160 Revolving Assessment Construction Fund over the Next 8 Years." Fax 952 2271170 Finance Approval of this item requires a simple majonty vote of the City Council Phone 952 2271140 Fax 952 2271110 BACKGROUND Park&Recreation At the city council's work session on February 23, 2015, staff discussed the Phone 952 2271120 construction of Well No 15 and the plan to finance it internally(borrowing from one Fax 952 2271110 of the city's other funds to the water fund). Internal financing will save the city bond Recreation Center issuance costs and it will benefit from the interest paid on the issuance of the debt 2310 Coulter Boulevard Phone 952 2271400 Interfund Loan,Well No. 15 Fax 952 2271404 Bond Issuance Costs $40,000 Planning& Interest Savings $110,000 Natural Resources Total Savings $150,000 Phone 952 2271130 Fax 952 2271110 It had been planned that the funds would be borrowed for a term of eight years, therefore the internal repayment would be planned for the same term One hurdle that Public Works had to be researched was the potential impact on the city's bond rating from Standard 7901 Park Place Phone 952 2271300 &Poors if we used $1.4 million in cash to perform an internal financing. The city Fax 952 2271310 asked its financial advisory firm to analyze if there would be any negative impact on future bond ratings and issuances Their analysis concluded that there would be Senior Center minimal to no impact on all of the rating criteria as demonstrated in the attached Phone 952 2271125 analysis and memo from Ehlers &Associates Fax 952 2271110 Website Once that conclusion was made, staff began discussing which fund(s) to borrow from www ci Chanhassen mn us and how to repay those funds Staff is estimating that the 2014 General Fund surplus will be significant, therefore we are recommending the $1 4 million in funds needed be transferred in equal amounts from the city's General Fund and the Capital Equipment Replacement fund to the Water Fund. Chanhassen is a Community for Life-Providing for Today and Planning for Tomorrow Mayor& City Council March 9, 2015 Page 2 In previous years, city council has transferred the majonty of any general fund surplus funds to the Revolving Assessment Construction Fund Therefore, staff is recommending that the first payments of principal and interest be repaid to the City's Revolving Assessment Construction Fund (years 2016-2019) and the remaining half be repaid to the city's Capital Equipment Replacement fund (2020-2023) RECOMMENDATION Staff recommends that the City Council authorize this internal financing and related transfers ATTACHMENT 1. Resolution 2 Analysis from Ehlers &Associates 3. Loan Repayment Schedule 4 Chart Demonstrating Transfers and Repayments f\gregs\council\2015\memo to council on transfer and well foi loan docx CITY OF CHANHASSEN CARVER AND HENNEPIN COUNTIES,MINNESOTA DATE: March 9,2015 RESOLUTION NO: 2015- MOTION BY: SECONDED BY: A RESOLUTION AUTHORIZING A TRANSFER FROM THE GENERAL FUND AND CAPITAL EQUIPMENT REPLACEMENT FUND OF$1.4 MILLION TO THE CITIES WATER FUND. THE FUNDS TO BE USED FOR THE CONSTRUCTION OF WELL#15 AND REPAID TO THE CAPITAL EQUIPMENT REPLACEMENT FUND AND REVOLVING ASSESSMENT CONSTRUCTION FUND OVER THE NEXT 8 YEARS. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF CHANHASSEN AS FOLLOWS: 1 That the city is estimating there will be a significant surplus in the city's general fund for fiscal year ending December 31,2014, and 2 That a transfer of$700,000 from the city's General fund(101)and $700,000 from the city's Capital Equipment Replacement fund(400)be made to the city's Water fund(701); and 3 The funds transferred to the city's Water Fund be used to construct well #15, and 4 That the attached repayment schedule be used to repay the funds starting with a February 1st,2016 initial payment, of which the 2016-2019 payments will be credited to the city's revolving assessment construction fund(601)and the 2020-2023 repayments be credited to the city's capital equipment replacement fund (400), and 5 The city council has the right to require repayment of any portion or the entire amount of the loan prior to any payment dates indicated on the attached repayment schedule at its discretion; and Passed and adopted by the Chanhassen City Council this 9th day of March, 2015. ATTEST. Todd Gerhardt, City Manager Denny Laufenburger,Mayor YES NO ABSENT 0 To Greg Sticha,City of Chanhassen,MN Mi From Nick Anhut,Ehlers&Associates LI.j Date January 