[Council Communication]

Council Communication

Title:	Report on August 2004 AFN Full Faith and Credit Bond Sale
Dept:	Finance Department
Date:	August 17, 2004
Submitted By:	Lee Tuneberg, Finance Director
Approved By:	Gino Grimaldi, City Administrator

Synopsis:	On August 11 of this year the city issued $15,500,000 in full faith and credit bonds to refinance capital and operating costs for the Ashland Fiber Network (AFN). The sale provided $6,817,997 to pay off the two bank loans, $246,484 for issue costs and discounts and $8,435,519 for internal borrowings and a small reserve. The internal borrowing amount is higher and bank loans amount lower than at June 30 due to significant debt service payments being made the first 40 days of FY 2004-05. The bonds were well received in the taxable market with interest ranging from 3.70% to 6.02% for a total interest cost for all maturities calculated at 5.91%. In comparison, the existing taxable loan was at 7.01%. The original tax exempt borrowing was at 5.14% and internal borrowing ranged from 1.75% to 5.00% in the last four years (depending upon when it was borrowed or paid back) with no cap in the years to come.
Recommendation:	This is a staff report. No action is required since the bond sale of up to $16,000,000 was approved by Council in July under Resolution 2004-27.
Fiscal Impact:	The bond sale follows what was discussed and approved in the budget process for FY 2004-05. The budget included a $15,000,000 bond issue but that amount was increased to include all issue costs and to incorporate a small reserve. A supplemental budget will be proposed in September to recognize the additional monies received and unbudgeted issuance costs paid from the proceeds. The 2004 bonds change the way the City funds past AFN operations. The total debt is now a long term payable on the Telecommunications Fund balance sheet and the annual debt service is more consistent and predictable than was possible with the interim financing through interfund loans utilizing adjustable interest rates. Monies loaned from other funds have been restored and the debt service has been leveled for the next 20 years.
Background:	AFN's debt load and the impact of internal borrowing has been discussed many times. The City's financial advisor and bond counsel helped staff to craft an acceptable financing to best fit AFN operations and to restore monies loaned from other funds. In one respect the achieved interest rate is less than the 2001 bank loan providing some savings. Replacing the first loan's 5.14% financing is more costly but the bonds better match the City's operation, stretch out the debt service and limits the interest cost. This is done by replacing the growing internal borrowing (including a floating interest rate) that could very easily climb to unacceptable levels in the next 10 to 20 years. Debt service payments begin July 15, 2005.
Attachments:	None

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