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Consideration of recommendation by Finance Director for approval of 2024 General Obligation Notes and State Trust Fund Loan
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Submitted by:
John Ruggini
Department:
Finance Director
A. Issue
As part of the 2024-2028 Capital Improvement Plan, bond proceeds are required to fund approved capital projects. As a result, it is necessary to authorize the issuance of these general obligation and water revenue bonds. It is important to consider the impact of these bonds on the City’s total debt capacity, tax and utility rates. In addition, since 2023 the City has borrowed short-term from State Trust Fund to approximate cash financing of capital due to levy limts. Approval of this is also included.
B. Background/Options
Capital Budget
The 2024-2028 Capital Improvement Budget included $22.3 million in general obligation bond and note proceeds for approved projects as shown in Figure 1. The total amount to be borrowed is $17.4 million. This is a not-to-exceed amount although we don’t anticipate the amount to change.
Levy-backed bonds are $1.9 million less than budgeted due largely to better than budgeted contract results for the Potter Road and 109th Street Improvements. Savings from the North Avenue from 73rd to 95th project also contributed to the reduction. Sanitary is $543,522 below budget also largely due to Potter Road contract savings. The Storm borrowing is less than budgeted due to the Honey Creek Storm Sewer Outfall project (4103) being delayed as well as savings from the Potter Road contract. There is no borrowing for TIF projects this year. The Water Utility bond issuance will be approximately $100,000 great than original budgeted amount as costs for the 1024 paving program were higher than expected.
The bond amortization schedules have been adjusted so that the same impact on the 2025 Budget is maintained and sufficient funds are included in the 2025 Budget to cover the debt service associated with this bond offering. Due to helpful changes in state legislation, the City is able to utilize a single 20-year promissory note issuance. Within that issuance, the levy funded portion will be repaid over 15 years, sanitary and storm over 10 and water over 20 years. As was the case in previous years, General Obligation Bonds are proposed instead of Revenue Bonds for the water projects. This is recommended to reduce interest costs, eliminate the need for a debt reserve and provide debt coverage relief
Figure 1
The specific projects included in these totals are shown in Attachment 1 which were all part of the approved 2024-2028 capital budget. That document can be found here: <https://www.wauwatosa.net/home/showpublisheddocument/5212/638354897645530000>
Debt Capacity
An important component of assessing a debt issuance is measuring its impact on debt capacity as governed by the Debt Management Policy (Attachment 2). Figure 2 compares the City of Wauwatosa’s debt profile (assuming issuance of this debt) to its policy goals and to the Aaa average.
Assuming this debt issuance, the City will have $136,915,000 in outstanding General Obligation debt; an increase of $1,240,000, or 0.91%, from the prior year. This includes all debt backed by property taxes, but does not include water revenue bonds. The amount of debt actually paid for with general fund property taxes (net debt) is $50,940,000; a decrease of $1,735,000 or -3.3%. This does not include general obligation debt paid for by the utilities or debt paid for by TIF Districts.
The City is below its stated debt policy goal for total debt as a percentage of full value - 1.42% compared to 4.0% per the City policy and below the 5.0% allowable under state statute. The City also remains below its policy goal of net debt service as a percentage of expenditures to not exceed 15%. It is estimated to be 11.4% in Figure 2 and remain relatively flat over the next 5 years. This is shown in Figure 3. On a per capita basis, the City’s net debt is 47% less than the Aaa average.
Figure 2 - Debt Profile Comparisons
Figure 3 - Projected Annual Levy Debt Service
The debt profile is just one measure used for determining a bond rating. Figures 4 and 5 present several ratios used to measure financial and economic strength. These figures are based on the 2023 financial results and also are compared to the 2021 Moody’s data as the most recent available. While the City’s financial and economic profiles are strong, some of the benchmarks come in lower than Aaa peers. General fund and cash balances are a lower percentage than peer, as is per capita value and income. A positive trend is the continued growth in equalized value overall which exceeds the Aaa peers on a gross basis, but not per capita. Tax base concentration was no longer reported. While none of these results is cause for concern as we are measuring ourselves against a very strong benchmark, it reinforces the need to have excellent financial results, tax base growth and strong financial management to offset our elevated debt levels.
