A $25 million borrowing
The focus of the town council tonight is financing Parks and Recreation spending of more than $25Million over the next three years. Last night, the town’s Parks and Recreation Commission discussed what will be done and when it will happen [See Panel]. Tonight, the town council will review and likely approve the details of a municipal bond issue to fund $25 million in spending on these items.
It will be a challenging meeting because of the detail nature of the discussion. What follows is our synopsis of the key elements of the financing.
The money will be repaid over 20 years in annual amounts of $1.7 million per year.
This assumes that the face interest rate of the bonds is to be no more than 3.5%. The actual rate is determined on the date that the bonds are sold to the public. Town Finance Director David Gephart estimates that the effective rate on these bonds will be from 2% to 2.25%. According to him, this will be a bit less than the effective rate on the bonds the town issued to pay down it's public safety debt. Those bonds were taxable bonds with an effective rate of 2.39%.
The town anticipates issuing bonds in the amount of $20,990,000. It anticipates that the face interest rate on the bonds will be such that investors will a premium of $4.4 million to own the bonds. Thus, the bond issuance would raise $25.4 million of which $25 million will go into the project fund. The remaining amount will be used to pay fees.
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The actual borrowing will be more than $25 million
This is because of fees paid to four third party participants: A special legal counsel, a financial advisor, a trustee, and an underwriter [those who actually sell the bonds]. The total of these costs is estimated to be $357,000.
In this case, the special council is Gust Rosenfeld P.L.C. The financial advisor is Stifel, Nicolaus & Company. The trustee is U.S. National Bank Association, a division of U.S. Bankcorp. The underwriter is Piper Sandler & Co.
The funds to repay these bonds are pledged from the town's sales ["excise"] tax revenues. Thus, they are called excise tax revenue obligations. The town is pledging all not previously pledged sales tax revenues to pay for the bonds. This means that the sales tax revenues must be used first to pay back the bonds. What is left can be used for town operations.
Primary backing is the half cent parks and recreation sales tax
Though the town is pledging all of its sales taxes to pay bond service, the primary fund being pledged is the half cent sales "community center" tax fund. This is now to be called the "Parks and Recreation Excise Tax Fund"
The town believes that fund will have sufficient capital over the 20 year time frame.
"The Town forecasts that the 0.5% sales tax the Town Council identified as the fund source for this bond repayment will be sufficient for both the continuing operations of the Town's golf courses and community center as well as the repayment." (Source)
The interest on these bonds is "tax free"
These bonds are being issued for a civic purpose. Thus the interest on these bonds is tax free. That is, the bondholder will not pay interest on these bonds. This is unlike the $27 million in bonds the town issued in July to reduce the town's large public safety pension underfunding. The interest on these bonds is taxable because the use of the proceeds to pay previous debt is not a "non taxable" use, per IRS rules. The difference between the two types of bonds matters because taxable bonds are generally only purchased by investors who have no tax liability, such as a University's endowment fund.
The proceeds of the bond will be held by a trustee
The proceeds do not become part of the town's general fund. According to the trust agreement the trustee xxx will disburse the funds for one of three reasons:
- to finance costs related to the project;
- to pay trustee costs and fees and
- to pay pay all or a portion of the costs of delivery of the 2021 Obligations
Generally, the proceeds are reinvested so that earn interest until they are used. In this case, the funds will be used over a three year period.
Bond agreement allows sales tax reduction only if certain conditions are met
Essentially the bond agreement requires that the town maintain sales tax levies at the same level as today. However, the town can reduce sales tax rates as long as the resultant sales taxes are "...equal to at least two times the Annual Debt Service Requirement (as defined in the Trust Agreement) payable under the Agreement. This is approximately $3.4 million.
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