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HomeMy WebLinkAbout12.B. Financing options for Community Canter 2.0 project General Business 12. B. SHAKOPEE TO: Mayor and City Council FROM: Kris Wilson, Assistant City Administrator DATE: 06/16/2015 SUBJECT: Financing Options for Community Center 2.0 Project (A, C) Action Sought The Council is asked to discuss and provide further direction on financing the desired option for the Community Center. Background At the March 31 City Council workshop, an overview of potential financing options for the Community Center 2.0 project was presented and discussed (see Attachment A). Compiled by the City's financial consultants at Springsted, that list contained six possible financing options —Referendum Bonds, Tax Abatement Bonds, Lease Revenue Bonds, Sales Tax Revenue Bonds, Recreation Bonds and Internal Loans. While all are technically possible, Council may wish to strike four of these six options based on their cost and complexity: o Recreation Bonds and Lease-Revenue Bonds carry a higher interest rate than the other bonding options. o Sales Tax Revenue Bonds would require special legislative approval which seems unlikely. o Internal loans would need to be paid back in 10 years or less, resulting in annual debt service payments significantly higher and more burdensome than for the other options. Additionally, while healthy, the City's Internal Service Funds do not have large enough balances to support loans for the full cost of any of the proposed options. That leaves Referendum Bonds and Tax Abatement Bonds for further consideration. Referendum Bonds, as their name suggest, are bonds issued following a voter-approved referendum. They are general obligation bonds of the City and carry the lowest interest rate and overall financing costs. They do, however, require the time and expense of conducting an election. Debt service on these bonds can be paid back over a period of 30 years. Tax Abatement Bonds can be issued following a public hearing and a majority vote of the City Council. They are also general obligation bonds and would carry the same interest rate as referendum bonds, however they must be paid back over 20 years instead of 30. Attachment B provides tables showing the new debt levy required to support both 30 year Referendum Bond and 20 year Tax Abatement bonds for each of the four major options presented at the recent open houses. (The 5th option—which is to repair the existing sheet of ice only — has an estimated cost of$1.75 million and likely would not require financing.) The new debt levy required for each option is less than the annual debt service payment due to the fact that the City has several outstanding bonds that are on the verge of being paid in full. As a result, the levy dollars that are currently being devoted to these bonds could be shifted to fund a portion of the new bonds issued for the Community Center. This reduces, but does not eliminate, the levy impact of issuing new debt for the Community Center. Attachment C presents estimates of the likely tax impact to homes and businesses at key benchmark values. Requested Action The Council is asked to discuss and provide further direction on financing the desired option for the Community Center. Attachments: Attachment A Attachment B Attachment C Springsted Incorporated 380 Jackson Street, Suite 300 -h- Saint Paul,MN 55101-2887 Springsted Tel: 651-223-3000 Fax: 651-223-3002 www.springsted.com MEMORANDUM TO: Mayor and City Council Kris Wilson, Acting City Administrator FROM: Paul Steinman, Vice President DATE: March 26, 2015 SUBJECT: Shakopee Community Facility Financing Options The purpose of this memo is to provide an overview of options for the City to finance a variety of facilities being discussed at present including an ice sheet, pool and playground and possibly other community recreation type facilities. We have been asked to describe various funding options that would enable the City to finance the capital costs of such facilities. This memo does not address how to pay the operating costs associated with the facilities. From our initial discussions we assume any new facilities would be ineligible for Capital Improvement Bonds because the improvements are for facilities unrelated to a"city hall, town hall, library, public safety facility, and public works facility"(as per the MN Statutes 475.521). In relation to financing options we will profile the various statutory authorities for Shakopee and the related debt repayment revenue sources.As each option has its own set of advantages and disadvantages,we will also address the financial characteristics of each option. These characteristics can become criteria for the City in evaluating the distinctions among the options and are detailed in a table in this report and generally summarized as follows: • General obligation security requirement • Complexity, ease of access, authorization and procedural steps to access funding option • Impact on general obligation credit rating • Impact on net debt limit(3%of taxable market value) o 3%X City's Pay 14 taxable market value of$3,206,518,700=$96,195,561 o $96,195,561 minus outstanding bonds applicable to net debt limit, as of 3/25/15, of$4,175,000 o Total net debt limit remaining: $92,620,561 • Impact on any statutory debt limits or other legally restricted capacities • Interest rate and overall cost of capital • Statutory maximum term • General market limitations City of Shakopee Community Facilities Financing Memo March 26,2015 The City is also interested in understanding the repayment requirements of a financing scenario using 2 