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<br />Mayor and City Council <br />Elk River Municipal Utilities Bonds <br />Page 2 of2 <br /> <br />I agree with Councilmember Dietz's position. There are several concerns with issuing variable rate <br />debt a few of which I already mentioned. Normally, variable rate debt would be issued in a time of <br />high interest rates where there is some assumption that rates will be decreasing; however, we are in a <br />low interest rate market where interest rates remain historically low and it is much more likely that <br />rates would increase substantially than decrease substantially. Since they are already very low, the risk <br />of increased cost for variable rate debt does not, in my opinion, outweigh the slight savings that <br />ERMU is estimating at this time. Additionally, this variable rate debt will need to be monitored <br />carefully. The payments for this debt are made monthly and Utility staff will need to analyze the <br />information monthly to ensure that they are being charged the correct rates and will need to provide <br />information to the city at least annually so that we may properly report on all of the debt. This will <br />increase the staff time from ERMU and the city fInance department to monitor and report on the <br />debt. Further, in speaking with other government fmancial professionals, most do not issue variable <br />debt. The only city that I am aware of that may issue variable debt is the City of Minneapolis where <br />there are signifIcant reserves available to pre-pay the debt if the interest rates increase. I do not <br />believe that ERMU has cash revenues available for prepayment. In speaking with representatives <br />from Sprinsted Financial Advisors, who are the ones working with the bond pool, variable debt is <br />typically issued by private colleges and most government entities do not issue variable rate debt. <br /> <br />Finally, it is the recommendation of Councilmember Dietz and myself that the City Council not <br />approve the authorization to issue variable rate debt through the MCMU pool because the cost to <br />issue debt through the MCMU pool does not offer enough savings to offset the risk. A stand alone <br />issue is recommended. <br /> <br />Action Requested <br />The City Council is asked to consider the Elk River Municipal Utilities request to issue debt by <br />requiring that the Elk River Municipal Utilities issue fIxed rate debt through the city as a stand alone <br />Issue. <br /> <br />S:\Council\Lori\200S\Urility Bonds 12 19 OS.doc <br />