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HomeMy WebLinkAboutagenda.council.worksession.20170815 CITY COUNCIL WORK SESSION August 15, 2017 4:00 PM, City Council Chambers MEETING AGENDA I. City Offices Finance discussion P1 MEMORANDUM TO: Mayor and City Council FROM: Pete Strecker, Assistant Finance Director DATE OF MEETING: August 15, 2017 RE: City Administrative Offices - Financing Options ____________________________________________________________________________________ REQUEST OF COUNCIL: Staff is seeking final direction on financing for the proposed new City administrative office facility slated for construction on the site adjacent to the Rio Grande parking structure. PREVIOUS COUNCIL ACTION: On July 11, 2017, City Council held a work session to discuss various finance options around administrative office space needs including reviewing cost and risk scenarios of: a) constructing new at the property adjacent to the Rio Grande parking facility; b) lease multiple spaces throughout the City; and c) purchasing and renovating existing space. These various options had different benefits and drawbacks associated with customer service, workforce efficiency and cost. Based on the feedback received during the work session, the majority of Council members indicated support for constructing a new facility on the site located adjacent to the Rio Grande parking structure. With that direction in place, Council members then discussed the options available to finance the new facility, focusing on issuing certificates of participation or general obligation bonds, and with the assumption that the renovation of the Armory would be cash-funded and construction would commence shortly after completion of the new facility Certificates of participation allow the Council to move forward immediately as they do not require an election to seek voter approval to implement, but they typically result in a slightly higher interest rate than general obligation bonds and therefore cost the City more to repay the borrowed funds over the 30- year term of the issuance – estimated to be about $320,000 to $435,000 on a present value basis. General obligation bonds, the other presented option, would cost the City less in interest over time due to a better interest rate as they are pledged by the full faith and credit of the City and necessitate voter approval. The delay on a financing decision increases the City’s risk of construction cost escalation and possible interest rate movement. The election and delay costs partially mitigate the cost variance between general obligation bonds and certificates of participation. DISCUSSION: To ensure thorough review of all possible funding options, staff recently examined the possibility of cash funding the new facility and, depending on timing, whether to cash fund or finance the Armory renovation. As Council is aware, financial planning for administrative offices has been under consideration for a number of years and actions have been taken to prepare for expenditures on a long-term solution. Beginning in 2015 and planned through 2017, Council has approved transfers of nearly $18 million in General Fund cash reserves to the Asset Management Plan (AMP) Fund in anticipation of needing these resources to fund new offices. The bulk of these funds ($13.6 million of the pre-2017 transfers) has been shown in the AMP Fund reserve at the bottom of the long-range plan documents during budget P2 I. development. These reserved funds were proposed as the method of payment for renovation of the Armory building, the last piece of the overall administrative office space project, currently programmed in 2018. The predominate rationale for holding this cash in reserve until the Armory renovation was to take advantage of existing low borrowing costs based on current market conditions and to provide additional contingency. With the additional $2 million scheduled to transfer in 2017, plus existing cash reserves within the AMP Fund, there is an option to utilize existing cash reserves and avoid borrowing externally for the proposed construction of the new facility next to the parking structure. Under this option, the City would utilize approximately $17.142 million in cash reserves, plus an internal advance of $5 million from the Wheeler Opera House Fund, to fund $22.142 million for the new facility. As part of the 2018 and beyond AMP Fund, City Council could discuss the cash funding or financing of the Armory renovation in future years. Benefits of the predominately cash option include: · Direction to advance the project could occur immediately and would not escalate construction costs. Based on Engineering News Record and other nationally produced construction cost indices, current annual escalation ranges from 4-8%. This doesn’t include any deviation for local construction price fluctuation. · Utilizing cash now would save on immediate interest expenses for this portion of the administrative offices solution. It is worth noting that the remaining phase, the Armory renovation, would need to be financed or delayed until cash reserves could support the project. · Borrowing from the Wheeler Opera House Fund can be structured such that the City can further reduce its borrowing cost relative to issuing either certificates of participation or general obligation bonds for the $5 million. · The Wheeler Opera House Fund, which has a fund balance of nearly $30 million, would benefit as a lender for the project, as the City can set the interest rate on borrowed funds higher than the return rate the Wheeler receives from the City’s conservative investment portfolio. · This alternative equates to the lowest cost of the three options for phase 1 of administrative office spaces. Drawbacks of the predominately cash option include: · If the Armory renovation project were to proceed, with construction commencing in 2020 at the earliest, borrowing costs for that project may be greater than if the funds were borrowed today for the current new construction project. There is risk of interest rate movement, but there is no absolute on magnitude or direction of such change – only that it is possible. However, it is certain that there is not enough cash today to construct both projects without some sort of financing on the current schedule. · There is a possibility that future Wheeler expansion proposals would be affected by the advancement of $5 million from existing cash reserves from the Wheeler Opera House Fund. This possible impact would depend on the timing and cost of such an expansion as to whether or not the additional $5 million would be necessary. P3 I. Assuming no cost escalation for project delays nor variances in financing costs, the differences between utilizing cash and various financing sources would compare as follows: Cash + Wheeler Fund Option Phase 1: Rio Grande Phase 2: Armory Total Total Cost $22.1 $15.9 $38.0 Existing Cash $17.1 $0.0 $17.1 Wheeler Advance $5.0 $0.0 $5.0 Financed: Source TBD $0.0 $15.9 $15.9 External Financing Options Phase 1: Rio Grande Phase 2: Armory Total Total Cost $22.1 $15.9 $38.0 Existing Cash $1.2 $15.9 $17.1 Financed: GO or COP $20.9 $0.0 $20.9 RECOMMENDED ACTION: Staff is seeking finalization of Council’s direction on how it wishes to proceed. Based on the direction at the July 11 work session, Council indicated moving forward with drafting an ordinance for issuing certificates of participation. If a revised direction is desired for general obligation bonds for the November 2017 election, ballot language should be finalized by the August 28th regular City Council meeting or through a special session of City Council prior to September 8. If Council wishes to move forward with the predominately cash option, with an internal advance from the Wheeler Fund, staff will calculate a repayment plan to the Wheeler Opera House Fund for the $5 million advance that will be fair relative to the return on investment it would have received within the City’s investment pool. POSSIBLE DIRECTIONS: There are multiple directions Council may wish to direct staff, including: 1. Proceed with certificates of participation for the purpose of constructing new City administrative office facility on the site adjacent to the Rio Grande parking structure 2. Proceed with a plan to utilize existing cash reserves within the AMP Fund for financing of new City administrative office facility on the site adjacent to the Rio Grande parking structure, with an additional internal advance from the Wheeler Opera House Fund 3. Delay further advancement of design and permitting phases of the project until an election to seek voter approval for the use of general obligation bonds to finance the facility 4. Continue advancing the project through design and permitting phases without results from an election process on the financing of the project, using existing cash for said expenses. In tandem, Council can elect to solicit a public vote on the use of general obligation bonds for construction costs, with an alternative financing source if a “no” vote is received. P4 I.