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Home My WebLink AboutS2-95 (3) Ordinance No. S2-95 AN ORDINANCE AMENDING ORDINANCE S2-80 ENTITLED "AN ORDINANCE SETTING FORTH THE DETERMINATION BY THE CITY COUNCIL OF THE CITY OF ELGIN, COOK AND KANE COUNTIES, ILLINOIS, THAT IT IS IN THE PUBLIC INTEREST TO ASSIST BUSINESS AND INDUSTRY LOCATED WITHIN AND NEAR THE CITY IN FINANCING ECONOMIC DEVELOPMENT FACILITIES AND POLLUTION CONTROL FACILITIES, PRESCRIBING THE PROCEDURES TO BE FOLLOWED IN THE ISSUANCE OF REVENUE BONDS FOR SUCH PURPOSES BY THE CITY" BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF ELGIN, ILLINOIS : Section 1 . That Section 13 of Ordinance S2-80 passed February 13, 1980, as amended, be and is hereby amended to read as follows : "Section 13 . Deposit. That any person requesting City to finance any project by issuance of its revenue bonds shall make a non-refundable deposit with the City Treasurer in the amount of $2,500 to reimburse City for its preliminary expenses in investigating the desirability and feasibility of such financing. That upon receipt of an application for the issuance of revenue bonds and the deposit required by this section, the application shall be forwarded to Speer Financial, Inc. for its review and recommendation to the City Council . " Section 2 . That this amendatory ordinance shall be in full force and effect from and after January 1, 1995 . s/ George VanDeVoorde George VanDeVoorde, Mayor Presented: January 25, 1995 Passed: January 25, 1995 Vote: Yeas 7 Nays 0 Recorded: January 26, 1995 Published: Attest: s/ Dolonna Mecum Dolonna Mecum, City Clerk • • Ell: Amanda Item No . D ro -34 0- Li ., FAZ January 19, 1995 TO: Mayor and Members of the City Council FROM: Richard B. Helwig, City Manager SUBJECT: Industrial Development Bond ( IDB) Application Review Process and Inducement PURPOSE The purpose of this memorandum is twofold: 1) to seek City Council approval of an IDB application review process and; 2 ) to approve an Inducement Resolution with Elgin Corrugat- ed Box utilizing the City's annual IDB authority. BACKGROUND Provisions in the Federal Tax Code allow home rule cities to issue private activity revenue bonds (also called industrial revenue or industrial development bonds) not to exceed $50/ capita per calendar year. In Elgin's case, this would amount to approximately $3 . 8 million per year. Qualified "small issue" private activity revenue bond financing permits a state or local governmental entity to finance manufacturing facilities for a business entity at a lower interest cost than they could obtain by the issuance of their own taxable debt. Interest on the bonds issued by the City of Elgin for such purposes is not includable in federal gross income of the bondholder. When bonds are to be issued, the City would enter into an agreement with the company in which they agree to acquire, equip, renovate or construct certain manufacturing facili- ties . Simultaneously, the City agrees to issue its bonds to finance a portion or all of the costs of the project and the entity agrees to make payments in amounts, and at time suffi- cient to meet debt service on the City' s bonds. Since the bonds are payable solely from revenues derived from the busi- ness, it is the credit of the business (or if there is a guaranty, an insurance policy or a letter of credit securing the bonds, the credit of the guarantor, the insurer or the issuer of the letter of credit) that will determine the inter- est rate of the bonds . Industrial Development Bond January 19 , 1995 Pao 2 In the recent past there has been no desire to use this fund- ing vehicle and the City has ceded this authority back to the State, who in turn utilizes it for other IDB projects . This year Elgin Corrugated Box, through American National Bank - Elgin, requested that the City' s IDB authority help finance their expansion. Project Highlights of the project are as follows : - Elgin Corrugated Box, a company that manufactures corrugat- ed boxes, proposes to fund the first of a three phase expan- sion that will ultimately result in a 200, 000 square foot box manufacturing plant . The first phase will consist of 1) constructing a $2 . 2 million 63, 000 square foot building at Gasket Drive ( immediately east of the U. S . Can plant) 2 ) installing a $400, 000 waste system and 3) purchasing a flexo-folder-gluer box machine at a cost of $1 . 2 million. The remaining phases are planned for completion over the next 7-10 years . - Ten new jobs will be created (an additional 14 will be relocating from South Elgin) . - Estimated increase in payroll = $330, 000 . - Estimated property tax yield to the City = $13, 000 . - Estimated assessed value of additional total real property $700 , 000 - $800, 000 . - Types of jobs - low level mechanics, customer service, maintenance and assistant supervisor. A copy of the preliminary application from Elgin Corrugated Box is attached. Approval Process At one time the City had IDB applications reviewed by an Economic Development Commission (this process was abolished in 1986) . Prior to the Economic Development Commission (EDC) the City contracted with Speer Financial, the City' s current financial advisors, to determine the financial feasibility of the firm as it related to the IDB financing. Industrial Development Bond January 19 , 1995 Page 3 Since the EDC is no longer functioning, no one individual or group is in a position to review the "financials" of the perspective IDB issuer. Given the sensitivity, should a company be denied use of the City' s IDB allocation, it makes sense to incorporate an outside independent group to perform the financial review. Speer' s original review process incorporated an extremely thorough analysis that was completed by Duff and Phelps (a nationally recognized resource for credit analysis) . This analysis is the major reason the financing fee was $10 . 00 per thousand dollars of bonds for the first $1, 000, 000 of bonds . On a $1 million issue, the fee would equal $10, 000 . Duff and Phelps ' current review fee now starts at $15, 000 . This siz- able increase essentially prices Elgin out of the IDB pro- cess . It would be as cheap to obtain the IDB from the State as it would from Elgin. To reach a point where the City is comfortable from a financial review standpoint and the fees stay within reason, Speer Financial will perform an in-depth financial analysis of the prospective company at a fee not to exceed the initial $2 ,500 application fee. Though not as extensive as the Duff and Phelps analysis, Speer will assure the City that based on historical data and trends, the compa- ny appears to be a going concern. Short of spending $15, 000 or more, this type of analysis should suffice. Additionally, American National Bank, who is actually lending the money has completed a detailed analysis, sufficient enough for them to feel comfortable that their loan will be repaid. Speer' s report, which recommends approval of Elgin Corrugated Box' s IDB application, is attached to this memoran- dum. In no way is the City responsible for the repayment of the bonds . Should the company default, the actual lender of the money (American National Bank) will suffer the loss . An ordinance change is required to officially incorporate the current (Speer Financial) review process into the IDB ordi- nance. COMMUNITY GROUPS/INTERESTED PERSONS CONTACTED None. FINANCIAL IMPACT All costs pertaining to the IDB issuance will be borne by Elgin Corrugated Box, the issuer. LEGAL IMPACT None. Industrial Development Bond January 19, 1995 Page 4 RECOMMENDATION It is recommended that 1 ) an Inducement Resolution be entered into with Elgin Corrugated Box for $3 . 8 million in Industrial Development Bonds and 2 ) the proper ordinance be amended to reflect the current practice of reviewing IDB applications . Respectfully submitted, CUB 4-- t/ u / ames R. Nowicki I Fine Director Raymond H. Moller, Director Business Services and Properties Richard B. Helwig City Manager JRN:daw Attachment