14,2015 G Re Rating Analysis Memo The City has asked Ehlers to perform an analysis of the use of City funds to finance$1,400,000 in water system improvements and the potential risk to the City's"AAA"bond rating from Standard and Poor's ("S&P") To help better understand the analysis and factors that most influence a rating with S&P,we have replicated the scoring of their new U S Local Governments General Obligation Rating Criteria The intent is to give the City of Chanhassen additional perspective on those key economic and financial metrics behind its current"AAA"rating and the score's sensitivity.The analysis uses information from the City's most recent 2014 S&P rating report,2013 audited financial statements,Minnesota Department of Revenue records for Economic Market Value,and U.S Census population data. It is important to note that S&P has reserved the right to adjust actual ratings from the indicated rating by one notch. S&P's criteria also include several qualitative factors where we believe the City can further reinforce its credit status Details of the scoring are included in the replicated scorecard attached to this memo S&P Rating Criteria S&P evaluates the creditworthiness of municipalities using seven key factors scored 1 to 5,each carrying their own assigned weighting An overall indicative rating results from the weighted average score of the seven factors. The scoring of each factor is based on defined quantitative indicators and qualitative adjustments Below,we have replicated the results of the City's last rating evaluation in 2014. S&P's Seven Rating Factors 2014 Score Weighting Weighted Score Institutional Framework 2.00 10% 0.20 Economy 1 00 30% 0 30 Management 100 20% 0 20 Financial-Budgetary Flexibility 100 10% 010 Financial-Budgetary Performance 2 00 10% 0 20 Financial-Liquidity 100 10% 010 Debt&Contingent Liabilities 3 00 10% 0 30 Total Weighted Score AAA 1.40 S&P's Indicative Rating Scale Score Range Indicative Rating 1.00— 1 64 AAA (City's indicated score: 1.40) 1.65 - 1.94 AA+ 1 95 - 234 AA www.ehlers-inc.corri �3�� �g EHLEIRS Minnesota phone 651-697-8500 3060 Centre Pointe Drive LEADERS IN PUBLIC FINANCE Offices also in Wisconsin and Illinois fax 651-697-8555 Roseville,MN 55113 1122 toll free 800-552-1171 Chanhassen,MN Analysis and Sensitivity Significant changes in one or more of the seven factors may result in moving the rating up or down The following analysis looks at the likely scoring impact of the choice to use internal funds to finance the 2015 water system improvements We are assuming the source of the $1,400,000 interfund loan will come from capital funds outside of the existing general fund balance Economy: No Impact While this score holds the highest weighting, Chanhassen scores in the top category and it is unlikely that City actions can have any significant impact to income and value measures in the short-term Additionally, the scoring is primarily based on residents' income and property valuation which is not directly impacted by choice of funding for the water improvements Management: No Impact Chanhassen's top score in Management is based on the stable set of financial tools, policies, and reporting practices in place at the City. The City's choice to engage in inter fund borrowing as an overall cost saving mechanism likely further solidifies this score Institutional Framework: No Impact The Institutional Framework score of"2"is a standard score S&P gives to all MN cities to reflect the legal and financial framework they operate within. This score is re-evaluated internally by S&P's analysts and published annually Budgetary Flexibility: No Impact S&P's criteria attempts to measure the degree of flexibility the City can look to in times of stress S&P uses the most recent audited information and is measured as available fund balance as a percentage of general fund expenditures S&P considers available balances those of the general fund and other governmental funds as long as they are unrestricted and legally available to support operations. The City's most recent rating achieved the top score of"1"by maintaining available fund balance above S&P's threshold of 30%of operating expenditures. In 2013,the City reported an unassigned general fund balance at$5,274,584 This figure alone represents 51%of S&P's calculated operating expenditures. The City would likely utilize balances from other capital funds to finance the mterfund loan. S&P does not currently include