different credit criteria: a)General Obligation bonds, and b) Lease Revenue bonds, summarized as follows: Principal amount of bonds: $20M Term of issuance: 20 years Today's rates plus 50 basis points(1/2%) General Obligation (GO) bonds are bonds that are secured by the City's full faith and credit. The City's current General Obligation bond rating by Moody's is Aa2. The GO provides maximum security to bondholders and therefore results in the lowest interest cost tax exempt bond financing available to the City. A Lease-Revenue bond is not a General Obligation bond. As described below, it would carry a rating generally 1 notch below the Aa2 rating, or Aa3. The impact of the different ratings on the interest rate can be seen in the following example. GO Bond, 3%, 20 year: $1,344,000 approximate annual debt service Lease Rev, 4%, 20 year: $1,471,000 approximate annual debt service I would strongly caution you to avoid becoming focused on these dollar amounts. Multiple varying factors in the bond market, project scope,timing, term, etc., can, and likely will, have significant impacts on these numbers. The purpose of the number at this stage is to provide only a general ballpark estimate as to debt service and potential levy amount. Financing Options A) General Obligation Referendum Bonds. A City has maximum flexibility to finance most capital projects, including community recreation facilities, upon the successful passage of a voter referendum. B) General Obligation Tax Abatement Bonds. The City would be able to finance the project with General Obligation Tax Abatement Bonds to the extent the total annual debt service of all approved abatements does not exceed $4,581,206,which is 10%of the City's pay 2015 net tax capacity of$45,812,061. The City currently has the following annual abatement estimates: • Ryan/Dean Lakes $79,107 • Rosemount/Emerson/ADC Building $62,301 • Datacard $34,047 • Shutterfly $81,794 • Trystar $23,968 • Total Projected Abatements 2016 $281,217 Subtracting these abatements from your statutory maximum, the City has remaining approximately$4,299,989 in annual tax abatement authority. Using the GO example above, $1,344,000 in annual debt service, you would still have remaining tax abatement capacity of approximately$2,955,989. 2 City of Shakopee Community Facilities Financing Memo March 26,2015 In tax abatement, each taxing authority considers whether or not to participate in the abatement with its share of the tax dollar and subsequently a tax abatement levy. If the County or School District provide written denial of participation in the abatement(or fail to respond within 90 days of a request to participate)the maximum term is 20 years. Participatory denial would be expected as other entities participation in tax abatement for the community facilities projects currently being discussed is not anticipated. Tax Abatement includes the identification of parcels with a"nexus"to the community facilities being proposed, whose tax capacity times the City tax rate is at least equal to the principal amount of annual debt service payments on the proposed Tax Abatement bond. This is simply a statutorily defined calculation, it has no exceptional impact on any specific parcels within the City, identified or not. The Tax Abatement statute also requires a public hearing be held prior to bonds being sold under this authority. It is important to remember that Tax Abatement is not a new source of revenue and that in order to receive the Tax Abatement, the City must annually levy such Tax Abatement. The annual Tax Abatement levy has the same impact of a general fund or debt service levy in that it is spread equally across all property tax payers in the City. Simply put, the benefit of using Tax Abatement in this overall context is to provide a mechanism to finance the capital costs of the community facilities projects being currently discussed. The dollar impact of a tax abatement levy for debt service(GO example above, $1,344,000/annual)for varying classifications of property using the City's most recently available Pay 2015 tax capacity information is included as Appendix Ito this memo. This is the Tax Abatement levy impact only, not including any additional levy impact for operational costs of the facilities, and not accounting for any other increases or decreases in your levy in a given year. Additional growth in tax base would reduce the projected impact and alternately, declines in the City's tax base would increase such impact. C) Lease Revenue Bonds. The City has authority through its EDA to issue lease revenue bonds to finance the community facilities. The EDA would finance, construct and own the facilities and subsequently lease such facilities to the City in the amount of the debt service payments on the bonds. Lease revenue bonds are not secured by a General Obligation pledge of the entity in that no long term legal commitment to levy general property taxes exists. Lease revenue bonds are secured by an annualized decision by the City Council to appropriate(levy)dollars to pay the lease with the EDA. The risk of non-appropriation causes such bonds to be of less credit quality as compared to general obligation bonds. Lease revenue bonds can have market access issues if the asset being financed is of a non-essential nature to the entity's basic public service program. D)Sales Tax Revenue Bonds. The City could, after gaining approval for a sales tax through the procedures outlined in statute, including special legislation and a referendum, capitalize future sales tax revenues to finance the community facilities. Sales tax revenue bonds require both financial and legal covenants and financial performance standards to be marketable. The potential exists that the sales tax revenue bonds also have a general obligation backing. Additional detailed research on the potential success of this option will need to be conducted as it depends upon a number of varying factors. Other cities including Bemidji, Mankato, New Ulm, St. Paul, Worthington, Hennepin County, Cook County and North Mankato have successfully executed sales tax revenue bonds for a variety of purposes, some of them recreational in nature. 