[Council Communication]  [Attachments]

Council Communication

Title:	Ordinance Authorizing the Issuance of Bonds to Finance the Ashland Fiber Network
Dept:	Finance Department
Date:	June 1, 2004
Submitted By:	Lee Tuneberg, Finance Director
Approved By:	Gino Grimaldi, City Administrator

Synopsis:	On May 4, 2004, Ashland City Council authorized the Finance Director to proceed with reviewing alternatives to financing AFN's existing bank loans and internal borrowing and to bring such a proposal back to Council within 30 days. Research and consultation with bond counsel and financial advisors have resulted in a proposal to issue revenue bonds with a full faith and credit backing via a non-emergency ordinance. If passed, the proposed ordinance will require a second reading on June 15, 2004. A thirty day referral period begins upon the second reading. Staff will submit a resolution at the June 15 that conforms with the Uniform Revenue Bond Act detailing the process, limitations and authority necessary to issue bonds in late July. If the bond issue is referred to the voters by 10% of the electors signing a petition, bonds would not be sold until passed by a vote of the citizens.
Recommendation:	Council adopt the ordinance and authorize the Finance Director to submit to Council a resolution to issue taxable revenue bonds at the June 15, 2004 meeting.
Fiscal Impact:	Any restructuring of the internal debt will most likely cost the City more in the way of interest over the life of the debt since internal borrowings from other City funds is normally at a lower rate than a financial institution would offer. Depending on the rate and issuance costs compared to the current low rate used for internal financing, the differential over twenty years could be over $2,000,000. As interest rates change this amount may be limited however, the City reserves and cash demands preclude the continued internal borrowing in the near future without difficulty in meeting operational and capital needs in other funds.
Background:	AFN's debt load is expected to be over $14.0 million and is projected to remain in that neighborhood for the next five years as revenues continue to increase and soon become greater than operating costs. Debt service on existing loans outstrips any operating income and result in additional internal borrowings beyond the principle amount paid to banks. Discussions with bond counsel and financial advisors have identified that the city could continue the current practice of borrowing internally, paying it back the next year and re-borrowing the needed amount for the ensuing year. However, projections show the future need for internal borrowing eventually exceeding $9.0 million and staff is concerned that there will not be enough funds available during the time frame it may be needed. Instead of the status quo, discussions considered revenue bonds, general obligation bonds, additional bank loans, taxes and/or subsidies to replace part or all of the existing debt or to meet annual debt service. Each alternative has many issues but the most promising is a "taxable" revenue bond issue restructuring all internal and external loans. The reasoning behind revenue bonds (especially ones that are not tax exempt per the IRS Code) are as follows: 0 1. The intent remains that debt service will be paid by revenues. 2. Revenue bonds normally have a 20 year life and that better matches the near future cash flow projections. 3. Taxable status gives the city maximum flexibility for construction and operations financing. 4. Covenants can be constructed pledging AFN and Electric Fund revenues first before looking to other city resources. 5. The market is still relatively good for this type of issue. Additionally, a refinancing of the internal debt will restore other funds' balances reducing confusion on the total budget and mechanics of borrowing internally as well. It should be remembered that internal borrowing could be less attractive in the near future if interest rates rise and the opportunity for restructuring passes the city by. Bonds cannot be sold without: 0 1. Council approval of an ordinance and a second reading AND 2. Council approval of a resolution establishing limits and authority at the June 15 meeting AND 3. the referral period ending with no requirement for a public vote.
Attachments:	•  Proposed Ordinance

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