The Finance Committee met 05/09/2022. They received a presentation on the sale of General Obligation Notes and Sewerage System Revenue Bonds from Baird representative Brad Viegut. They then voted to approve the sale of $15,530,000 worth of General Obligation Promissory Notes and $11,460,000 Sewerage System Revenue Bonds.
Mr. Viegut started out with a timeline of the steps to bring the issues to market, starting with approval by the Finance Committee on 05/09/2022, moving to Notes/Bond pricing on 05/18/2022, followed shortly thereafter by the approval by Common Council on 05/18/2022, and closing on 06/15/2022.
They would be issuing $15,530,000 worth of General Obligation Promissory Notes. $8 million of that would be used to fund the city’s Capital Improvement Program, $345,000 would go toward the purchase of a new fire truck, $6 million would go toward the first phase of the Library Project. Some would also go toward stormwater, watermain, and sewer projects.
It was structured to be repaid over 10 years with the final payment scheduled of 04/01/2032. The first interest would be paid in October of 2022 and would come from funds generated from a bid premium generated from the offering of the notes. They also included a call feature of 04/01/2029, so the city would have the option to either refinance or prepay with funds on hand the principal payments for 2030, 2031, and 2032.
In the presentation, Mr. Viegut showed an interest rate of 3.24%; however, the market had moved a little bit since then and, as of the morning of 05/09/2022 the estimated rate would be 3.40%. He noted that during last year’s financing, the city hit the market at a time when it was at historic lows. Although the current rate was quite a bit higher than the rate in July of 2021, if they looked at 40 years of market history, a rate of 3.40% was still below the average of interest rates over that time.
He provided an outline of the repayment plan that had been developed. The left-hand side of page 4 showed the existing levy supported debt service payments, i.e., the general obligation bonds and notes that have already been issued. Those rates were fixed.
The center of the slide focused specifically on the $15,530,000 note issue under consideration that day. The principal was deferred for two years, so the first principal payment was scheduled to 2024. There was also a bid premium that was going to be generated which would cover the first 2+ years of interest payments.
The right-hand side of the page showed a projection of the city’s existing levy supported payment including the impact of the new issue. He noted that the city had budgeted a little over $11 million for debt payments in 2022, but in 2023 that budget amount would increase by about $2.2 million.
The next page showed the allocation of the 2022 note issue over the different projects that were being funded.
On page 6, Baird had put together a long-term capital financing plan so that the city was no longer looking at any one debt issue in isolation. Based on the city’s Capital Improvement Plan, they put together a 10-year projection representing debt issues to fund the city’s CIP. They also included placeholders for large one-time infrastructure improvements.
He acknowledged that this was going to be a fluid model because the Capital Improvement Program chances as it is adopted each year. As a result, this projection would be updated so the city could have confidence in knowing what impact their decisions regarding the Capital Improvement Plan budget would have on debt service payments in the future.
The plan as it stood today had the city’s debt payments increasing up to $13.4 million and remaining fairly level for four years. Under the current projection, they then estimated that in 2027 debt payments would increase to around $14.4 million and, again, stay level until 2032 which was as far as the projection went.
He reiterated that the plan would be updated and presented to the Finance Committee at least annually and that both Baird and city staff would be looking at it more than annually.
He then moved on to the Sewerage System Revenue Bonds portion of the presentation. These bonds would fund $11,000,000 worth of sewer projects and were estimated to cost $11,460,000.
He said that the city’s practice with sewer revenue bonds was to finance those projects over a 20-year period, so the finance principal payment was schedule of 05/01/2042. They did, however, include a call feature starting 05/01/2030, so all of the bonds maturing in 2031-2042 would be callable at the city’s option.
The estimated rate shown on the slide was 3.88%; however, as of the morning of the meeting, that had moved closer to 4.10%.
He provided a detailed payment schedule for both existing sewerage bonds and the new issue being considered. There were no principal payments on the new bonds scheduled for this year because they were past May first, so they would only be paying interest in 2022. The peak year for debt service would be 2023 after which it would stabilize. He noted that as future sewer bonds were layered in, there may be increases, but they had not currently designed a repayment structure that had accelerated or increased steps in debt service payments.
He finished up by saying that the market is volatile. Rate have been increasing and, since the end of 2021, had increased fairly sharply. That was why they were coming to the Finance Committee earlier than usual so they could get this locked up in May instead of waiting until their typical timeframe of July – August. He then opened things up for questions.
Alderperson Vered Meltzer (District 2) asked how many years back would they have to go to see comparable interest rates.
Mr. Viegut answered probably around 2009/2010 right after the bubble and the Great Recession. Since that time, other than a little blip around 2014/2015, rate had been at very low levels. In the last two years, they had historic all-time lows in the municipal bond market.
Alderperson William Siebers (District 1) asked what the chances were that the rate wasn’t going to go even higher by the time they locked it in on 05/18/2022.
Mr. Viegut responded that rates had been moving higher every day. He didn’t think that the rate for the general obligation notes would reach 4%, but it was possible it could end up being 3.50%. He would be very surprised if it ended up higher that 3.75% given that they were only a week and 2 days away from locking in the rates. He added that they see day-to-day fluctuations so it may come down a little bit even though the trend was the other way.
None of the other committee members had any questions, so they moved on to voting starting with the request for Finance Director to sell $15,530,000 of General Obligation Promissory Notes, which they approved 5-0.
They then moved on to the request for Finance Director to sell $11,460,000 Sewerage System Revenue Bonds, which they also voted to approve 5-0.
View full meeting details and video here: https://cityofappleton.legistar.com/MeetingDetail.aspx?ID=958498&GUID=7245F561-C9B2-4A28-968D-8F8D920AF216
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