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Tiffin council to decide how to fund CIP projects

To bond or not to bond ...isn’t really a question

TIFFIN– The City of Tiffin has over $7 million in improvements projects on its to-do list.
The next priority is figuring out how to pay for them.
Jeff Heil, of Northland Securities, came before the Tiffin City Council at its April 8 meeting to explain the city’s options for incurring the debt necessary to fund its committed capital projects, including completing the Ireland Avenue extension, upgrading Roberts Ferry Road, finishing Phase 5 of its portion of the Clear Creek Trail system and constructing municipal water and sewer utilities to Clear Creek Amana’s new elementary school.
Tiffin’s city council approved a Capital Improvements Plan (CIP) for Fiscal Years 2015 through 2020 in January, a fluid document that will slightly change as needs arise. A CIP lists short-term and long-term major projects, their estimated costs and expected timeframes for completion. The council hired V&K Engineering to help craft its most recent CIP and is now in the process of discussing how to fund it now and in future years.
That’s where Heil came in.
Heil said Tiffin has immediate needs in the next two years that will push the city over its debt capacity, and financing those projects with annual appropriation bonds would be required.
Iowa’s constitution restricts the amount of debt cities can take on to no more than five percent of their total property valuation. Tiffin’s most recent actual valuation was $182,284,072, creating a legal debt limit for Fiscal Year 2015-2016 of just over $9 million. With $4.8 million in current debt, Tiffin has a little more than $4 million borrowing capacity remaining.
That’s not enough to cover the FY2016 CIP project list, and most municipal financial planners advise against cities borrowing up to their maximum debt limit anyway, as did Heil.
“We always talk about keeping it at that 75 percent,” of full debt capacity said Heil. “If you throw that in there as protection, you really only have about $2 million to borrow.
Cities have three common options when borrowing money: general obligation (GO) bonds backed by the city’s credit, which a city sells and then pays back with interest; revenue bonds, which are repaid only through revenues generated from user fees (like sewer and water utilities); and appropriation bonds, repaid by an appropriation approved by the council each year. With just a single payment that must be approved annually, only that yearly payment amount counts against the city’s debt capacity. Appropriation bonds also come with an interest rate that fluctuates with the market.
Heil said if the city did not want to raise taxes to pay off GO bonds, or increase user fees to fully finance its $7.2 million CIP, the city would have to increase its Tax Increment Finance (TIF) borrowing to $1.1 million. Otherwise, he said, appropriation debt is another avenue.
Heil said he does not recommend appropriation borrowing to communities with an average annual rate of growth less than five percent, but Tiffin is not in that situation.
“You’ve averaged eight percent (growth) in the last seven years, from $108 million to $182 million of value,” an increase of 58 percent, said Heil. “That’s not normal for the State of Iowa. When you have that kind of growth, your debt capacity is not strong enough to put in your sewers, your waters; you are in a position to pay for it, but your debt limit is not there, so communities like yours use appropriation debt.”
While improving its annual cash flow, Tiffin’s population growth has also spurred the need for a major expansion of its sanitary sewer plant, a project estimated at over $5 million. The city council plans to finance that project through Iowa’s State Revolving Fund (SRF) loan program, allowing the city to fund the plant’s design work with a zero-percent interest loan and get a construction loan at just two percent.
But finding money for other more immediate projects was Heil’s focus last week.
“If you take it all as general obligation (debt) and use it all up on these projects, you are going to be forced to raise user rates,” said Heil. “I don’t think borrowing all $7 million is wisest right now. I would advise you to borrow $5 million to $5.5 million through annual appropriations now, that gets you all the projects through the summer of 2016, and then you are going to know more of the costs on some of these other projects.”
Using appropriation debt to borrow just a portion of the CIP total would leave the door open to borrow against the city’s debt capacity and an option to increase user fees for a revenue bond in the future, Heil said.
“You have some good options next year to use TIF and debt service without raising taxes,” Heil said. “We are going over your debt limit, but with your cash flow and your (current tax) levy, you are in a good position to do all of it.”
Council member Peggy Upton asked about the risks of using appropriation borrowing, and Heil explained the interest rates on appropriation loans run a half to a full percentage point higher than GO bond rates, creating more cost for borrowing. Though the annual payment is the only number that counts against the city’s debt capacity, the city council would have to re-appropriate it every year.
Heil’s projected schedule shows the city making an annual appropriation payment of approximately $730,000 per year through the year 2027. He suggested the council hold its public hearings in May to firm up a finance plan.
He also suggested the council hold public hearings for the slate of projects all at once using an amount not to exceed total estimates, to secure the authority to move forward on any of the projects even before the city has to borrow for them.
“Jeff will come back with more accurate numbers when (Interim City Administrator) Tim (Long) gets him more accurate numbers,” Mayor Steve Berner told the council.
As all discussion took place during the pre-meeting work session, the council took no action on the CIP finance plan. Berner indicated the council would set a date for a public hearing in its May 13 meeting.