Bruce Kimmel, bond advisor with Ehlers, shared an update regarding Gardner’s fiscal capacity at the March 2 meeting. The city’s current mill rate is 20.7 mills
The city is going to have quite a few capital projects across the funds coming up, starting with a sizeable bond issuance this spring. Now is a good time to look at existing debt profile, look at the major funds that debt gets paid from, answer questions.
Kimmel wants to provide the information for the best decisions possible. He presented a profile of the existing city debt service, which matures over the next 18 years, and provide more detail on the bond and interest fund which is the debt service that is paid significantly with property taxes, and a profile of the wastewater and water utility funds.
The utility rate study the city had done recommended rate increases: 1 percent rate increase starting five years from now for wastewater, and 3.7 percent annual increases in effect starting this year and are assumed to be ongoing. They’ve assumed those same rate increases as a starting place for the profile.
According to the minutes, Kimmel provided updates on the city’s existing debt service profile.
One-third of the debt service that is coming this fiscal year is paid from the tax levy. Looking at all of the debt service, roughly $7.7 million this year, about $2.4 million is coming from the tax levy, then a considerable chunk paid from special assessments.
Some of that is paid from the dedicated infrastructure sales tax, and a little is paid from special highway. On the wastewater fund, a large part of debt service is paid from the sewer utility. There is a little water debt outstanding and a smaller amount of electric debt outstanding. Most of the debt is general obligation debt and backed with property tax abilities, and in Gardner there is a very diverse set of revenues that are paying debt service back across the city, and overall the debt has a rapid amortization.
There are two large years, 2020 and 2021, but in 2022, overall debt service that is scheduled drops by $2 million and continues to fade off. Kimmel expects the city to issue new debt. The city is in a good position from a debt profile perspective to take on new investments because of paying off existing debt fairly rapidly.
In 2030, existing debt is $2.2 million, which is a 72 percent drop from debt load in 2020. This is evidence that staff takes pains to try to amortize debt as reasonably quickly as they can. The question is how much capacity does the city have going forward to support new financings in bond and interest, specifically the part about interest that’s paid from property taxes, wastewater, and water? He did not assume any new debt being levied against special highway fund. The city may apportion some portion of a new debt against that fund. Also no new debt is assumed for the street sales tax that is scheduled to sunset in 2026 unless the city puts that forward for voter authorization for renewal.
Randy Gregorcyk, council member, asked, of the bond and interest on the tax fee supported, what is percentage breakdown between residential and commercial tax in that revenue stream?
Kimmel said staff has the breakdown, and it’s in the official statement.
Looking at the true tax base that the mill rate is spread against, it’s broken out by property classification. Bond and interest fund has debt service paid from property tax levies, fee revenues, benefit district special assessments, so it’s not all property tax. Kimmel focused on the portion of bond and interest that’s being paid from property taxes primarily to give a benchmark number of what the city can support in new debt paid from property tax.
The current mill rate is 20.7 mills. Two-thirds of that is for general fund, and a third is for bond and interest fund. When doing the analysis before, they assumed a stable overall tax rate with assumed decreases in general fund property tax rate because of the tax lid, assuming the city wouldn’t keep all of its growth, and some offsetting increases in the bond and interest fund mill rate.
There are ways to work with the tax lid, the city gets to keep the growth that’s due to development. Expenditures for public safety and other limited purposes are exempt from the tax lid. Debt service is exempt from the tax lid. That’s the city was able to assume an increase in the bond and interest fund.
Kimmel kept the bond and interest levy flat at 6.6 mills to be more conservative, so he didn’t show an increase in that mill rate. When mapping revenues over the next 10 years, the expenditures, including existing debt service paid from bond and interest fund, and the net revenues that are available, they found about $10 million in brand new debt that would be funded just from the B&I mill rate of 6.6 mills. If there’s an increase in that mill rate, the city could afford more in new financing.
If council decides against asking voters to renew the street sales tax, the city may need to fund more street projects from the Bond and Interest fund and use some of the capacity. If council seeks renewal and voters agree, then more of this capacity could be used for other projects.
Gregorcyk asked about Bond and interest under total other revenue. There is $9.3 million and an offset on the expense side of $8.6 million, and he requested additional data. Kimmel said the city issued temporary notes in 2019 for benefit district projects, and they will come due in 2021. They have not translated the temporary debt into long-term financing, so those are the payoffs. The revenues would be payoffs for those benefit district financings and the expenses are the debt service lump sums coming due in October 2021.
Wastewater fund and water fund facing major capital expenditures in the coming years. Existing debt service drops rapidly, but then there’s $31 million of new projects in the next six or seven years.
Significant projects include Grata infrastructure and wastewater treatment plant. The utility rate study recommended one percent rate increases starting in 2025. The city does have the ability to take on this $31 million of new projects with no strain on the wastewater fund. The projection shows the cash balance is projected to increase in years 26-30. The city could either take on additional projects, or forego some of the rate increases, or amortize the debt more quickly. There might be more volume, which could increase revenues, or there could be more expenses in the operating side. All in all, the wastewater fund looks solid.
Kimmel encouraged the council to continue discussing how to finance street projects, which is something to watch in terms of what is appropriate property tax burden versus what other revenue sources are available to fund street projects.
The city cannot expect to let the current sales tax sunset and keep the bond and interest mill rate level.
Shute, said there are significant projects coming, and inquired as to the efficacy of exploring moving some of those projects up in the calendar to take advantage of the financing that’s available now. Kimmel responded that it could. Their rule is ‘issue debt when you need the money’, but interest rates are at an all-time record low. The justification of the project still has to lead the way, but if there are projects on the bubble in terms of timing, interest rates area consideration, and it may make sense to accelerate if the justification is there. Mayor Shute said he was specifically thinking about the wastewater treatment plant, which they know they will need for the Grata project and for other projects on the east side of I-35, something already scheduled for 2021 or 2022 might be something they move up in the calendar. Kimmel shared an estimate based on numbers they saw for B&I, wastewater and water funds.
While this shows a robust debt service profile going forward, if the city does all of the projects as they’ve projected, the cash flows and fund balances are in strong shape, according to Kimmel.