any capital funds balances in its calculation of the City's score. To the extent the City intends to utilize capital funds outside of the general fund, the current score would not be impacted. Budgetary Performance: Minimal Impact S&P's criterion attempts to measure fiscal balance in both a general fund and total governmental funds perspective using net revenues above or below expenditures The fiscal net result of each is calculated as a percentage of expenditures The City scored a"2"in this category based off of the 2013 audit and projected 2014 results. The transfer of$1 4 million in governmental funds to source the water loan could increase S&P's calculation for total expenditures and decrease net revenues,but would not change the general fund calculation. The impact is minimal as the city's score would remain at"2 " An important consideration is the criteria attempts to gain a more sustainable view of performance by smoothing out onetime revenues and expenditures such as capital outlays or capital transfers If the City chooses to internally fund the water system improvements using governmental funds, it will be an important discussion point during a future rating call to walk the analyst through the onetime nature of this activity. Liquidity: Minimal Impact This category measures the ability of the City's unrestricted cash and cash-equivalents to cover expenditures. First compared to annual total governmental expenditures, and then compared to annual debt service Chanhassen again receives the top score of"1"based on maintaining liquid assets well above S&P's thresholds of 15%of total governmental expenditures and 120%of annual debt service The City anticipates a reduction of $1.5 million in cash in 2014 due to the prepayment of the 2004B Bonds. Regardless of source, the use of cash to fund the water improvements would represent another$1,400,000 decrease in S&P's measure of cash or cash-equivalents and potentially a corresponding increase in expenditures as a transfer out of governmental funds. Due to the magnitude of the City's cash position,this decline poses no risk for the City's liquidity score Debt and Contingent Liabilities: Minimal Impact S&P's debt criteria focus on two measures. total general obligation principal outstanding as a percent of total governmental funds' annual revenues and total governmental funds' annual debt service as a percent of expenditures. The City current score of"3"is based on sitting just above the 60%threshold of net debt as a percent of revenues,with debt service at 12%of calculated expenditures Choosing to loan internally instead of issue new debt generally solidifies this score. An important consideration is that S&P nets out any G 0 debt that it considers"self-supporting," or 100%repaid by non-property tax based revenues such as a utility or other essential service enterprise. When issuing debt for the utility systems,the City traditionally pledges to repay the debt with utility revenues. It is unlikely a new G.O. bond issue for the water system would impact the City's debt score given this exemption. Therefore,the lone debt scoring consideration is whether the reduction in capital funds on hand due to this project creates the need to borrow for other potential projects prior to loan repayment I look forward to discussing these results with you. Standard Poor's New Criteria Estimate City of Chanhassen,MN-General Obligation S&P U.S.local Governments Rating Methodology:Rating Summary (Assumes data from City's 2013 audit and S&P's 2014 Rating Report) 5&los$even Rating Factors 2614 kore "Weighting Weighted Scorel Kati Institutional Framework 2.00 10% 0.20 '" c Economy 1.00 30% 0.30 '1- 04 . ,. A Management - 1.00 20% 0.20 -i 1,65-2.a4 Mt Financial-Budgetary Flexibility 1.00 10% 0.10 1.95.2.34" M Financial-Budgetary Performance 2.00 10% 0.20 '° 2.3§,yg4 ' Financial Liquidity • - 1:00 - 10% - 0.10 2.85.3.24. A+ Debt&Contingent liabilities - 3.00 10% :0.30 3.25.3.64 A Total Weighted Score AAA 1.40 3.84-3 94 A- 395-424 BBB+ t ing Factorss K _ 71,,,---,,..„?.' 4.25-4.54 BBB' - - 'Porftiye Overriding Factors- " 455-4.74 BBB--High Income Levels(EBI>.225%or>300%U.S.) 1 or 2 notch adjustment 4.75-{S4 BBGtegory High Available GeneralFund Balance: 4.95.5.00 1- " BCetegory >75%of OF expenditures(current and projected) 1 notch adjustment .