04-26-2016 CCM WORKSHOPHUTCHINSON CITY COUNCIL
DEBT MANAGEMENT PLAN
MEETING MINUTES
TUESDAY, APRIL 26, AT 4:15 PM
CITY CENTER — COUNCIL CHAMBERS
1. Call to Order
Mayor Forcier called the workshop to order at 4:15 p.m. Members present included Mary
Christensen, Chad Czmowski, Bill Arndt and John Lofdahl. Others present were: Matt Jaunich,
City Administrator, and Kent Exner, City Engineer
DISCUSSION/REVIEW ITEMS
Matt Jaunich, City Administrator, explained that the discussion item before the Council today is
to review the City's debt management plan. Mr. Jaunich spoke about a couple of issues as part of
the plan. One is a shortage for heavy equipment needs and a gap for infrastructure needs.
1. Debt Management Plan
Andy Reid, Finance Director, presented before the Council. Mr. Reid noted that the items of
discussion for today's workshop include a review of the existing debt management policy that
was approved in 2008, the interest rate impact on the debt management policy, the rising project
costs and the potential need to increase the City's annual debt limit, the debt tax levy gap
identified in years 2017-2022 and the heavy equipment backlog.
Mr. Reid noted that the guidelines for future debt identified in the 2008 debt management plan
include that the City will manage the special property tax debt levy so that each subsequent tax
debt levy will increase 5% per year until it increases to approximately $2,200,000 by the year
2015; the average project amount financed and paid from the special property tax debt levy for
each year will be approximately $1,500,000; and the aggregate future debt will mature after 15
principal payments. Mr. Reid noted that the current debt plan was a step in the right direction as
it has provided guidance to manage the City's existing and future debt and it has provided the
City with a consistent approach to completing essential infrastructure improvements on an annual
basis. However, the plan does not address the impact of inflation and rising construction costs on
the annual project scope and the plan is too focused on the $1,500,000 annual debt limit and does
not provide the flexibility to adjust project scope up or down based on current interest rates.
Mr. Reid reviewed 2014 project costs and funding sources which included Jefferson Street Phase
2, Lynn Road, pavement management program and a contingency fund totaling $3.5 million. The
funding sources included state aid, enterprise funds, special assessment and general obligation
debt.
Mr. Reid reviewed the original debt levy plan as established with the 2008 policy. The plan
included a $1,500,000 limit on City debt annually with future interest rates assumed at the 2008
rate of 4.5 %. Because of the low interest rates today (ranging in the 2-3% range), the debt plan
looks much different with the City falling short of the target levy by $200,000. Because interest
rates on issued debt has fallen significantly since 2008 when the debt plan was created, the City is
falling short of the $2,200,000 debt levy target. The original debt plan assumed interest rates
would stay similar to the 2008 interest rate or increase slightly.
Mr. Reid explained that public works has indicated that an additional $400,000 in City project
costs is needed annually for an effective project level. The annual debt limit would increase from
$1.5M to $1.9M. This is due to rising construction costs creating a real issue that is basically
eroding the City's project scope. As costs increase, the City has to cut back on projects to stay
within the $1.5M threshold for the City debt per the current policy. Completing future
improvement projects each year will result in the growth of backlogged projects which could
have a negative impact on roadway conditions. Increasing special assessments is problematic as
City staff believes we would run into significant resistance and objections from property owners.
The additional $400,000 in projects would need to be financed by City debt, increasing the annual
City debt threshold to $1.9M.
Staff is proposing the Council consider increasing the debt management plan by increasing the
annual city debt to $1.9M with a moderate increase in interest rates from 2015. This would allow
for a new target levy of $2.6M reached in 2031 with average levy increases of 1.5% starting in
2024. Interest rates are a factor in the debt management plan and the City must be mindful of
how they change.
Mr. Reid reviewed the impacts of increased debt. These include that increasing the annual
project scope has a definite impact on future debt tax levies; the impact on the debt levy is not
immediate — first levy increase would not be needed until 2024; interest rates, and the Debt Plan
in general, will need to be reviewed each year before a final project scope is approved with the
project scope adjusted accordingly; periodically review the Debt Plan to address future inflation
and other economic variable (i.e. every 3-5 years); the impact on the City's bond rating would be
very minimal and should not result in a downgrade.
Mr. Reid then spoke about the debt levy gap and various causes of it. For the levy years 2017-
2022, the debt gap equals either $2,350,000 if the annual debt limit is not increased or $1,850,000
if the annual debt limit is increased to $1,900,000. Mr. Reid noted that consistency in structuring
future debt is critical to prevent large annual fluctuations in future debt levy.
Mr. Reid spoke to the levy gap in 2017-2022. He offered options to address the gap which
included: reducing the debt tax levy substantially for 2017 ($565,000); increasing the annual
project costs and debt service; and/or utilizing the gap as a short-term financing tool to fund other
critical needs, such as the heavy equipment backlog. Mr. Reid suggested that the best scenario to
fully utilize the levy gap is a combination of increased project costs and funding heavy
equipment.
Mr. Reid then reviewed the heavy equipment backlog. Included on the list is a Zamboni, fire
truck, one ton with aerial bucket, heavy snow blower, snowplow truck, wheel loader and police
special response vehicle totaling $1,536,250. Mr. Jaunich noted that there is no financing plan
for these pieces of equipment. Mr. Reid noted that increasing the annual debt to $1.9 million and
funding heavy equipment needs over a five-year period nearly alleviates the gap in 2017-2022.
Mr. Reid noted that it appears that the City has the capacity to increase its annual debt level to
address increased roadway improvement costs and the backlog of heavy equipment needs; the
current debt management policy will be revised based on feedback from today; it will be critical
that the debt plan be reviewed annually to determine the appropriate level of improvement costs
that can be financed by debt and a decision on the heavy fleet will need to be made fairly soon as
the bonding process begins in July. Mr. Reid noted that he feels general obligation equipment
debt is the cheapest financing option.
Mr. Jaunich asked for direction from the Council on how to proceed with the plan, not action on
the plan itself. The Council was in agreement that the debt levy plan should be increased by
$400,000 and the plan should be reviewed on an annual basis. Mr. Jaunich noted that staff will
put together a new debt management policy for the Council to consider at an upcoming Council
meeting.
2. Adj ournment
Motion by Arndt, second by Christensen, to adjourn at 5:15 p.m. Motion carried unanimously.
ATTEST:
Gary T. Forcier
Mayor
Matthew Jaunich
City Administrator