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Youth Development Center (YDC) Bond / Note Issue
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Executive Summary
The City issued $6.9 million in notes to acquire the YDC property. In September of 2011, the City paid down the note by $2,250,000 leaving a balance of $4,650,000 that will mature September 28, 2012. A decision needs to be made to determine if we will issue bonds to permanently finance the remaining balance or roll the notes forward in anticipation of receiving additional federal funding. Council also needs to decide if it wants to finance the cost of demolition of the YDC buildings.
Legislative History
Ordinance 09-97 approved on September 16, 2009: to issue $6.9 million in notes to purchase the YDC property.
Ordinance 10-112 approved on September 1, 2010: to roll the notes forward.
Ordinance 11-92 approved on August 17, 2012: to roll the notes forward.
Purpose & Explanation
The purpose of the legislation would be to approve the issuance of bonds for the YDC property. The source of funding would be the General Fund ($2,650,000) and Parks Fund ($2,000,000). The City confirmed with bond counsel that issuing bonds would not jeopardize our ability to make use of federal funding to be applied toward the purchase of the property should we receive it at a later date. There would be separate legislation to temporarily finance the cost of demolition of the buildings. The estimated demolition cost is $1,227,000.
City Council has two decisions to make regarding YDC property financing:
Bonds vs. Notes
The following is a summary of options on how to proceed with the $4,650,000 maturing notes issued to purchase the YDC property:
1. Issue $4,650,000 in bonds. The bonds would be repaid by the General Fund ($2,650,000) and the Parks Fund ($2,000,000).
Advantages: The City would take advantage of current interest rates and eliminate the risk of long-term rate increases.
Disadvantages: By permanently financing the property, any future grant funding that would be used to pay off some or all the remaining cost of property would create challenges. For example, if we were to be awarded a federal grant in 2013, we would not be able to use the grant to pay down the bonds until the call date. We could sell the bonds with a short call date which would improve our chances of using the grant to pay down the bonds; however we would pay a slightly higher interest rate on the bonds which amounts to an annual increase of $2,800 per year. There may also be stipulations in the grant award that would require us to spend the proceeds within a certain timeframe.
2. Roll the Notes forward for 6 or 12 months. We would issue notes for $4,650,000 to pay off the maturing notes.
Advantages: We would have additional time to determine if any federal grant will become available. We would have the flexibility of paying down the notes with little to no issues.
Disadvantages: There is a risk of increased interest rates if we have to sell bonds at a later date. We would also incur issuance costs to sell the notes in addition to bond issuance costs if/when we need to permanently finance the property.
Demolition Costs
The other issue for Council to consider that has not been discussed is financing the demolition of the YDC buildings. We included $820,000 in the 2012 budget to raze a portion of the buildings. However, assuming we move forward with demolition of all buildings, the estimate from DLZ Ohio is $1,227,000. The following are options on the demolition costs:
1. Issue a one year note. We would sell notes to temporarily fund the demolition.
Advantages: This would prevent us from spending down our General Fund balance and allow us additional time to continue exploring the possibility of securing funding for the demolition. We would also know the actual demolition costs if we decide to issue bonds to permanently finance the demolition.
Disadvantages: We would incur issuance costs to sell the notes in addition to bond issuance costs if/when we decide to permanently finance the demolition.
2. Pay with Existing Funds: We would pay the demolition costs out of our General Fund balance.
Advantages: We would avoid any issuance costs to finance the project.
Disadvantages: We would pay down the General Fund balance by $1.3 million. With the reduction in state funding and elimination of estate taxes, this would accelerate the projected declining balance.
Other Considerations
One of the provisions in the YDC Purchase Agreement is the property shall be used for public purposes for a period of five years. The agreement was entered into on September 8, 2009 therefore by September 2014, the restricted use provision expires. If the City issues tax-exempt debt to finance the property and decides to allow private use of the property (either sell or lease), there will be complications in the transaction. It is permissible but we need to be aware that there are additional considerations.
If we are able to use federal grant proceeds to pay for the land, there will likely be restrictions or prohibition in future private use.
Timing Considerations
We anticipate discussing the debt issue at the September 5, 2012 City Council meeting with passage of authorizing ordinance(s) at a Special City Council Meeting on September 11, 2012 (the same night as the regularly schedule Council Workshop).
Fiscal Impact
Currently Budgeted
Supplemental Appropriation Required
X Appropriation Not Required.
Suggested Action
If the determination has been made that we should not expect additional grant funding for the purchase of the YDC property, we recommend City Council approve the legislation to issue the YDC bonds and include emergency language to allow the bonds to be sold in time to pay off the outstanding notes. We also recommend issuing short term notes to temporarily finance the demolition of the YDC buildings.
Submitted By:
Jeff Knoblauch, Finance Director
Approved by: Anthony J. Bales, City Manager; Scott N. Schroyer, Asst. City Manager