02-161 Resolution No. 02-161
RESOLUTION
ESTABLISHING A POLICY FOR INCURRING DEBT
BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF ELGIN,
ILLINOIS, that as it is necessary and desirable to continue the
city' s efforts to maintain and improve the city' s credit worthiness,
there is hereby established a financial policy related to General
Obligation debt issuance and key debt related ratios and to promote
a usable, financially achievable capital improvement program.
BE IT FURTHER RESOLVED that consistent with the types of ratios
used by the major national credit rating agencies, the following
debt ratio policies are hereby established:
Estimate
As of As of
Type of Ratio 12/31/94 Median Ceiling 12/31/01
Direct Net Debt
Per Capita $508 $710 $852 $404
Ratio of Net Direct
Debt to Estimated
Full Value (EFV) 1 . 35 1 . 78 2 . 14 . 96
Overlapping Net Debt
Per Capita $1, 071 $1, 333 $1, 600 $2 , 012
Ratio of Overall Net
Debt to Estimated
Full Value 2 . 85 3 . 68 4 .41 4 . 77
Net Directing Debt As a
Percentage of Operating
Expenditures 14 . 1% N/A 17 . 50 8 . 74%
No direct debt ratio shall exceed the ceiling established. The
city encourages overlapping governments to coordinate debt issuances
and repayment to stay under the ceiling.
BE IT FURTHER RESOLVED that the following debt issuance
policies are established:
A. Tax or Revenue Anticipation Notes shall not be issued to
fund governmental operations except in the event that existing cash
reserves are exhausted due to emergency expenditures . Borrowing due
to exhaustion of cash reserves shall be for one year or less and
shall be used solely to address cash flow shortfalls between
operating expenditures and revenue collection.
B. Bond Anticipation Notes (BAN' S) shall not be issued for
a period longer than two years . If the city issues a BAN for a
capital project, the BAN will be converted to a long-term bond or
redeemed at expiration.
C. Capital projects shall be financed from current revenues
to the extent reasonably practicable .
D. A five-year capital improvement program shall be adopted
and updated annually. In accordance with this policy and in order
to meet the debt ratio targets, to schedule debt issuance, and to
systematically improve the capital infrastructure, the capital
improvement program shall identify the source of funding for all
capital projects . The debt issues that are a part of the capital
improvement program shall be structured to meet the city' s debt
policies and debt ratio targets . The city when issuing debt, shall
insure that when averaging proposed debt with existing debt 50% of
the principal shall be retired within ten years . Additionally, no
debt shall be issued whose maturity exceeds the expected life of the
asset for which the debt was incurred.
E. The Director of Finance, in conjunction with the city' s
financial advisor, shall review the acquisition, improvement, or
other purpose of borrowing and provide the City Manager with a
recommendation as to the type of debt that should be issued.
Criteria used shall include amount, time, type of acquisition or
project, prevailing interest rates and prudent maturity schedule.
F. The city shall not other than in exceptional circumstances
use General Fund equity to finance current operations . The city' s
General Fund equity balance (unreserved cash balances) shall provide
the city with sufficient working capital and contingency fund to
enable it to finance unforeseen emergencies without borrowing. To
conserve the General Fund equity balance and to avoid reliance on
this balance, the city will not finance operations from the General
Fund equity balance for periods longer than one year.
s/ Ed Schock
Ed Schock, Mayor
Presented: April 24 , 2002
Adopted: April 24 , 2002
Vote: Yeas : 7 Nays : 0
Attest :
s/ Dolonna Mecum
Dolonna Mecum, City Clerk
City of Elgin Agenda Item It No.
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April 19, 2002 m+
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TO: Mayor and Members of the City Council FINANCIALLY STABLE CITY GOVERNMENT
EFFICIENT SERVICES.
FROM: Olufemi Folarin, Interim City Manager AND QUALITY INFRASTRUCTURE
SUBJECT: Authorization for the Sale of $8 . 775 Million
in General Obligation Bonds, an Amount Not
to Exceed $10 Million in Refunding Bonds
and Revisions to the Debt Policy
PURPOSE
The purpose of this memorandum is to provide the Mayor and
members of the City Council with information to authorize the
sale of $8 . 775 million in General Obligation Corporate Purpose
Bonds and up to $10 million in Refunding Bonds .
BACKGROUND
On December 13 , 2001, the City Council approved the 2002 Budget
and 2002-2006 Financial Plan. Included within the 2002 budget was
the funding of capital improvements through the issuance of
$8 . 775 in General Obligation Bonds . Copies of the 2002 Water
Capital Plan highlighting the scheduled projects are attached.
Additionally, the City continues to investigate the possibility
of advance refunding previously issued bonds . Speer Financial ,
Inc . , has recommended that up to $10 million in past debt could
be refunded. The refunding process replaces the existing debt
that was sold at higher interest rates with newly issued debt
that is sold at a lower interest rate. The savings generated by
performing this transaction is estimated at $75, 000 present value
and is net of all fees over a 15-20 year period.
Speer Financial, Inc . , has also recommended that the bonds be
sold through a negotiated process rather than the competitive bid
process if the savings meet our criteria. Otherwise a
competitive sale is recommended. The negotiated process is
preferred when:
A. The amount of bonds being issued is of such a size the
number of bidders able to formulate a competitive bid on the
bonds is minimized. In issues such as these, bidders will
form consortiums containing as many as 20 underwriters . As
a result, the number of actual competing bids received is
relatively low (two or three) .
Authorization for 2002 Bond Sale
April 19, 2002
Page 2
B. Achieving a specified interest rate target is preferred. It
is desired to determine an interest rate ceiling and work
within the changing markets to hit that target . Timing and
structuring flexibility are more easily attained through the
negotiated process than the competitive process .
C. Given the volatile interest rate market, the ability to work
within a longer time frame to secure the best interest rate
is preferred to a specific date and time dictated by a
competitive sale.
D. Refunding previously issued bond sales involves various
complex questions . All bonds that are refunded must have a
corresponding government security purchased to ensure that
the original bond will be retired at its original maturity
date . With interest rates swings so prevalent in the
marketplace, it becomes imperative that the proper mix of
securities be purchased correctly the first time or savings
could be lost . Additionally, timing flexibility provides the
City the ability to take advantage of the best possible
market conditions or avoid obvious temporary problems such
as economic announcements or competing bond issues .
Speer will coordinate and oversee either the competitive bid or
the negotiating process to ensure that the underwriters buying
the bonds provide the most competitive price . Speer' s fee
structure is the same as in past years and they have the
personnel and resources to complete the sale in a timely,
efficient manner.
The issue will cover $2 . 815 million for water improvements, $3 . 8
million for the Public Works facility build-out and $2 . 16 million
for Sherman Hospital' s Wellness component within The Centre. The
water portion will be repaid with user fees generated from the
Water Fund and the Sherman portion will be repaid according to
the previously approved lease agreement .
In updating our debt policy, the five ratios were reviewed. As
you may recall , over the past year three other governmental units
have issued debt (Gail Borden Library, ECC & U46) . Due to those
debt issues, the overlapping or overall debt ratios have now
exceeded the ceiling within our existing policy. To that end,
staff has consulted with Speer Financial, Inc . , the City' s
financial advisor. They have recommended that policy be updated
to reflect that only direct debt ratios be utilized. The two
rk
Authorization for 2002 Bond Sale
April 19, 2002
Page 3
ratios where the City has no control over debt issuance by other
units of local government would be advisory in nature only. It
should be noted that the three ratios that pertain directly to
the City' s financial status are in a more superior position today
than they were in 1994 when the Debt Policy was created. Copies
of both the original Debt Policy Resolution and the Revised Debt
Policy Resolution are attached for your information.
As of
Type of Ratio 12/31/01 Median Ceiling
Direct Net Debt Per
Capita $404 $710 $852
Ratio of Net Direct Debt
to Estimated Full Value . 96 1 . 78 2 . 14
Net Direct Debt as a Percentage
of Operating Expenditures 8 . 74% N/A 17 . 5%
Overlapping Net Debt Per
Capita $2 , 012 $1, 333 $1, 600
Ratio of Overall Net Debt
to Estimated Full Value 4 . 77% 3 . 68% 4 .41%
Debt service schedules are in the process of being prepared and
will maximize principal retirement from available water revenues
generated by the rates approved in the 2002 Budget and Five Year
Financial Plan. The water and public works portions of the bond
sale will be retired over 15 years while Sherman Hospital' s
portion will be retired over 20 years . Attached is a schedule of
existing debt highlighting those outstanding debt issues along
with the planned 2002 bond sale.
The City has historically issued general obligation bonds rather
than revenue bonds for water and sewer projects . General
obligation debt, because of the ultimate pledge of property tax
dollars, carries a lower interest rate . User fees collected from
water and sewer customers have been utilized to retire the
annual principal and interest . The applicable portion of the
property tax levy is then abated to ensure no property taxes are
levied.
COMMUNITY GROUPS/INTERESTED PERSONS CONTACTED
rk Speer Financial , Moody' s Investors Service, Standard & Poors.
Authorization for 2002 Bond Sale
April 19, 2002
Page 4
NANCIAL IMPACT
Retirement of these bonds has been taken into consideration as
part of the Five-Year Financial Plan and will be budgeted accord-
ingly. The direct debt ratios outlined in the debt policy are
within the prescribed limits .
The bonds will be utilized to fund various water, public works
and recreation capital projects . The final amount of the bond
sale takes into account the use of impact fees, developer
contributions, and interest earnings . No sewer debt is being
issued this year due to accumulated impact fees and savings/
interest income from previous bond sales and projects .
AL IMPACT
All future actions should continue to be coordinated with bond
counsel .
RECOMMENDATION
It is recommended that the City Council authorize proceeding with
the sale of General Obligation Corporate Purpose Bonds and adopt
the revised Debt Policy.
Respectfully submitted,
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Olu emi Zarin
Inter'm C t M ager
JRN/km
Attachment
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