(" Negative Overridi g Factors '. f Weak Liquidity(score of 4 or 5) Caps Rating at BBB+or 8B+ Weak Management(score of 4 or 5) Caps Rating at A or BBB- Lack of Willingness to Pay Obligations Caps Rating at13 for debt not in default Available Fund Balance<$500,000 1 notch adjustment Key Market Value per.Capita<$30,000 1 notch adjustment - =Base score kdkatlon 2-year Structural Imbalance no plan to restore Caps Rating at BB8+ :4!"....:;'...464,,=Potential score w/adjustment factors Negative General Fund Balance <-10%of GE expenditures Caps Rating at A+ <-5%of GF expenditures for 2 yrs Caps-Rating at A- <-5%of i3 eupenditures for 3 yrs Gas Rating at 888 Rating Background All governments of the same type within the same state receive one score Factors' Institutional I Predictability the extent to which a local government can forecast its revenues and expenditures on an Score Range Framework Score ongoing basis 1 1.5 1 Revenue and Expenditure Balance the extent to which a local governments have the ability to finance 175 2 75 - 2 the services they provide 3.0 3.75 3 Transparency and Accountability the overall Institutional framework's role in encouraging the 4.0 4.5 4 transparency and comparability of relative financial Information 4 75 5.0 5 Systemic Support the extent to which local governments receive extraordinary support from a state government when the local government is under extreme stress f S,ao !i`:E , ,. kr rd'-'',..!?ii/;"-- ,'it b :.a,d `.+1 •4a.�z, Factors. 2014 Economic Market Value(2013/14)• 3,692,988,746 Per Capita Income Market Value per Capita Population estimate(2013)•• 23,642 As%of US >$195,000$195K-$100KS100K•BOK $80K-55K <$55K >150 1.5 2 2.5 3 Projected Per Capita Income as%of US 188% 110.150 1.5 2 2.5 3 3.5 Market Value per Capita 156,205 85-110 2 2.5 3 3.5 4 70-85 2.5 3 3.5 4 4.5 <70 J 3 3.5 4 4.5 5 Participation In larger/diversified economy(MSA level) S&P uses Per Capita Effective Buying Income(EBI) •MN Dept of Revenue Includes portions attibutable to Hennepin and Carver Counties "U.S Census Bureau Note Rating and scoring are estimates only and do not include qualitative assessments with which the Rating Agency may adjust the rating up or down Prepared by Ehlers 1/14/2015 Standard Poor's New Criteria Estimate ifi5,....ij.ftiA, '. cne,a; Past FMA 'Strong (2014) Topics(Policies)Examined: Weighting, Revenue&Expenditure Assumptions High Importance Rounded Score Characteristics Budget Amendments&Updates High Importance 1 FMA Score of"Strong"and none of the factors In score 4 or 5 are present Long Term Financial Planning Average Importance 2 FMA Score of"Good"and none of the factors In score 4 or 5 are present Long Term Capital Planning Less Importance 3 FMA Score of"Standard"and none of the factors in score 4 or 5 are present Investment Management Policies 4 FMA Score of"Vulnerable or any fin.reporting restatement with material 8 Less Importance negative Impact,any score 5 condition last 3 years,structural Imbalance,or very high pension,OPER,and debt burden w/o plans to address Debt Management Policies Less Importance Reserve&Liquidity Policies Average Importance 5 Regardless of FMA Score,any of the following present. Management team that lacks relevant skills resulting in a weak Overall assessments are communicated using the following terminology The capacity for planning,monitoring,and management; term"Good",in addition to the terms"Strong","Standard,and"Vulnerable",Is An auditor has delivered a going concern opinion, used to further differentiate governments.The difference In degrees of Importance Is limited,however,so that each factor's contribution to the The government is actively considering bankruptcy in the near term,or assessment Is meaningful The government has shown an unwillingness to support a debt or capital lease obligation L ice ,' a rr an o.low ng �r'=M r';.. v,+"SiA.3 E F% .a*r.F �a_ ..�'S Analyzes most recent,current,and following year 2014 Available Fund Balance(unrestricted). 5,274,584 Available fund balance as%of Expenditures General Fund Expenditures" 10,148,479 % >15% I 8 15% I 4 8% I 1 4% f <1% Available fund balance as%of Expenditures 51.97% Score 1 2 1 3 4 5 •General Fund and any other balance legally available for operations Omits assigned balances within other funds($3.7m) ••S&P's calculation Includes transfers out as expenditures i.5 isdgetacy Performance - 10% Potential Waiter Loan impact: Minteitii Analyzes most recent,current,and following year 2014 Water Loan Adjusted General Fund Expenditures. 