City of Northfield, Minnesota, U.S.A.

Summary

Project cost has evolved over time (see details lower on this page).

• The current (early 2011) estimate is $10.7 million
• Assumes a single facility for Police and Fire on a site that must be purchased from the current owner.

The City has three mechanisms to finance a capital project such as the Safety Center:

• Capital Improvement Bonds - basically a standard municipal bonds approved by City Council, subject to citizen reverse referendum, mid-range timeframe if not put to referendum
• Referendum Bonds - standard municipal bond, but put to public referendum for approval/rejection, longest time-frame since referendum vote must be held
• Lease/Revenue Bonds - financing from another city department that can levey taxes, higher interest rate, not subject to public referendum, quickest turn-around time

At the Feb. 1, 2011 City Council Meeting the Council voted to fund the project with Capital Improvement Bonds. A public hearing will be held in March 2011, after which citizens have a 30-day period to gather sufficient signatures to trigger a public reverse-referendum vote. The vote can be held as a single-item special election or as part of a general election in November.

Details about the project financing are provided below.

Bond Options – General Information

The standard amortization schedule for a major building project is twenty years.  Shorter periods, say fifteen, can also be considered. Extending the amortization to twenty-five years may also be considered, but doing so adds a significant amount of interest expense.  A twenty-year amortization schedule is recommended at this point. 

The standard amortization model also establishes even debt payments over the life of the bonds.  Alternatives include lower payments at the start with gradually increasing payments over time.  This is something that should be considered in light of the contracting tax base.

With the proposed building schedule for the Police and Fire stations within a year of each other, one bond issue could / should also be considered. 

A financing analysis was prepared by Dave Callister at Ehlers and presented to City Council (1/12/2010 Work Session).  It shows the details of each type of bond for an $8.5 million project side-by-side for comparison purposes.  Also included in the property tax impact on six different properties.

Staff provided scenarios to the City Council that show the property tax impact with graduated amortization schedules.

A Public Hearing on CIP Financing was held on 6/15/2010. The City Council chose to utilize the Referendum Bond path to finance the project. More information about Referendum Bonding and the other financing options available for this kind of project is provided below. - Information handout from the 6/15/2010 public hearing. (PDF) The Referendum Bond vote was pulled by the City Council later in 2010 in order to allow new Council members to participate in decisions related to the Safety Center.

The City has three primary means to fund the Safety Center project (General timeline for the different financing options - PDF):

Referendum Bonds

These can be used for a wide variety of public purposes.  In fact, they must be used for those facilities that are not specifically allowed under CIP bonds – such as recreation facilities, none of these projects – safety center or library - require the use of referendum bonds.  This type of financing was used for the Northfield Community Resource Center.  Property tax levies for referendum bonds are now based upon tax capacity.  Market value-based levies, as used for the NCRC, are no longer an option.

• The referendum question(s) would ask the community whether or not they approve of the sale of bonds to finance the projects. 
• A simple majority is needed for approval.
• If the electors do not approve the issuance of the obligations, the question may not be submitted to the voters again until 180 days from the date of the 1st election; if not approved a second time, a 3rd election may not be held until for one year.
• None responses (neither yes or no) on ballots are recorded as non-votes (as opposed to votes of "no").

This type of bond will take the longest period of time from initiation to sale due, in part, to the requirements of providing a 49-day notification to the County Auditor.  Should this option be considered, the vote would be scheduled as part of the November 2010 general election.  This would allow bonds to be issued the following spring just prior to the start of construction. 

We are assuming all three projects (Police, Fire and Library) would be included on the ballot.   We also assume that one bond issue would be sold in the spring of 2011 for $8.5 million (plus issuance costs) that would provide construction funds for both the Police and Fire facilities. The bond issue for the Library expansion wouldn’t be sold until early 2014.  A safety facility option only could also be a considered referendum, with either a second referendum or alternate finance option used for the Library expansion project.

Preparation prior to the referendum would need to include site selection(s) and detailed architectural design work for the projects included in the referendum.  This would need to be completed this spring/early summer and followed up with public presentations and education through the summer and early fall prior to the referendum.

Referendum bonds are general obligation bonds and would offer the lowest interest rates – right now, about 4%.

The City will pay a greater proportion of the “ballot” costs with the addition of the referendum question(s) and likely higher consulting costs in preparation for the election.  However, having the referendum as part of a general election saves an estimated $15,000 over a special election.

A referendum on the bonding does provide for the most direct form of voter approval of a project and also limits the decision-making authority of the elected body.

Capital improvement (CIP) Bonds

CIP Bonds are used to finance City facilities such as city halls, public safety and public works buildings and libraries. 

• This bond requires the development of a “Capital Improvement Plan” document that is a subset of our five-year capital improvement program and contains those projects for which we intend to issue CIP bonds for. 
• A notice of the public hearing on the CIP must be published in the City’s official newspaper at least 14 days, but not more than 28 days prior to the date of the hearing.
• At the conclusion of the public hearing, the plan must be approved by a 2/3’s majority vote of the Council (at least a 5/2 affirmative vote).
• This type of bond is subject to a reverse referendum.  The reverse referendum component is specific to the state statute authorizing this type of bond and should not be confused with reverse referendum language in the City Charter. 
• A reverse referendum petition must be signed by voters equal to five percent of the votes cast in the city in the last general election and is filed with the City Clerk within 30 days after the public hearing. 
• Should the decision be made to issue CIP bonds and should a reverse referendum petition succeed, the question would be put to the voters in the fall general election.

It is also important to note that the City cannot put itself in the position of assisting the petition process in any way - through providing legal advice or other information. 

Using this type of bond financing would allow greater flexibility in the timeline for the preparation of the detailed plans and drawings from referendum bonds. 
CIP bonds are also general obligation bonds and would offer the lowest interest rates – right now, about 4%.

Public Project (EDA/HRA Lease) Revenue Bonds

These bonds may be used to finance City facilities.  The underlying security for the bonds is the lease between the City and the other entity (EDA or HRA). 

• Under this option, the City’s HRA or EDA could provide financing through a direct lease arrangement and could issue lease-revenue bonds to the competitive market.
• The lease is not a general obligation or indebtedness of the City, but a special obligation payable solely from lease payments annually appropriated by the City that are covered by an annual property tax levy.
• The City has the right to annually levy for the lease payments while reserving the right to annually terminate the lease, without penalty. 
• This type of financing will see interest rates at least .50% to .80% higher than a general obligation bond rate – so, 4.50% to 5.30%, rather than a 4.0% in today’s market. 
• This type of bond also requires a larger bond issue size to provide additional dollars for a debt service reserve (equivalent to the last year’s debt service payments). 
• Issuance costs will also run higher – about 50% more than a general obligation bond.
• A public hearing may be required for approval of a redevelopment plan on any or all of the projects financing by this type of bond.
• This type of bond does not have any reverse referendum option.  This type of financing was used for the City’s outdoor pool. 

One important point regarding the lease revenue bonds – these could be refunded in the future with CIP refunding bonds.  The refunding would be included in the CIP (the mini-document for the public hearing).  While this would also be subject to a reverse referendum, why would anyone object to lowering the interest rate?