A. Issue
As part of the 2023-2027 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.
B. Background and Fiscal Impact
Capital Budget
The 2023-2027 Capital Improvement Budget included $18.6 million in general obligation bond and note proceeds for approved projects as shown in Figure 1. The total amount to be borrowed is $16.375 million. This is a not-to-exceed amount although we don’t anticipate the amount to change.
Levy-backed bonds are less than budgeted due mostly to using surplus from bonds issues in previous years to fund a portion of the sidewalk improvement program. The Storm borrowing is less than budgeted due to the Honey Creek Storm Sewer Outfall project (4103) being delayed. There will be no Sanitary borrowing as the financing of these projects will be cash financed. There is no borrowing for TIF projects this year. The Water Utility bond issuance will be approximately equal the original budgeted amount.
The bond amortization schedules have been adjusted so that the same impact on the 2024 Budget is maintained and sufficient funds are included in the 2024 Budget to cover the debt service associated with this bond offering. Ten-year terms are being used for general city infrastructure projects as well as storm projects so that the 10 year note issuance is large enough to attract bidders when the notes come to market. A 15-year term is being used for the levy paid bonds that are tied to paving, parks and fire department capital purchases and projects. A 20-year term will be used for the water revenue paid bonds. 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 2023-2027 capital budget.
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 $135,945,000 in outstanding General Obligation debt; an increase of $640,000 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 $52,945,000; a decrease of $2,385,000 or 4.3%. 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 - 1.51% 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 13% 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 45% 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 2022 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.
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, 2022 which demonstrates how the strength of our finances and growing tax base help overcome other weaknesses and maintain our Aaa rating. For clarification, the low rating for Management Institutional Framework is due to the state restrictions, primarily levy limits, on the City’s ability to raise revenue.
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 2023-2027 capital budget, the sanitary sewer fund maintains a 1.10 average coverage ratio through 2026. (Figure 7). After this the coverage ratio intentionally falls below 1.0 to spend down fund balance in lieu of rate increases knowing that debt service will begin to decrease in the 2034. With this coverage ratio, the cash balance will continue to grow through 2024 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 2024, we are considering a 5% rate increase but this is yet to be finalized. Rate increases are assumed for 2025-2030 to offset rising debt service. (Figure 9)
A separate report will be provided later this year with a recommended 2024 rate increase.
Figure 7
Figure 8
Figure 9
Storm
Assuming the issuance of the 2023 bonds as budgeted as well as the debt necessary to finance the 2023-2027 capital budget, the storm sewer will achieve a 1.1 coverage ratio by 2026 (Figure 10). The Storm Sewer cash balance is forecasted to be 56% of operating expenditures in 2024 (Figure 11) and remain constant until a planned reduction in 2027for the Schoonmaker Creek project. A 3% rate increase is considered in 2024. The necessary rate increases to support the 2023-2027 capital budget and coverage ratio are shown below in figure 12.
A separate report will be provided later this year with a recommended 2024 rate increase.
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 2023-27 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 although in practicality it would be difficult to issue debt and maintain the current bond rating if the coverage ratio fell below 1.5. Figure 7 shows that the coverage ratio will remain at approximately that level 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 2026 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.
Figure 16
Debt Issuance Process
Pending Council approval of the Initial Authorizing Resolutions, the actual sale date for the 2023 general obligation bonds is scheduled to be the week of October 23rd as a competitive sale. Prior to the sale, the official statement will be distributed and reviewed with Moody’s who will then assign a rating to the bonds.
In order to expedite the bond sale process we are again including a “Parameters Resolution” along with the standard Initial Authorizing Resolution. This will give staff - the Finance Director and City Attorney- the ability to jointly approve the bond sale without additional Council approval. The parameters are attached.
Staff would return to the committee for approval if we need to increase the bond amounts above what was included in Figure 1.
D. Recommendation
I recommend the approval of the Initial Authorizing Resolution and Parameters Resolution not to exceed the amounts and terms shown below. Should staff need to increase borrowing amounts above what was presented in Figure 1, they will return to the committee for approval.