10,148,479 Total Governmental Funds Net Result(%) General Fund Net Revenues(net of transfers)• (17,466) General Fund Limited Balanced Pressured Significant General Fund Net Result(%) -0.17% Net Result(%) >1% 1 to-5% -5 to 10% 10 to 15% <-15% Limited(>5) 1 2 3 3 4 Adjusted Governmental Funds Expenditures" 18,135,140 19,535,140 Balanced(-1 to 5) 2 3 3 4 5 Total Governmental Funds Net Revenues` 2,297,510 897,510 Pressured(< 1) 3 4 4 5 5 Total Governmental Funds Net Result(%) 12.67% 4.59% Adjusting for onetime expenditures relating to TN capital improvements and unrealized net change In fair value of investments .fiti^+. �b, me `m- n ±ro±*v e tea*- as Analyzes most recent,current,and following year 2014 Water Loan Total Government Cash and cash equivalents" 31,163,984 29,763,984 Total Cash%of Total Total Government Cash as a%of Total Governmental Adjusted Governmental Funds Expenditures 18,135,140 19,535,140 Governmental Funds Debt Service Total Cashes a%of Total Governmental 171.84% 152.36% Fund Expenditures >120 ( 120 100 ( 100 80 I 89 40 I <44) Funds Expenditures >15 -1 2 3 4 5 Total Government Cash and cash equivalents. 31,163,984 29,763,984 8-15 2 2 3 4 5 Total Governmental Funds Debt Service 2,189,487 2,189,487 4 8 3 3 3 4 5 Total Government Cash as a%of Total 1 4 4 4 4 4 5 Governmental Funds Debt Service 1423.35% 1359.40% <1 5 5 5 5 5 t Includes '�Deposits„petty yca{ssh and liquid Investments(<1 year maturlty).Excludes restricted funds y* eki As of the end of 2014 2014 Water Loan Revenues Governmental Funds. 19,398,869 Total Governmental Net Direct Debt•• 11,890,000 Funds Debt Service Net Direct Debt As%of Total Gov't Ed Revenue 61.29% As a%of Net Direct Debt As%of Total Governmental Funds Total Governmental Revenue Expenditures Governmental Funds 18,135,140 19,535,140 Funds Total Governmental Funds Debt Service 2,189,487 2,189,487 Expenditures <30 30 60 60 120 120 180 >180 Total Gov't Fund Debt Service%of Expenditures 12.07% 11.21% <8 1 2 3 4 5 8 15 _ 2 :' '.:_t: 4 4 5 •Adjusted for onetime revenues related to TH capital Improvements 15 25 3 4 5 5 5 ••Total direct debt adjusted for non-tax based self supporting debt 25 35 4 4 5 5 5 Water Improvement Bond issue(if levy supported) 1,455,000 >35 4 5 5 5 5 Resulting Debt%of Total Gov't Fund Revenue 68.79% 14>65%total direct debt coming due In 10 years(excludes balloon maturities) Resulting Debt Service as%of Expenditures 12.21% Note Rating and scoring are estimates only and do not include qualitative assessments with which the Rating Agency may adjust the rating up or down. Prepared by Ehlers 1/14/2015 CITY OF CHANHASSEN $1,400,000 Water System Interfund Loan, Series 2015 2015 Water Capital Improvement Projects- 8 years Sources & Uses Dated 03/09/20151 Delivered 03/09/2015 Sources Of Funds Capital Equipment Replacement Reserve Interfund Loan $1,400,000 00 Total Sources ____._._.._.._.__._._.__.._._._.._.......�_.._-..._..._.....-..._.....__...__...__._._._............._.___..____..._._...._---.--....._.__._._.__.._..__._._..__..____....._.___._..______.._..___._---._...._.51,400,000 00 Uses Of Funds Deposit to Project Construction Fund _ 1,400,000.00 Total Uses $1,400,000 00 Chanhassen Series 2015 Wa I SINGLE PURPOSE I 2/10/2015 I 2:34 PM 0.:.E1133,t.E:RS :, 1 �t/t#+uet t -Fteix Page 1 CITY OF CHANHASSEN $1,400,000 Water System Interfund Loan, Series 2015 2015 Water Capital Improvement Projects-8 years Debt Service Schedule Date Principal Coupon Interest Total P+i 02/01/2016 163,446.04 2 500% 31,305 56 194,751 60 02/01/2017 163,837 75 2.500% 30,913 85 194,751 60 02/01/2018 167,933 69 2 500% 26,817 91 194,751 60 02/01/2019 172,132 03 2 500% 22,619 56 194,751 59 02/01/2020 1761435 34 2 500% 18 316 26 194,75160 02/01/2021 180,846.22 2 500% 13,905 38 194,751.60 02/01/2022 185,367 37 2 500% 9,384 22 194,751 59 02/01/2023 190,001 56 2 500% 4,750 04 194,751 60 Total $1,400,000 00 - $158,012 78 $1,558,012 78 Yield Statistics Bond Year Dollars $6,320 51 Average Life 4 515 Years Average Coupon 2.5000001% Net Interest Cost(NIC) 2.5000001% True Interest Cost(TIC) __�_.... .__ _—..,.._._..._.......__. _...._ 2 4852462% Bond Yield for Arbitrage Purposes __..._.—.....__._.____.._.____�.___....._..__.._.�AIC 2 4852462% iv All Incluse Cost _..._._.....---_._....-__--.--(. �___.___....__._.____..._....___._..._..._._._....–_._ 2 4852462% IRS Form 8038 Net Interest Cost 2.5000001% Weighted Average Maturity 4 515 Years Chanhassen Series 2015 Wa I SINGLE PURPOSE 1 2/10/2015 I 2:34 PM E °" r IT,T . i. 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