3 City of Shakopee Community Facilities Financing Memo March 26,2015 E) Internal Loan. To the extent the City has available funds internally, it can choose to loan such funds to finance the project. In discussions with bond counsel at Kennedy&Graven, there is no statute that actually allows interfund loans outside of the Tax Increment Financing context. However, the state auditor has published a position paper that states interfund loans are a reasonable tool as long as they are"temporary"in nature and if the City is borrowing from an enterprise fund that the money definitely be returned. Bond counsel has interpreted"temporary"to mean no longer than 10 years. There is no rule of thumb/statutory requirement on interest—bond counsel has suggested using a reasonable estimate equivalent to what the City would actually get when investing, up to the annual Tax Increment maximum interest rate(currently 4%). To provide some general idea of rates, present investment rates at the 4M Fund (through the League of MN Cities)are 2.2%for a 5 year Certificate of Deposit. A 10-year investment period would yield slightly higher than 2.2% F)Recreational Facility Revenue Bonds. 1)The City could finance the facilities using lease revenue bonds if the project is leased to a nonprofit corporation. This option requires payment of rent by the nonprofit sufficient to service debt on the bonds issued to finance the facilities. 2)The City could also issue gross revenue bonds secured by a pledge of gross revenues of the facilities financed. If gross revenue bonds are issued, such revenues are required to cover debt service on the bonds and subsequently the City may levy taxes to pay for any deficiency in revenues needed to pay operating and maintenance costs. 4 City of Shakopee Community Facilities Financing Memo March 26,2015 Type of General Interest Impact on Count Other Complexity Statutory Max General Financing Obligation Rate and City Credit against Statutory Term Market Pledge Overall Rating Debt Limits Limitations Cost Limit? General Yes Lowest Full Yes Voter Low except 30 Years None Obligation Approval for (Referendum) referendum Bonds Tax Yes Lowest Full Yes Public Low 20 years if one None Abatement Hearing entity denies Bonds participation Lease- No Moderate(1 Full Over$1 No High, similar None, except Generally no Revenue notch below million to a real marketability but size/term Bonds GO rating) applicable, estate suggests lease considerations Bond transaction commensurate Counsel? _ EDA/City with term Sales Tax Dependent on Lowest or Full No Special Medium-high 30 years Potential Revenue authorization moderate Legislation market Bonds depending and limitations on on form Referendum size/term Internal Loan N/A Lowest Partial No Yes Low 10 Years None Recreation No Higher Full No No Higher 30 Years Market Bonds limitations if insufficient debt service coverage Conclusion The City has a number of potential financing tools, many having the highest potential credit quality, hence lowest interest rate. Many project and public policy items exist for final resolution. Either as part of that resolution process or at its conclusion we can assist the City in matching these outcomes with the most advantageous financing options. 5 City of Shakopee Community Facilities Financing Memo March 26,2015 Appendix I Shakopee,Minnesota Annual Tax Impact-Based on Net Tax Capacity Levy Amount $4.844: Estimated 2014/2015 TNTC(Pay 2015) $38,705,002 Market Net Tax Value(a) Capacity Tax Rate Increase(b): 3.472% Homestead Residential $50,000 $300 $10 85,000 554 19 125,000 990 34 200,000 1,808 63 250,000 2,353 82 300,000 2,898 101 350,000 3,443 120 400,000 3,988 138 450,000 4,500 156 500,000 5,000 174 550,000 5,625 195 650,000 6,875 239 750,000 8,125 282 850,000 9,375 326 950,000 10,625 369 1,000.000 11,250 391 Commercial/Industrial $100,000 $1,500 $52 150,000 2,250 78 250,000 4,250 148 500,000 9,250 321 1,000,000 19,250 668 3,000,000 59,250 2,057 5,000,000 99,250 3,446 7,000,000 139,250 4,835 10,000,000 199,250 6,919 Apartments(4 or More Units) $50,000 $625 $22 100,000 1 250 43 1,000,000 12,500 434 3,000.000 37 500 1,302 7,000.000 87.500 3,038 Seasonal/Recreational(Residential) $30,000 $300 $10 40,000 400 14 45,000 450 16 50,000 500 17 75,000 750 26 Agricultural Homestead Value per Acre $5,000 Dwelling Est. Net Tax Market(c) Acres Total EMV(d) Capacity $100,000 80 $500,000 $2,718 $94 160 900,000 4,718 164 320 1,700,000 10668 370 640 3,300,000 26,668 926 Agricultural Non-Homestead Net Tax Acres Total EMV(d) Capacity 80 $400,000 $4,000 $139 160 800,000 8,000 278 320 1,600,000 16,000 556 640 3,200,000 32,000 1,111 (a) Estimated market value is the basis from which the net tax capacity is calculated. This value is not necessarily the price the property would bring if sold. (b) The tax rate increase is deri'ed by dividing the a'..erage debt service by the taxable net tax capacity. The dollar increase in taxes payable is denied by multiplying the net tax capacity by the tax capacity rate increase. 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