FOR THE COUNCIL MEETING OF AUGUST 15, 2023
COUNCIL AGENDA REPORT
TO: City Council
FROM: City Manager
Prepared by: Director of Finance
SUBJECT: Financing Options for Fire Station No.1 Expansion and Other Facility Improvements
Description:
The City Council will receive a presentation for financing options relating to facilities improvements, specifically for the Fire Station No.1 Expansion Project, as well as actions being taken by City staff to research available funding options.
Environmental Notice: The activity is not a “Project” as defined under Section 15378 of the California Environmental Quality Act State Guidelines; therefore, pursuant to State Guidelines Section 15060(c)(3) no environmental review is required.
RECOMMENDATION:
Consider financing options relating to facilities improvements, specifically for the Fire Station No.1 Expansion Project.
BACKGROUND:
On June 20, 2023, the City Council received a presentation on amendments to the 2023- 24 Mid -Cycle City Budget. This presentation included a discussion on $6 million necessary to fund the Fire Station No.1 Expansion Project. In addition to the Fire Station No.1 Project, there are several other deferred maintenance and capital projects identified among sever al other City facilities. Public Works is currently undergoing a facilities condition assessment project which will result in prioritizing needs and identifying cost estimates across City facilities.
Generally, there are two options for financing capital projects: 1) Pay-as-you-go utilizing cash and savings, and 2) Pay -as-you-use, or debt financing. Historically, the City has utilized pay-as-you-go. With the increased need for improvements to City facilities, it may now be advantageous to look at pay-as-you-use, or debt financing, to fund these projects.
During the budget presentation, the City Council directed staff to research debt financing options and bring an update to the City Council within eight weeks.
DISCUSSION:
Since the June 20 th City Council meeting, staff have begun researching options for debt financing, utilizing municipal guidance from the State of California, California Debt and Investment Advisory Commission (CDIAC), and International City/County Management 2 Association (ICMA). Staff also met with the municipal finance advisors which assisted the City in a 2021 Water Bond Refinancing and contacted the City’s banking services provider, Bank of America. In addition, staff reviewed the City Debt Policy in compliance with Government Code Section 8855(i).
Staff will continue to research available options and bring additional information back to the City Council, based on City Council direction. In the meantime, two options have been tentatively identified:
1. As there may be a more immediate nee d for the $6 million Fire Station No.1 Expansion project, the first option could involve securing a loan from a private bank.
Typically, these loans range from 5 to 10 years, they carry a higher interest rate, however a lower cost of issuance and less administrative requirements. Given the current interest rate environment, and the federal funds rate at 5 to 5.25 percent, private bank loans are currently much higher than historical rates. Staff are currently working to receive estimated loan interest rates.
2. A second option is to utilize the findings from the facilities condition assessment and consider a revenue bond issuance, leveraging general fund (Measure U) revenues.
This option would depend on the size of the issuance, the readiness of any projects, and the term of the loan selected. This option would carry a lower interest rate, however it’s a more complicated process with increased administrative obligations, including compliance with securities laws, and continuing disclosures.
Utilizing revenue bonds would not require voter approval. However, if the City were to seek a new revenue source, such as General Obligation (GO) Bonds, this would require a two -thirds voter approval. The City would need to consider tax exempt bonds, which carry a lower rate, however IRC Section 54A requires that issuers of qualified tax-credit bonds spend 100 percent of the available project proceeds of the issue by the close of the expenditure period (generally, the three-year period beginning on the date of issuance).
Another item to consider, if the City were to move forward with the private bank loan for the Fire Station No.1 Project, a bank loan could be refinanced into a revenue bond issuance later.
Since the City has very little debt currently outstanding, the financial advisors have stated it would likely not be difficult to obtain debt finance; however additional information will be needed, such as the estimated dollar amount for the bonds and how quickly capital projects will be ready. It is advised that borrowing does not occur until the funding is ready to spend. Additional considerations still need to be researched further, such as alternative grant funding, and market interest rates available.
Alternative(s)
The City Council could choose to continue funding facility improvements with the pay-as- you-go strategy by authorizing use of reserves. This strategy will likely further delay facility 3 improvements because City reserves are not sufficient to accommodate multiple facility expansion or rehabilitation projects.
Fiscal Considerations
This item does not have any direct fiscal considerations and is intended as an update to the City Council.
Impact to the Community
None.