Figure 4 - Financial Comparisons
Figure 5- Economic Comparisons
Figure 6 presents the analysis from the City’s bond rating agency, Moody’s, as of the last full rating in October 2023 which demonstrates how the strength of our finances and growing tax base help overcome other weaknesses and maintain our Aaa rating.
Figure 6- Moody’s Rating Scorecard
Finally, it is important to examine the sanitary, storm and water coverage ratios and cash surplus. It is recommended to maintain a 1.10 coverage ratio and 25% cash surplus. A coverage ratio is the net operating income divided by the debt service amount.
Sanitary
Assuming the debt necessary to finance the 2024-2028 capital budget, the sanitary sewer fund maintains a 1.10 average coverage ratio through 2030. (Figure 7). With this coverage ratio, the cash balance will continue to grow through 2030 at which point it assumed to drop as a significant portion is used for the Schoonmaker Creek project but it will remain above the 25% policy requirement. (Figure 8)
For 2025, we are considering a 0% rate increase but this is yet to be finalized. Rate increases are assumed for 2026-2030 to offset rising debt service. (Figure 9)
Figure 7
Figure 8
Figure 9
Storm
Assuming the issuance of the 2024 bonds as budgeted as well as the debt necessary to finance the 2025-2029 capital budget, the storm sewer will maintain a 1.1 coverage ratio through 2030 (Figure 10). The Storm Sewer cash balance is forecasted to be 145% of operating expenditures in 2025 (Figure 11) and remain constant until a planned reduction in for the Schoonmaker Creek project. No rate increase is considered in 2025. The necessary rate increases to support the 2024-2028 capital budget and coverage ratio are shown below in figure 12.
Figure 10
Figure 11
Figure 12
Water
Like Storm and Sanitary, it is important to understand the impact of borrowing funds on the Water Utility’s coverage ratio, surplus and rate projections. In addition, the impact on the rate of return must also be considered as displayed in Figure 13. For all of these projections, the 2024-28 borrowing is assumed. The annual borrowing and rate increases assumes $500,000 in annual cash financing beginning in 2024.
The rate of return is calculated by dividing the net operating income by the net value of the Water Utility’s physical infrastructure. The Public Service Commission sets a cap, currently 6.25% and typically a rate increase is required if the rate of return falls below 2.0%. As shown below, the rate of return is anticipated to remain stable through 2030 assuming the rate increase shown in Figure 16.
Figure 13
By bond covenant, the Water Utility coverage ratio must remain above 1.25. Figure 7 shows that the coverage ratio will remain at approximately 1.3 through 2030. With the transition to General Obligation Bonding; however, the coverage ratio minimum can decrease to 1.10 with fewer restrictions.
Figure 14
Due to increasing to total debt service (including general obligation debt not included above), and increased operating spending on infrastructure repairs and the use of fund balance for tank paintings cash balance is projected to decrease through 2028 as shown in Figure 15 and then begin to rise in 2029 assuming a conventional rate case in 2028. The policy minimum is 25%.
Figure 15
Figure 16 shows the planned rate increases necessary to fund the borrowing assumed in the 2023-2027 Capital Budget. However, given the capital budget pressures, it is likely the 2028 rate increase will be larger than shown below.
Figure 16
Debt Issuance Process
Due to a positive change in state legislation, the City no longer has to issue bonds but can exclusively issue promissory notes. This simplifies the borrowing process. As a result, the Council must only approve the Parameters Resolution included with this report. The actual sale date for the 2024 general obligation bonds is scheduled to be the week of October 7th as a competitive sale. Moody’s reviwed the sale with City staff on September 11 and will assign a rating to the notes in the coming week.
City staff will work directly with the State Trust Fund to borrow $665,000 which is anticipated to be paid off by August 2025. The current $665,000 loan borrowed in December 2023 will be paid off on January 3, 2025.
C. Strategic Plan (Area of Focus)
Priority Area Three: Infrastructure
D. Fiscal Impact
Annual debt service costs are included in the 2025 Budget.
E. Recommendation
I recommend the approval of the debt issuance not to exceed the amounts and terms shown below.
In addition, I recommend that the committee approve borrowing $665,000 from the State Trust Fund for infrastructure improvements to be included in the 2025 Capital Budget.