2006-08-23 CC Set Agenda & Handouts

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Ehlers Advisor . August 2006 City of Long Prairie Develops Industrial Park and Refinances Wastewater Treatment Plant The City of Long Prairie, Minnesota, has been busy with improvements, developing an industrial park in order to attract new and expanding businesses and constructing a new wastewater treatment plant. Over the years, the City assembled and purchased land to form its industrial park. The City is spending approximately $1.67 million on industrial park improvements with contributions of a $500,000 DEED Grant and a contribution of $250,000 from available tax increment funds. The City's net share of $895,000 is expected to be repaid from future land sales and assessments on the property which is currently owned by the City. In essence, the City is assessing itself for this project, and if the land does not sell as expected, the City will be required to levy taxes to pay for its assessments. This tax levy is not expected to increase the overall tax levy for debt as the City has a declining levy requirement for its existing debt. With continued efficient debt management, this program should not have an adverse impact on the overall tax burden of the residents. With the installation of the infrastructure improvements, the City will be able to market the lots with full utilities available. Ehlers assisted the City in the development of the fmancing program for this project. The City has recently constructed a wastewater treatment plant to replace its existing ponding system. The new plant was fmanced through a loan from the Minnesota Public Facilities Authority (PF A) and a grant and loan from Rural Development (RD). One of the conditions of the loan from the Minnesota Public Facilities Authority required the City to transfer a certain amount of revenue per gallon to a replacement fund. This fund can only be used to accumulate funds over the term of the loan so that the City would have "adequate funds available" to pay for a new plant or to construct major improvements to the plant at the end of the 25-year fmancing period. Thus, the City would not have to borrow to pay for these future costs. By Jerry Shannon, Ehlers Financial Advisor The Rural Development loan also required the City to maintain tracking records for every new hookup and report the data to Rural Development. The City was transferring about $45,000 per year into the replacement fund and incurring administrative costs of about $10,000 per year on the tracking information. With a recent adjustment to the user rates, the City had sufficient revenue to meet its operating expenses and to pay debt service on its 2.17 percent loan to Public Facilities Authority and its 4.50 percent loan to Rural Development. One of the City's major users has offered to purchase the City's old system in order to treat their own waste. This major industry represents approximately 30 percent of the City's Sewer Utility revenue. The City and Ehlers recomputed the 2005 income statements without this customer revenue and found the City would lose approximately $200,000 in net revenue and would not be able to pay for operations and debt service. Ehlers helped the City analyze its available funds in order to "buy down" the amount of debt outstanding so that a major rate increase would not be (continued on page 3) By Brian Reilly, Ehlers Financial Advisor Those of us in the U.S. have become accustomed to the gradual tightening of monetary policy over the past two years. The Federal Open Market Committee (FOMC) has raised the Federal Funds rate some 17 times, from 1 percent to 5.25 percent, since June of 2004. As was widely expected by the market, the FOMC took a pause from rate hikes at its August meeting. However, the third quarter has introduced us to a market environment that has not existed for quite some time. One in which the central banks of most the world's industrialized nations are working in unison to remove the accommodative (i.e. inflationary) monetary policies of the past few years. The Bank of Japan recently raised the overnight lending rate to .25 percent (from 0.00 percent), the European Central Bank has all but telegraphed its intent to increase .25 percent, and the Bank of China is even getting into the act by tightening reserve requirements among the country's financial institutions. The Central Banks of England, Australia and Canada have all undertaken quarter point increases to their respective 8.00% Bond Buyer Index, 1990 to Present -AUG. 4, 2006 discount rates in the past few months, as 7.50% well. There are a myriad of other examples, 7.00% but the point is clear: the environment for global growth is not as attractive as in the 6.50% recent past. 6.00% Throughout the second quarter, the primary 5.50% cause of concern seemed to be an inflationary 5.00% spiral due to the Fed not moving fast enough, in 4.50% :i~;o~n terms oftime and magnitude, on rate hikes. That 4.00% 4.18% on mentality appeared to turn on a dime, as 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 ~~/~5 _ evidenced by the Ten-year Treasury Note, which NOTE: The 80nd Buyer 20 Bond Index is a weekly index of average inleresl rates on lowest AA-raled municipal bonds maturing in 20 years. Source: The Bond Buyer. since 8/68 has retreated from a yield of 5.24 percent in mid-June to just under 5.00 percent. The entire Treasury curve from two to ten years is now trading below 5.00 percent. A general rule of thumb states that Treasuries do not usually trade below the Fed Funds rate (currently 5.25 percent) for any extended period of time unless the market envisions a rate cut in the next six to eight months. In fact, market participants are pricing in a greater probability of more rate cuts than increases through the end of 2007. It is clear that the interest rate market sees lower inflation and lower growth in the not-too-distant future. Growth will likely moderate over the coming months while the economy absorbs the increased costs of energy and general tightness in the labor markets. Those that are calling for a recession are likely getting ahead of themselves, as there would likely need to be a significant downturn in both capital investment and, primarily, consumer expenditures before such a scenario would occur. In the world of municipal issuers, increased rates at the short end have been tempered by a general supply/demand imbalance, which has kept borrowing costs relatively attractive. Highly rated issues with twenty-year repayment schedules are currently costing approximately 4.30 percent - 4.40 percent. This is a mere 30 basis points over the cost of one-year money and only about ten to fifteen basis points over comparable quality ten-year paper. As has been the case over the past three years, long-term fixed-rate financing remains very appealing. .2.