Agenda - Council Work Session - 07/09/2013

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CC Work Session 4. 1. Meeting Date: 07/09/2013 By: Diana Lund, Finance Title: Issuance of Capital Equipment Certificates for 2013 Capital Equipment Purchases Background: On December 11, 2012, City Council adopted the 2013 General Fund Budget and Levy. Included in the budget was $463,000 for capital equipment which included the second year funding for a fire tanker truck that council gave official authorization for purchasing at the June 25, 2013 City Council meeting. The first half of the fire tanker truck was included in the 2012 General Fund budget. Overall, the amount of capital that needs to be funded for 2013 is $594,000 (See capital listing that includes full funding of fire tranker truck). The funding source for the purchase of these capital items was proposed to be the issuance of capital equipment certificates. The issuance of certificates not only allows the city to take advantage of lower interest rates, but it will allow the Equipment Revolving Fund time to rebuild and preserve the fund for future needs. The last time that the city issued capital equipment certificates was in 2007, with 2013 payable the last year equipment certificate debt was levied. The amount of certificates to be issued to fund the capital items is proposed to be $635,000 which covers the principal costs of the capital items and underwriting costs. The certificates would be for a ten-year time frame and be levied to the property tax starting in year 2014. The annual levy from the debt issuance would be approximately $76,000 based on today's interest rates. Interest rates have been increasing due to recent comments by the Federal Reserve in regard to the economy. Before the final sale of certificates is brought to the city council, rates will be monitored to take advantage of when rates seem to be stabilizing. The sale needs to occcur by year end 2013. Another factor that will affect the city's interest rate is the refinancing by PACT Charter School of their current debt. The original issue was a conduit debt through the city and they are proposing to refinance via conduit debt once again. This request will be brought to the City Council in late July/early August. The net affect of this refinancing is that their debt issue will be over $10,000,000. As this is conduit debt, this total debt is added to the city's total debt issuance for the year (capital equipment certifcates) and will push the city pass the bank -qualified debt limit. In other terms, the city will be considenered non -bank qualified (debt issued in excess of 10M in any calendar year) and will have to pay higher interest rates. PACT Charter School is aware that they will make the city non -bank qualified for their equipment certificate issue and will be responsible for paying the extra interest cost via a reimbursement back to the city. Notification: Paul Donna from Northland Securities, the City's financial consultant, will be present to discuss the finance plan in regards to the issuance of $635,000 Capital Equipment Certificates. The proposed effect on the city's tax rate is attached. The city is under levy limits for year 2014 and the numbers reflect the city's maximum levy allowed - General Fund and Economic Development Authority fall under levy limits. 2014 budget is in preliminary stages and will be brought to the city council in a near -future date. Recommendation: