CCP 06-29-1992 - Laserfiche WebLink

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Terry Post . May 27,1992 Page 2 Bayport, Minnesota The City of Bayport recently put to voter referendum the question of a $700,000 General Obligation Bond for a public works building. While the City Council realized the building was necessary for present and future purposes it was their decision to let the residents determine whether or not the project should proceed. According to Council Member Larry Hering, the decision to pursue a voted general obligation bond over the lease-purchase option was purely political in that the Council "did not want to face the music of circumventing an election." The majority voting were in favor of the project, albeit slim With this $700,000 General Obligation Bond, the City of Bayport is right at their Net Debt Limit which could pose problems should the need arise in the near future for capital equipment acquisition (also under the net debt purview). Moreover, had the City chosen to proceed with a lease-purchase agreement as opposed to a voted bond, a larger proportion of the annual debt service payments would have been shifted to commercial/industrial properties in the community and less to residential homesteads as will be explained further in a moment. Apple Valley, Minnesota The City of Apple Valley also needed to construct a public works building to handle development the City is experiencing. Instead of issuing general obligation bonds, the City chose . to finance the $2,560,000 project through a municipal lease-purchase agreement. The rational for this decision was two-fold: 1. The issuance of general obligation bonds would have put the City too rlo,e to its Net Debt Limit, ~nd in light of future equipment needs, the ,City wished to "preserve" its gt,hcral obligation allowanceJor this purpose. 2. While the City of Apple Valley respects citizen opinion, a voter referendum was feared to fail. In the minds of the City Council and Staff, this vote might appear to be in the residents best short-term interest, however, not to the community's long-term benefit. Therefore, the lease option allowed the City to proceed in a sure and expedient manner. Finally, I have enclosed a cash flow a-nalysis for each a general obligation issue and a lease- pnrchase agreement. As you will note, each of the issues are structured for a 20-year term with a par amount of $2,120,000 which nets out approximately $2,000,000 for applicable project costs, For the most part, the two issues are structured similar to one another with three noticeable exceptions, First, the interest rates on the lease altemative are slightly higher than that of the general obligation issue due to the greater risk factor associated with the lease, Our projections of the present bond market indicate that an average coupon rate difference of 6.232% to 6.334% would exist between the general obligation and the lease alternatives, respectively. Second, Juran & Moody would recommend that a public sale be pursued if the general obligation method is selected and a negotiated sale if a lease is preferred, Third and most important deals with the tax impact of the two financing methods. Please note columns K through R on the analyses. The Minnesota Legislature recently enacted into law a bill requiring voted debt to be spread across the . community on a market value basis as opposed to the tax capacity value. In short, this legislation will put a $100,000 market value homestead on the same tax impact base as a $100,000 market value commercial/industrial operation. Under the previous law, the annual tax levy would have